French debt costs hit 17-year high after Middle East oil blockade

French government bonds were yielding 3.97% in mid-May, their highest level since 2009. German bonds reached 3.18%, the highest since 2011. The immediate trigger is oil: prices moving towards $109 a barrel after the Strait of Hormuz blockade squeezed roughly a fifth of global crude trade. But the market move is exposing a deeper European problem, one familiar even from a small eurozone state such as Malta: governments want more defence, more investment and more resilience, while the cost of borrowing has suddenly become harder to ignore.

From Oil Price to Bond Price

The route from an oil shock to higher government borrowing costs runs through inflation expectations. Dearer energy feeds into headline inflation, the figure that includes volatile items such as fuel and food. US consumer prices reached 3.8% in April, pushed by a 17.9% jump in energy. US 10-year Treasury yields then moved above 4.44%, and global bond markets followed.

In Europe, traders now put an 87% probability on the European Central Bank raising rates in June. When markets expect higher rates, yields rise across government debt. The ECB says the term premium, the extra return investors demand for holding longer-dated bonds in uncertain times, is the main driver behind higher long-term yields. Before the crisis, long-term inflation expectations were still anchored near 2%. Investors have not abandoned the ECB. They are charging more for risk.

France: Where Global Shock Meets Local Weakness

Every eurozone government is now paying more to borrow. France has the added problem of domestic political risk sitting on top of the global shock. The spread between French and German government bonds has widened to around 85 basis points, or 0.85 percentage points, compared with a historical average of 53 before the 2024 political crisis.

France’s interest bill rose 37% in the first quarter of 2026, to more than €6 billion. For the year as a whole, the Treasury expects €59.3 billion in debt service, now higher than the education budget. Interest payments have become the French state’s largest single item of spending.

The sharper signal is Italy. France and Italy now borrow at almost identical rates, with the gap between their bonds falling to just 5.5 basis points last summer. The old market order, where France was treated as safe and Italy as risky, has broken down. The ECB itself describes Italy as a "positive exception" because of Rome’s fiscal discipline. Paris, by contrast, is paying for political fragmentation.

Guns and the Arithmetic That Doesn't Add

This is the setting in which NATO is pressing members to spend 5% of GDP on defence by 2035. France currently spends 2.4%. Closing that gap would require another €75 billion a year, just as the government has ordered €6 billion in spending cuts to offset higher interest costs. Rearmament and debt service are competing for the same fiscal space.

France is far from alone. Spain’s fiscal watchdog, AIReF, says Madrid needs €15 billion in adjustments by 2028 to comply with EU budget rules. Poland’s defence spending already stands at 4.8% of GDP, the highest in NATO, but 37% of it is financed through debt. Germany’s new €500 billion infrastructure fund, added to unlimited defence borrowing, has led economists to warn of possible breaches of EU fiscal rules.

The ECB meets on 11 June. Christine Lagarde has called the situation a "layer cake of shocks": each shock manageable on its own, together without precedent. Raising interest rates to contain an oil-driven inflation shock is standard central banking. Doing so while the eurozone’s second-largest economy is already under fiscal strain is the harder part, and the question Frankfurt would rather someone else answer first.