France and the Euro – A system that rewards debt: How France's debt strategy dominates all of Europe

The end of fiscal discipline: Why France is being rewarded for its 3.5 trillion euro debt mountain

Three trillion euros at risk: How the ECB is secretly financing France's disastrous debt policy

France's national debt is breaking historic records – yet instead of harsh sanctions, Brussels offers only mild words. While Germany stubbornly clings to its national debt brake and tightens its belt, Paris has perfected a political-economic system in which chronic over-indebtedness is not punished but structurally rewarded. The price for this asymmetric fiscal policy is ultimately paid by others: through creeping inflation, toothless excessive deficit procedures, and a European Central Bank that acts as a silent guarantor of default. This is a data-driven, unvarnished analysis of why austerity is increasingly becoming an irrational strategy in the Eurozone – and how European institutions are quietly defusing France's €3.5 trillion powder keg, at the expense of long-term stability.

When fiscal discipline becomes a punishment: How Europe is undermining its rules and who benefits

France's fiscal powder keg: Debt as a matter of national interest

The figures read like an inventory of chronic irresponsibility: France is forecasting a public deficit of around five percent of its gross domestic product for 2026 – and this after years of pledges to fiscal consolidation. Public debt currently stands at around 117 to 118 percent of GDP, approaching the level of Italy, which was long considered the prototypical problem country of the Eurozone. France's total debt amounts to approximately 3.5 trillion euros – a sum that is not merely an abstract threat, but has concrete economic consequences, especially for German companies that depend on the French market.

What makes these figures particularly worrying is not their absolute level, but their dynamics. When the euro was introduced in 1999, France's national debt was still close to the Maastricht limit of 60 percent of GDP – similar to Germany's. Since then, it has almost doubled. In the first quarter of 2025, France's national debt amounted to around 3.3 trillion euros, equivalent to 114 percent of GDP. The trend is clear: France borrows more in good times, and it borrows even more in bad times.

A new committee to monitor public finances has been convened in Paris, but political action remains limited. Prime Minister François Bayrou announced savings of €43.8 billion for 2026 to reduce the deficit to below 4.6 percent of GDP – still well above European limits. The goal is to bring the deficit below the three percent threshold for the first time by 2029, but even this modest ambition requires political stability, which Paris has lacked for years.

The culture of debt affects everyone: the state, businesses, and households

France's fiscal woes are not confined to the public sector. France suffers from a deeply entrenched culture of debt that permeates all sectors of the economy. Corporate debt has risen from 121 percent of GDP to nearly 200 percent since the introduction of the euro – by comparison, Germany's figure is 127 percent. Private households have increased their debt from around 34 percent of GDP to approximately 60 percent today, while German households have reduced their debt over the same period. When public, corporate, and private debt are combined, a picture emerges of systemic dependence on credit.

In February 2025, the rating agency S&P Global downgraded France's credit outlook to negative. The private sector – businesses and households combined – had debt levels of 214 percent of GDP in mid-2024, significantly above the eurozone average and 27 percentage points higher than a decade earlier. These figures illustrate that the problem is not a temporary anomaly, but rather structural in nature. The ease with which the French government, businesses, and households incur debt reflects a political and economic system that prioritizes short-term consumption and social welfare over long-term financial soundness.

Government spending is particularly striking: at 57.1 percent of GDP, France has one of the highest government spending ratios in the entire European Union – only Finland is higher. At the same time, the government has to spend around 70 billion euros annually on debt servicing alone, and this figure is rising. Interest payments are thus approaching a level that leaves increasingly less room for independent fiscal policy – ​​a classic symptom of the fiscal vicious cycle.

Maastricht was Germany's idea – France sabotaged it

It is a historical irony of considerable magnitude: The Maastricht criteria, the Stability and Growth Pact, and the entire architecture of fiscal discipline in the Eurozone were largely established under German pressure. Germany insisted that the common currency had to be underpinned by sound public finances and enshrined this in European law. The logic behind it was strikingly simple: If all members of a monetary union maintain fiscal discipline, there is no incentive for the central bank to expand the money supply and thus import inflation.

