Learning from history: What are the similarities and differences between France's debt predicament and the Greek crisis?

Investors are hotly debating whether the eurozone will erupt in a new debt crisis, and this time it is France, not Greece, standing in the eye of the storm. This month, a gauge of French bond risk soared to its highest level since late 2011, when the Greek crisis was at its most severe. Violent protests on October 17 have left the public anxious, and a divided parliament is blocking the French government's debt-reduction plans. With only six months until the election, France has become the biggest pain point in European markets, just as Greece was 15 years ago. Setting aside the alarmist rhetoric, France's predicament has little in common with the Greek crisis that once threatened the entire eurozone. But investors are not breathing easier for thatthey warn that the stress test France poses to the EU is more severe: it is the EU's second-largest economy, with debt of 3.6 trillion (about $4.0 trillion), and its bonds are widely held by international investors. How severe is the French bond sell-off? French bonds have been hammered this year, inflicting bigger losses on investors than any other major government bond market. The yield on 10-year French government bonds touched 5% this month, the first time since 2002. The move stems partly from an energy shock that forced the European Central Bank to raise rates, but it also reflects deteriorating investor confidence in France. The current situation is still far from the point when Greece's fiscal problems came to light. This month, the extra yield investors demand to hold French debt over German debt soared to 1.78 percentage points. Greece's equivalent measure peaked at more than 35 percentage points. And whereas Greece was shut out of bond markets back then as buyers balked, France can still issue new debt. How does France's debt burden compare with Greece's at the time? Relative to the size of its economy, France's debt burden is smaller. At the outbreak of the crisis in 2009, Greece's debt was equivalent to about 129% of its GDP, then soared in the following years, peaking above 200% during the Covid pandemic. But that ratio is falling fast, while France's is risingcurrently 119%, well above the eurozone average of 87%. The key difference is the scale of the debt. France's influence in global bond markets far exceeds Greece's at the time, which is one reason investment institutions such as Franklin Templeton worry that a new crisis could be more severe. France's 3.6 trillion debt is about 10 times Greece's in 2011. About 60% of the bonds are held by investors outside France, meaning the impact of a bond crisis would reverberate globally. How does France's budget position compare with Greece's? France's deficit is markedly lower than Greece's at the outbreak of its crisis. Back then, Athens' misreporting of the size of its deficit shook investor confidence. While there is no evidence France has misreported its challenges, in recent years the country has repeatedly failed to meet its public finance targets, owing to tax receipts falling short of expectations, slowing growth, and a minority government struggling to win support for austerity measures. Even this year's goal of narrowing the deficit slightly to 5% of economic output (5.1% in 2025) has been abandoned, and the French government now expects a deficit ratio of about 5.4%. France's tax revenue as a share of national output ranks among the highest in Europe, meaning there is less room than elsewhere to raise taxes further without harming growth. And unlike France, Greece at the time had widespread and systemic tax evasion, so tightening tax collection offered greater potential for revenue gains. France's focus is therefore on spendingwhich accounts for 57% of economic output, second only to Finland in Europe. But spending is on an upward trend due to structural factors such as an aging population and rising healthcare costs, making it hard to control. Cutting welfare spending is also difficult because of political resistance. Last year's social security budget barely passed parliament, but the deficit far exceeded expectations, and the government also suspended its reform to raise the retirement age. "At the end of the day, France needs to discuss pension reform and, more broadly, discuss how large a scale of public services the government can provide," Rodrigo Valdes, head of the IMF's fiscal affairs department, said this month. How do the two economies compare? At the outbreak of Greece's debt crisis, its economy relied heavily on tourism, shipping and agriculture; France's economy is far larger and more diversified, spanning high-margin industries such as luxury goods, aerospace and finance. BNP Paribas notes that France is also a leader in European logistics and technology, which gives it a surplus in services trade. Overall, France's current accounta broad measure of trade and income flows with the worldis close to balance. In 2009, Greece's current account deficit was about 12% of GDP. France is also less dependent on fossil fuels than other countries, with most of its electricity coming from nuclear and renewable sources. The IMF forecasts France's long-term growth rate will hold steady at around 1%, which helps offset fiscal challenges. Is France's banking system sounder than Greece's was? The surge in French sovereign risk has raised concerns about the health of its banks, since French banks typically hold large amounts of government debt. Falling bond prices can directly affect lenders' solvency and financial strength ratios. But French banks are more diversified, more resilient and better regulated, with thick capital buffers designed to protect their balance sheets in the event of losses. This is starkly different from the "doom loop" that trapped Greece. Greek banks held large amounts of their own government's debt, and losses on those holdings during the sovereign debt restructuring nearly wiped out their capital base. That reduced their ability to lend to businesses and households, and the deep recession caused non-performing loans to surge, requiring a massive recapitalization of the entire banking system. What tools does the EU have to respond to a French crisis? Compared with the sovereign debt crisis, the evolution of the eurozone's architecture is one of the most notable differences. When Greece and other countries ran into trouble, governments created rescue mechanisms for the eurozone from scratch, including the European Stability Mechanism (ESM). That mechanism was used by Ireland, Portugal, Cyprus and Greece, and can still provide loans in exchange for economic reforms, among other tools available. Another line of defense is the European Central Bank. Then-President Mario Draghi made history in 2012 by declaring the ECB would do "whatever it takes" to save the euro. That pledge was later translated into an unlimited bond-buying program called Outright Monetary Transactions (OMT), though it was never used and came with strict conditions. After the Covid pandemic, the ECB's Governing Council introduced another similar tool. At the time, the ECB was preparing to raise rates, and Italian government bond yields soared and outpaced those of comparable countries. The mechanism, called the Transmission Protection Instrument (TPI), allows central bank officials to buy sovereign debt when they determine that market moves lack economic fundamentals and impede the transmission of monetary policy. So far, the ECB has denied speculation that it is about to intervene, stressing that solving the problem is France's responsibility. What are the political similarities? Although the timelines differ, there are political similarities between France in 2026 and Greece in 2009. In both countries, fiscal problems emerged as establishment parties were crumbling and populists were preparing to take power. In Greece, the traditional center-right party was ousted in 2015 by left-wing radical Alexis Tsipras. In the final stage of the crisis, his confrontation with other EU members nearly forced Greece out of the eurozone, and he ultimately accepted deep spending cuts as the condition for a third and final bailout. In France, far-right nationalist Marine Le Pen is seen as the favorite to succeed Macron in next year's election, while many polls show far-left leader Jean-Luc Melenchon in second place.