France’s debt crisis explained: Could it trigger another euro zone meltdown?

Low economic growth, social unrest has fuelled fears that France's debt crisis could spread across the euro zone, according to reports.

Over 4 lakh protestors took to the streets in France this weekend, including more than 1 lakh in the capital, Paris, Bloomberg reported citing data from the country's Interior Ministry. Overall, support for the movement has sustained it added, with a Cluster 17 poll of 3,000 adults for L’Opinion carried out Oct. 19-22 finding majority support at 53%, it added.

However, 59% of the 1,500 adults interviewed want the demonstrations to end quickly, up 6 points, as worries increase about the economic and social fallout.

According to the report, the unrest has increased fears about public finances. This comes while France dodged a downgrade by Moody’s Ratings late Friday, even as it struggles to reduce the budget deficit ahead of the 2027 election, it added.

It noted that the spread between 10-year yields in France and Germany, a closely watched gauge of bond risk rose to levels last seen during the euro-area debt crisis. These bonds are the region’s safe asset and reached 178 basis points on Thursday, compared with just 85 basis points at the start of September.

Private-sector economic activity also shrank this month, with the Composite Purchasing Managers’ Index (PMI) compiled by S&P Global dropping to 48.4 in October from 51.1 last month, the report added. It noted that this is under the 50-threshold separating expansion from contraction.

The report added that France isn’t the only European country dealing with popular unrest. Clashes broke out in Albania on Saturday as protesters demanded Prime Minister Edi Rama’s resignation.

In Italy, police used tear gas in Turin after demonstrators threw paving stones and bottles, according to newswire Ansa. There were also confrontations with police in Rome and Bologna.

In Milan, where protests degenerated into looting last week, access to the central Piazza del Duomo was blocked off by authorities. Even so, 10,000 demonstrators gathered in Milan, Corriere della Sera reported.

Protests also took place in Belgium.

According to a CNBC report, investors are worried that France's debt problems risk could drag the rest of the euro zone as alarm bells ring over the region's second-biggest economy being under pressure.

The report highlighted fragmentation as the “big concern” as countries that share a currency face sharply different borrowing costs, compounding market stress and risking spiraling debt repayments for the worst-impacted countries. Its something that happened in the early 2010s when the crisis stated in Greece and spread to Ireland, Italy, Portugal and Spain.

France has among the highest deficit-to-GDP ratios in the 21-nation euro area and high debt, with economic growth in 2026 down to just 0.5% amid political volatility and social unrest, the report said.

Analysts told the publication that while contagion risks remain, it could be limited.

“French spreads are now wider than they were at the peak of the peripheral crisis of the early 2010s, but they’re still much narrower than the extreme levels that we saw in Spain, Italy, Greece and Ireland back then, so... I think the market’s assumption is that things will need to get worse before we get to a point where EU institutions start to look to try and limit further damage,” John Stopford, head of multi-asset income at Ninety One told CNBC.

George Lagarias, chief economist at Forvis Mazars told CNBC crucial structural differences minimise the risk of a wider economic spillover akin to the early 2010s, which he estimated at 10-20%.

Alex Everett, investment director for rates management at Aberdeen Investments concurred, “Compared to the early 2010s, the Eurozone has stronger banks, greater integration and numerous tools designed to limit the risk of sovereign fragmentation. I anticipate contagion to be short-lived.”

(With inputs from Bloomberg)

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