France never took this construct seriously from the outset. The three percent deficit rule – according to common understanding, a largely arbitrary figure anyway – was treated in Paris more as a bothersome bureaucracy than as a binding guideline. Germany, in addition, introduced its own national debt brake, enshrined in its constitution since 2009, which limits structural new federal borrowing to 0.35 percent of GDP. In France, however, no comparable commitment was made. Instead, it used its political influence in Brussels to gradually weaken the rules.

The reform history of the Stability and Growth Pact clearly illustrates this: In 2003, when Germany and France simultaneously exceeded the three percent limit, the excessive deficit procedure was effectively frozen. In 2020, the pact was completely suspended due to the Covid pandemic and only reinstated in 2024 in a reformed, significantly more flexible form. The new reform grants countries with excessive debt up to seven years to reduce it—significantly more than before—takes national specificities more into account, and opens up exceptions for defense spending and strategic investments. Highly indebted states like France and Italy had insisted on precisely this flexibility.

The document remains silent, the penalty is omitted: Why the deficit procedure is toothless

In July 2024, the EU Council formally opened excessive deficit procedures against seven member states – including France, which had a deficit of 5.5 percent of GDP in 2023. The institutional response followed a familiar pattern: recommendations were issued, corrective action plans were outlined, and deadlines were set. However, no sanctions were imposed – just as had been the case in the three decades since the Pact's inception. Theoretically, fines amounting to billions of euros are possible; in practice, these instruments have never been used.

This institutional finding is of central importance for evaluating the entire set of rules: a set of rules without enforcement is not a set of rules, but a recommendation. The European Commission has discretion to consider mitigating circumstances and has made excessive use of it. The political logic behind this is also understandable: imposing sanctions against France or Italy would create political tensions that could jeopardize the European project. The price of this restraint is the credibility of the debt rules themselves.

France is thus in a comfortable position: it is subject to an excessive deficit procedure, has a deficit more than twice the permitted limit, and a debt-to-GDP ratio almost twice the Maastricht target – and pays no serious price for it. The loss of confidence in the rules is the real, and difficult to repair, collateral damage of this arrangement.

The ECB as a silent life insurance policy: The transmission protection instrument and its limits

The European Central Bank's Transmission Protection Instrument (TPI), unanimously adopted by the ECB Governing Council on 21 July 2022, is one of the most powerful and controversial monetary policy instruments ever developed in the history of a central bank. It authorizes the ECB to purchase unlimited amounts of government bonds from individual euro area countries if, in the Governing Council's assessment, a country's borrowing costs rise above the level justified by economic fundamentals. The instrument was explicitly designed to prevent "fragmentation" of the euro area – that is, a situation in which the ECB's monetary policy impulses do not reach all member states equally.

The effect of the TPI begins even before its activation: it is sufficient for markets to know that the ECB can intervene without limit in a crisis to dampen speculative attacks on individual government bonds. This announcement effect – similar to ECB President Mario Draghi's legendary "whatever it takes" from 2012 – has significantly decoupled risk premiums in the eurozone from actual default probabilities. Investors no longer need to price in adequate risk because the ECB acts as a backstop.

This is precisely where the systematic distortion lies: The TPI socializes the credit risk of sovereign debt without explicitly stating so. The Bundesbank has pointed out that purchases under the TPI are tantamount to monetary financing of governments, which is actually prohibited under EU law. At the same time, the volume of purchases is not limited ex ante, the conditions for activation are vaguely defined, and the ECB Governing Council reserves the right to decide for itself when a situation exists that justifies intervention. This structure grants the ECB discretionary power that far exceeds what is traditionally afforded to classical central banks in democratic systems.

For France, the TPI acts as a kind of implicit insurance. Analysts at DZ Bank conclude that current risk premiums on French government bonds—although they have risen since 2024—remain far below the levels observed in comparable situations in Italy or Greece. The reason for this is structural: Markets trust that the ECB will intervene if necessary. The TPI thus acts as a dampener on the market-disciplining effect of rising spreads—precisely the kind of discipline that is intended to encourage governments to act responsibly on fiscal grounds.

Three trillion on the balance sheet: The silent risk of the Eurosystem

The Eurosystem's balance sheet has grown dramatically since the 2008 global financial crisis. Through quantitative easing programs, emergency asset purchase programs during the pandemic, and structural liquidity injections, the Eurosystem has accumulated assets of more than three trillion euros – including substantial holdings of member states' government bonds. The Eurosystem countries are jointly liable for these holdings, according to a capital key that roughly corresponds to the economic weight of each country.

