IMF Flags France’s Deficit Strain

France is now running a deficit of 5.2% of GDP, according to the IMF. Its public debt stands at €3.54 trillion (Eurostat, INSEE). Investors are asking for close to 4% to lend to the French state for ten years (IG).

The IMF’s annual check-up on France, published on 22 July, was unusually direct: Paris is still spending far more than it collects, and the gap is not closing (Bloomberg). The Fund expects the deficit to reach 5.2% of GDP in 2026, above the government’s own 5% target and barely different from 5.1% in 2025.

Public debt rose by €75.6 billion in the first quarter alone, reaching 117.6% of GDP. Two years ago, it was 112.6%. For Maltese readers used to seeing EU fiscal rules treated as someone else’s lecture to smaller states, this is the awkward part: the eurozone’s second-largest economy is now the country struggling to convince markets that its numbers add up.

This would matter less if France could still borrow cheaply. It cannot.

How higher yields eat the budget

France’s 10-year government bond yield, the interest rate investors demand to lend to Paris for a decade, is near 3.93%. The spread with Germany, meaning the extra interest France pays compared with Berlin, has widened to around 80 basis points, or hundredths of a percentage point, from roughly 60 (FAZ).

That is not a market footnote. It is the price of lost fiscal confidence. Investors now want a visibly higher return to hold French debt.

The cost goes straight back into the budget. BNP Paribas estimated that if borrowing costs remain at these levels, the extra interest bill would absorb around 60% of the spending increase planned for the 2027 budget (BNP Paribas). In plainer terms, for every ten euro France hoped to add to hospitals, schools or defence, six would go to bondholders instead.

The French government knows the squeeze is real. Economy Minister Roland Lescure has called the 5% deficit target difficult. Budget Minister David Amiel said another €3 billion in cuts were needed, on top of €6 billion in emergency savings already made (Euronext/Reuters).

The IMF is asking for more: cuts or tax rises worth about 0.8% of GDP every year through 2029, after stripping out the effect of the economic cycle, which economists call structural adjustment (IMF). With growth forecast at just 0.6% this year (Boursorama), that means cutting into services people actually use.

Why the eurozone is watching

France is the eurozone’s second-largest economy. Higher French borrowing costs do not automatically push up rates in Madrid, Rome or Valletta. But they change how investors price risk across the bloc, and they narrow the room for the ECB, the European Central Bank that sets interest rates for the 20 eurozone countries.

The ECB created a backstop tool in 2022 to intervene when bond-market stress threatens the working of monetary policy (ECB). France has not reached that point. But when a state as central as France loses fiscal credibility, the ECB has less freedom to cut rates without appearing to ignore the risk building inside the system.

France has been under the EU’s Excessive Deficit Procedure since July 2024, alongside six other member states (Council of the EU). This is the formal EU process triggered when a country’s deficit exceeds 3% of GDP. Malta knows the mechanism well enough: Brussels does not take over a budget, but it does force a timetable, a correction path and political accountability.

The sharper comparison is now Italy. French and Italian borrowing costs are moving closer together. Italian Economy Minister Giancarlo Giorgetti expects Italy to leave its own deficit procedure before France does (Il Messaggero). For years, France borrowed more like Germany than Italy. That distinction is weakening.

The fight over where the cuts land is already becoming concrete. The options being discussed include higher medical deductibles and lower drug reimbursements, measures that would shift costs onto households with the greatest healthcare needs (Le Figaro).

Economist Olivier Blanchard argues that stabilising France’s debt requires closing the gap between revenue and spending, before interest payments, by around €120 billion. He also warns that France’s budget process itself increases the risk of a debt crisis (Le Monde).

France is not facing a bailout. It is negotiating inside the EU’s ordinary fiscal rules. But credibility is already costing it money. Every quarter without correction means a wider deficit, a higher interest bill and a more direct argument over who pays: patients facing higher medical costs, public workers dealing with squeezed budgets, or future taxpayers inheriting a larger debt.