Europe's New Debt Worries: France Leads the Pack

Europe's financial landscape, once scarred by the early 2010s debt crisis that threatened the entire Eurosystem, has undergone significant reforms. These changes, including a shift from "Bail Out" to "Bail In" for banks and stricter supervision under the Banking Union, have made a new crisis less probable, according to experts.

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A debt crisis is not impossible even today, but much less likely than back then. From 2010 to 2012, there was an interplay of institutional weaknesses.

Philipp Heimberger, head of the macro group at the Vienna Institute for International Economic Studies (WIIW), notes that while a debt crisis is not impossible, the interplay of institutional weaknesses seen in the past has been addressed. Banks are now better capitalized and supervised, and the direct link between banks and sovereign debt, a major vulnerability during the crisis, has weakened. Claudia Buch, chair of the ECB's supervisory board, confirmed that the entanglement between banks and states is no longer a cause for supervisory concern.

Greece, which bore the brunt of the crisis with the highest debt-to-GDP ratio in the EU at 143.5%, is now fiscally stable. Zsolt Darvas, a senior fellow at the Brussels think tank Bruegel, suggests Greece could even increase spending while adhering to EU fiscal rules, having achieved budget surpluses. Portugal, another country heavily affected by the crisis, has also seen similar fiscal improvements.

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Banks are now better capitalized and under stricter supervision by the Banking Union.

However, concerns are shifting towards France, which is far from achieving surpluses. In the first quarter of this year, France's debt stood at 117.6% of its GDP, with a budget deficit of 5.1% in 2025 alone. The description highlights that since the COVID-19 crisis, the debt ratio has been on the rise, making France a new "problem child" in Europe's debt landscape.

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Greece could even spend more and still comply with the EU's fiscal rules.