This form of joint liability is institutionally opaque and has received little political attention. It is not a formal mutualization of debt, but it has similar consequences: if the bonds of a highly indebted country lose value on the ECB's balance sheet, Germany automatically bears a portion of the loss through its capital share. For this reason, economists – particularly those from the ordoliberal spectrum – have criticized the bond-buying program from the outset as a form of disguised fiscal transfers.

At the same time, the reallocations within the ECB's holdings have contributed to a situation where risk premiums in the euro area no longer reflect country-specific default risks. Through the targeted reinvestment of repayments from German government bonds in bonds of the southern periphery—a mechanism that long received little public attention—the ECB has actively smoothed interest rate differentials in the euro area. This occurs within the framework of the PEPP (Pandemic Emergency Purchase Programme) and its successor mechanisms. The result is a structural cross-subsidization of risk premiums, which—with a neutral ECB policy—would be significantly higher.

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Debt through the back door: How Europe introduced Eurobonds without saying so

The formal mutualization of debt in the European Union is officially prohibited. Article 125 of the Treaty on the Functioning of the EU – the so-called “no-bailout clause” – explicitly forbids liability for the debts of other member states. In practice, this clause has been increasingly undermined by a series of institutional innovations.

The crisis mechanisms of the sovereign debt crisis of 2010 were the first to be implemented: the European Financial Stability Mechanism (EFSM), the European Financial Stability Facility (EFSF), and finally the permanent European Stability Mechanism (ESM). All three instruments allow for collective liability for the debts of individual member states, albeit formally under strict conditions. The real paradigm shift came with the COVID-19 pandemic: the NextGenerationEU program, with a volume of €750 billion, was financed by the first large-scale issuance of joint bonds by the European Commission – a move many economists described as "Eurobonds light." In addition, there is the SURE program for stabilizing labor markets, also financed by EU bonds. By the end of these programs' terms, the EU is expected to hold around €1 trillion in outstanding bonds.

The funds from these joint programs flow disproportionately to highly indebted eurozone countries, precisely where the fiscal challenges are greatest. This is justifiable from a stability perspective, but it also creates structural incentives: those who spend more than they earn for decades are disproportionately favored by EU transfer programs, while fiscally disciplined countries become net donors. Meanwhile, new impetus is emerging for further development: Bundesbank President Joachim Nagel is publicly embracing the idea of ​​common European debt, and even the ECB, according to a confidential document, is advocating for a permanent common debt market in the form of genuine eurobonds. The debate, which Angela Merkel declared over in 2012 with the phrase "not as long as I live," has now fully ignited.

Inflation as an invisible tax: The silent redistribution in the Eurozone

The loss of purchasing power of the euro since its introduction in 1999 is a rarely openly discussed, but economically highly relevant phenomenon. While the ECB was obligated to maintain price stability under the European treaties, and for a long time the inflation rate remained close to the two percent target, the sum of price increases since 1999 has resulted in a substantial loss of purchasing power for the euro – rough calculations suggest a cumulative loss of around 40 to 42 percent, depending on which consumer price series are used. The majority of this loss occurred in the period after 2021, when inflation in the eurozone rose to between seven and over ten percent.

Inflation acts like a silent debt reduction machine for highly indebted countries. When inflation rises and nominal interest rates on government debt remain below the inflation rate—a condition economists call "financial repression"—the real debt burden shrinks without the government having to formally repay a single euro. France benefited considerably from this dynamic after 2021: its real debt burden temporarily decreased, despite its nominal debt remaining high. Germany, as a net debt-free country and a net contributor to the Eurosystem, loses out in this scenario: its citizens' savings lose real value, and the export surpluses, recorded as TARGET2 claims on the Bundesbank's balance sheet, erode due to inflation.

Inflation, as an instrument of implicit debt mutualization, is thus perhaps the most effective and at the same time the least transparent mechanism in the entire system. No one formally decides that Germany will pay for France's debts – but through a common monetary policy, joint bond purchases by the ECB, and a common inflation zone, precisely that is happening, albeit in a more subtle, less visible way.

