The situation in France, characterized by political and economic difficulties, resembles dangerous scenarios from the past for Americans. The country is approaching a fiscal crisis because its spending exceeds its debt repayment capacity. The acceleration of repayment deadlines is linked to the sharp rise in bond rates in recent months, which has been fueled by rising energy costs.
Possible solutions include tax increases and cuts in government spending, but such steps could provoke strong dissatisfaction among an already irritated population. Any viable solution faces serious obstacles amid uncertain budgetary battles and deep division within the government.
A growing number of countries, including the UK, face issues similar to those in France: rapidly growing debt, increasing cost of servicing this borrowing, and insufficient political will to make the difficult decisions necessary to resolve the situation in the Western economy. The United States is also on this list.
However, the similarities may be superficial. Financial tension in France is particularly acute. The risk of the crisis spreading across Europe is assessed as low. A large share of public spending in France is dedicated to an extensive state support system, which differs significantly from the situation in the United States. Furthermore, the unique dynamics of the American economy mean that the US is not under immediate threat of becoming the next France.
The core of the problem
These difficulties are not new; the social support system in Europe has been on an unstable path for decades, and economists and some politicians have warned for years about the inevitability of this moment.
However, the situation is worsening. Iran's military actions have exacerbated the financial problems of the West. The IMF reported last week that the average yield on 10-year government bonds in G7 countries has risen by more than one percentage point since February, reaching the highest level in nearly 20 years.
According to the IMF, by the end of the decade, the total public debt of these seven economies will exceed their economic output, setting a precedent since World War II.
France's national debt stands at about 119% of GDP, double the European Union's target, and the annual budget deficit reaches 5.4% of gross domestic product. Peter Taylor-Gubi, a professor of social policy at Kent University, noted: 'In Europe, people are increasingly afraid of the bond market and the interest rates that governments must pay for borrowing. It has reached a point where it cannot be ignored. If we do, we will reach a serious crisis.'
On paper, America does not look that different: its national debt of $32 trillion is roughly equal to the US annual GDP, and the $2 trillion budget deficit, which was closed, exceeds 6% of GDP. The cost of financing America's national debt recently crossed the $1 trillion annual mark, representing a staggering 14% of the total federal budget. In other words, one of the seven taxing entities is used exclusively to pay interest on borrowed funds.
However, the serious discussions about spending cuts and tax increases taking place in Europe are far less significant in the United States. So why is the US not facing the same problems as France?
Why this won't happen in the US yet
The main advantage of the United States is that it issues the world's reserve currency. Most global transactions, including key commodities like oil and gold, are conducted in US dollars.
Demand for the dollar remains high largely because it is considered safe: the transparency and commitment of the United States to the rule of law make the dollar the cornerstone of the global financial system, even if some attractiveness has diminished over the last decade.
This also stimulates demand for US Treasury securities, which are widely considered the most reliable among safe-haven assets. Even during a global bond sell-off, US bond yields remain lower than those of other Western economies. When stocks began to fall last week, investors were not afraid to turn to their traditional haven, leading to a sharp drop in Treasury yields.
But the key difference between France and the United States comes down to one point. As James Carville said: 'The economy, dumb.' The United States also possesses a uniquely large and diverse economy that is much less susceptible to shocks than many of its smaller counterparts. Artificial intelligence, in particular, is stimulating an investment boom in the United States, supporting the economy, while other sectors show stagnation or decline.
One of the key ways to make deficits less significant is maintaining strong economic growth. This makes the debt negligible in comparison. Therefore, countries must ask: what percentage are we paying, and is it sustainable for us to continue paying it based on expected economic growth?
Mark Zandi, Chief Economist at Moody's Analytics, noted: 'France and the UK are quite close. But in the US, the contribution of AI to growth makes it more likely that we can manage our debts and get through this much more gracefully.'
Economists caution: one must not confuse the absence of an impending debt crisis in the United States with fiscal responsibility. It is simply that the American economy handles this issue better than France or the UK. Zandi added: 'That doesn't mean we should comfort ourselves with that. We are just in a different position.'
Could it happen elsewhere
Any situation where a European country faces a fiscal problem raises concerns about contagion that could spread across the continent. However, economists generally consider France's problems to be localized within the country.
The European Central Bank has indicated that it will not need to intervene in France's financial situation. Nevertheless, it could, and according to Andrew Cunningham, chief European economist at Capital Economics, it is well-prepared to buy large quantities of bonds from its member states to limit any potential contagion effects.
The deficits of other European economies are also significantly smaller compared to France. Some of them are expected to run a surplus this year.
Political parties in France, both left and right, have stated their desire to remain in the European Union, including the far-right candidate from the presidential front, Marine Le Pen, who previously advocated for 'Frexit' but has since abandoned that promise. However, Cunningham noted that the AfD party in Germany advocates for leaving the EU but is not yet close to forming a government.
But the 'X-factor' could lead to a debt crisis outside of France: the US 'X-date'. At some point next year, the United States will again hit its debt ceiling, and a new Congress will have to negotiate with President Donald Trump to raise it—a political ball that could be especially difficult due to the 'vampire' president and a potentially Democrat-controlled Congress less inclined to compromise.
The inability to raise the debt ceiling threatens to force the United States into an artificial default on its obligations, even if it could otherwise service them. Zandi stated: 'We can build a scenario where we breach the debt limit by Halloween next year. And then you will have other problems.'