Krugman Warns France Could Collapse or Be Rescued: Eurozone Crisis Alert

[Block Media Reporter Lee Jeong-hwa] Nobel laureate Paul Krugman has warned that France's worsening financial situation could lead to a debt crisis that shakes the entire Eurozone.

With France's national debt swelling to 119% of its Gross Domestic Product (GDP), there are concerns that fiscal reforms are being delayed. He expressed worries that France is too big to be rescued and poses significant risks.

In a post on Substack on the 9th (local time), Professor Krugman diagnosed that France's financial situation is heading down an unsustainable path. He cautioned that France's financial issues could threaten European integration beyond individual countries.

France: A Country That Can Neither Be Left to Fail Nor Rescued

Krugman stated, "The current situation in France is truly concerning," adding, "This is not just a problem for France alone." He warned that "the fact that France is a member of the Eurozone creates the possibility of an explosive debt crisis," which could have devastating effects on European integration.

France's national debt has reached €3.6 trillion (₩540 trillion), with a debt-to-GDP ratio of 119%, the highest since the euro's inception. The problem is that despite the already massive level of national debt, the government continues to increase its borrowing.

Krugman analyzed that the French government's lack of fiscal responsibility could make future bailouts even more difficult. There is a possibility that other Eurozone member states may refuse to support France. He pointed out that the sheer size of the French economy means that the costs of any bailout would be enormous.

He remarked, "France may have crossed over from being too big to let fail to being too big to rescue." He further warned that "it is not difficult to envision a very bleak scenario where a crisis in France leads to severe divisions within Europe."

The French bond market is already reacting sensitively to fiscal risks. In recent months, there has been a massive sell-off of French bonds. Initially, concerns over new inflation shocks triggered the sell-off. Subsequently, the issues of massive fiscal deficits and political polarization exacerbated the instability in the bond market.

The yield spread between French 10-year bonds and German bonds, considered safe assets in the Eurozone, has also widened. This gap has reached levels seen during the European debt crisis of 2011-2012. On the 9th, the yield on French 10-year bonds fell by 3 basis points (0.03 percentage points) to 4.86%. However, the structural fiscal issues that Krugman is concerned about remain unresolved.

Pension Reform Failures and Political Conflicts: Warning of Underestimating Default Risks

Krugman identified the structural causes of France's fiscal deterioration as the pension system and the lack of political will for reform. While France is not the only country facing fiscal issues, the inability to realistically address retirement problems is particularly severe. He pointed out that French citizens start receiving pensions at an earlier age compared to those in other Western European countries.

Political movements are also acting as obstacles to improving fiscal soundness. Marine Le Pen, a leading candidate in next year's French presidential election, has promised to allow some workers to retire at 60.

In contrast, protests by students against teacher shortages, overcrowded classrooms, and outdated school facilities continue across France. Krugman criticized, "France is effectively providing massive subsidies to the elderly at the expense of everyone else." He added, "It is not surprising that there are nationwide large-scale student protests."

He also warned that financial markets are underestimating the risk of France defaulting. According to Krugman, the implied probability of default reflected in the prices of credit default swaps (CDS) for France is 1.2%.

While this absolute figure is low, he believes it is excessively low considering the actual fiscal risks. He stated, "The sudden rise in the CDS prices of French bonds is very concerning."

CDS are credit derivatives that protect against the risk of a bond issuer failing to meet its obligations. Generally, when CDS prices rise, it indicates that the market perceives an increase in credit risk.

European authorities are also monitoring the instability in the bond market. Christine Lagarde, President of the European Central Bank (ECB), stated this week that Eurozone finance ministers are closely watching market movements. She emphasized that they have measures in place to respond if the market moves disorderly without justifiable grounds.

On the other hand, French Finance Minister Roland Lescure expressed that France is far from a situation that requires ECB intervention.

Krugman's warnings focus on the idea that France's fiscal problems may not be limited to just rising bond yields. In a situation where massive national debt, political conflicts, and difficulties in pension reform are intertwined, a rapid deterioration in market confidence could threaten the stability of the entire Eurozone.

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