The crisis fails to materialize – and that is the real problem

It would be wrong to conclude from the above that a classic sovereign debt crisis like the one Greece experienced between 2010 and 2015 is imminent in France. The institutional safety mechanisms that have been built up since the introduction of the euro, in parallel with the dynamics of debt, are real and effective. The ECB's TPI (Total Price Incentive) is available as a last resort, the ESM (European Stability Mechanism) capacities are in place, and the political resolve of the EU institutions to prevent fragmentation of the eurozone at all costs remains unbroken. A speculative debt crisis, such as those experienced by smaller peripheral countries, is hardly conceivable for France, as the eurozone's second-largest economy and a systemically important state.

But that is precisely the real problem: the crisis will not materialize – and this failure to do so will not instill any discipline. As long as the ECB stands ready as a backstop, as long as EU programs channel transfer payments to highly indebted countries, and as long as excessive deficit procedures remain without consequence, there is no structural incentive for fiscal consolidation. Rating agencies have downgraded France's credit outlook to negative, risk premiums on French government bonds have risen since 2024, and France is now even paying higher spreads than some other euro area countries. Nevertheless, these spreads remain far below the level that would economically incentivize fiscal discipline.

The calm with which the markets are reacting to France's fiscal situation is not the calm before the storm – it is the result of a carefully constructed system designed precisely to prevent such storms. The price is a gradual loss of confidence in the currency, creeping inflation, and an increasing dependence of all involved on the very institutions that are supposed to enforce the rules.

When austerity becomes an irrational strategy: What France's path means for Germany

If one follows the logic described above to its logical conclusion, one arrives at an uncomfortable one: Under the given institutional conditions of the Eurozone, it is rational from a national perspective to incur debt – and irrational to save. The reason for this is the asymmetrical distribution of costs and benefits within the system. The costs of inflation are borne equally by all Eurozone countries – through the loss of purchasing power for their citizens. Conversely, the benefits of high nominal debt – favorable refinancing thanks to the ECB backstop, transfer payments from EU programs, and real debt reduction through inflation – accrue disproportionately to the highly indebted countries.

For decades, Germany committed itself to the ideal of being a fiscally disciplined member of the Eurozone, coupled with the strategic calculation that sound domestic finances would ensure credibility when demanding compliance from others. This calculation has proven partly deceptive: France and other debtor states broke the rules, Germany demanded compliance – and in the end, the rules were adapted to the debtors, not the other way around.

The debate surrounding Germany's debt brake, which has intensified since the 2023 ruling by the Federal Constitutional Court, reflects this realization. If European institutions fail to effectively enforce fiscal discipline, if the ECB acts as an insurance policy in times of crisis, and if EU programs implicitly redistribute debt, then the national debt brake loses its European purpose. It remains useful as a national disciplinary instrument – ​​but its benefit as a signal to partner countries is undermined by an architecture that structurally fails to reward such signals.

Between system stability and erosion of trust: The dilemma without a simple solution

The real dilemma of the European debt system lies in its inherent contradictions. The mechanisms that prevent crises in the short term—the ECB backstop, EU transfer programs, flexible debt rules—are, in the medium to long term, the very forces that undermine confidence in the common currency. Inflation, as a silent instrument of debt mutualization, has transformed a significant portion of European savings into real transfers since 1999—without this ever having been formally decided or democratically legitimized.

France is representative of a systemic problem: a country permeated by a debt mentality, institutionally too large to go bankrupt, and which has so profoundly influenced European institutions that the rules of the game now reflect its structural interests. This is not a critique of France as such—it is a rational response to the incentive structure of the system. But it is a fundamental critique of the system itself.

A solution to this dilemma requires two things that have so far proven politically unfeasible: firstly, a credible, automatically effective sanctions mechanism for deficit violators – and secondly, a democratically legitimized form of debt mutualization, should this path be pursued. Half-hearted constructs like the TPI or the NextGenerationEU programs fail to fully meet either of these requirements: they mutualize risks without establishing political accountability, and they fail to impose sanctions without admitting this fact.

As long as this contradiction remains unresolved, the euro's monetary system will persist in a permanent state of institutional ambivalence: too robust to collapse, too fragile to be truly stable. The sovereign debt crisis in France will be averted – but the latent confidence in a common currency, which should be based on the principle of sound public finances, will not be strengthened, but rather quietly eroded.

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