France's record public debt sparks fiscal risks as it approaches EU limits

According to the latest data released by the French National Institute of Statistics and Economic Studies (Insee), France's public debt rose to 3.5955 trillion euros by the end of the second quarter of 2024, with the debt-to-GDP ratio reaching 119 percent, setting a new record high since the end of World War II. This figure not only reflects the deterioration of France's fiscal condition but also highlights the vulnerability of European nations amid global economic shocks.

There are three primary factors driving the surge in France's debt: First, the emergency fiscal spending during the COVID-19 pandemic involved massive injections of capital to secure healthcare, unemployment relief, and business assistance; second, the soaring energy prices and inflationary pressures brought about by the Russia-Ukraine conflict forced the government to increase energy subsidies and price controls; finally, the long-term expenditure structure of the French government in public services and social welfare failed to undergo simultaneous tax adjustments to offset the accumulation of debt. Together, these factors have driven up the debt burden and caused the national fiscal deficit to remain consistently above the European Union's ceiling of 3 percent of GDP.

At the EU level, France's debt ratio is approaching and even exceeding the "safety line" set by the European fiscal rules, which caps the debt-to-GDP ratio at no more than 60 percent. Although France has not yet officially violated the regulatory clauses, its persistently high debt levels could trigger strict scrutiny of its fiscal discipline by the European Central Bank and the European Commission. If effective fiscal adjustments cannot be implemented in the short term, credit rating agencies may further downgrade France's bond ratings, thereby driving up sovereign bond interest rates, increasing government financing costs, and forming a vicious cycle.

To address the debt pressure, the French government has been discussing multiple policy options. Tax reform is the most direct measure, which may include expanding the personal income tax base, adjusting corporate tax rates, or introducing new environmental taxes. Meanwhile, adjustments to the public expenditure structure have also been placed on the agenda, such as scaling back certain social welfare programs, optimizing public service efficiency, or promoting the privatization of public infrastructure. In addition, France is considering accelerating structural reforms to enhance labor market flexibility, promote innovation, and boost international competitiveness, with the hope of enhancing long-term economic growth potential and providing a buffer for the debt burden.

Compared with other EU member states, countries such as Germany, Italy, and Spain also have high debt-to-GDP ratios, but France's debt growth rate remains notable. If France fails to implement effective fiscal adjustments over the next two to three years, its debt ratio could continue to rise, posing potential risks to European economic stability. Conversely, if moderate tax increases and expenditure optimization can be advanced simultaneously, France is expected to gradually restore fiscal sustainability while maintaining social security.