France’s debt is set to rise to 121.7% of GDP in 2027, while Bruegel sees limited scope for ECB intervention

France is expected to end 2027 with public debt equivalent to 121.7% of GDP, even if the government succeeds in reducing the deficit as outlined in next year’s draft budget. The official public debt report estimates 119.3% of GDP in 2026 and a further increase in 2027, while the interest bill would rise from EUR 79.2 billion to EUR 91.2 billion in a single year.

In brief

The French government estimates public debt at 119.3% of GDP in 2026 and 121.7% in 2027.

The 2027 budget draft aims to reduce the deficit from 5.4% to 5.0% of GDP through an adjustment effort of approximately EUR 54 billion.

Interest expenditure is estimated at EUR 79.2 billion in 2026 and EUR 91.2 billion in 2027.

Bruegel considers that an increase in French bond yields justified by deteriorating public finances would not, in itself, be grounds for ECB intervention.

The ECB’s TPI can be used against disorderly and unjustified market movements that threaten the transmission of monetary policy, following an assessment of the targeted state’s fiscal and macroeconomic situation.

The French draft budget for 2027 provides for a recovery effort of approximately EUR 54 billion. The government aims to reduce the public deficit from 5.4% of GDP in 2026 to 5.0% next year, despite an economy that would grow by approximately 1%. However, the measures would not be sufficient to immediately halt the increase in debt, as the deficit would remain above the level compatible with stabilizing the debt-to-GDP ratio.

The report of the French Ministry of Finance shows that debt reached 115.7% of GDP at the end of 2025 and would continue to rise through 2027. The government estimates a reversal of the trend only from 2029 onward, if the multiannual budgetary path is respected.

Pressure also comes from refinancing debt accumulated during the period of very low interest rates. As older bonds mature, the state must issue new securities at higher yields, and the cost is gradually transferred to the entire stock of debt. Interest expenditure would thus increase by approximately EUR 12 billion between 2026 and 2027.

Bruegel starts from this combination of high debt, a persistent deficit and rising financing costs to analyze what would happen if pressure on French bonds became much stronger. The authors, Gene Frieda, Jacob Funk Kirkegaard and Mahmood Pradhan, do not describe a crisis that has already begun and do not claim that the ECB is preparing an intervention.

The analysis separates two situations that may arise in the market. Investors may demand higher yields because they consider that France’s deficit, debt or growth prospects justify greater risk. However, the pressure may at some point exceed this reassessment and become disorderly, affecting market liquidity or the financing costs of other euro area states.

The first situation remains primarily a matter of French fiscal policy. The ECB did not create its monetary transmission protection instruments to artificially maintain a government’s borrowing costs when markets are reacting to the country’s economic fundamentals.

The second situation may fall within the scope of the Transmission Protection Instrument, TPI. The European Central Bank created the instrument in 2022 for situations in which unjustified and disorderly market dynamics threaten the uniform transmission of monetary policy across the euro area.

TPI allows the Eurosystem to purchase securities on the secondary market issued by states facing deteriorating financing conditions, if this is not justified by economic fundamentals. There is no automatic threshold for yields or for the spread against German bonds that would trigger intervention.

The ECB Governing Council must assess the market situation and compliance with eligibility criteria. These include compliance with the European fiscal framework, the absence of severe macroeconomic imbalances, the sustainability of public finances, and sound and sustainable macroeconomic policies.

France is subject to an excessive deficit procedure, but this does not automatically exclude the use of TPI. The ECB framework also considers compliance with corrective measures and debt sustainability assessments conducted by the European Commission, the ECB, the European Stability Mechanism and the International Monetary Fund.

Bruegel considers that the problem for France would arise precisely in assessing the origin of market pressure. If investors demand higher interest rates because debt continues to rise, the deficit remains high and budgetary adjustment is unconvincing, part of the increase in yields may reflect the country’s fiscal risk, rather than a malfunction in the transmission of monetary policy.

The authors therefore argue that Paris should begin its own debt stabilization process before the problem reaches the ECB. In the scenario analyzed by Bruegel, a credible budget, medium-term expenditure control and reforms capable of changing the debt trajectory would make the distinction clearer between pressure justified by the fiscal situation and a disorderly market reaction.

If adjustment begins and yields continue to rise at a pace that can no longer be explained by France’s situation, or if pressure is transmitted to other sovereign markets unrelated to their fundamentals, the argument for using TPI would become more closely aligned with the purpose for which the instrument was created.

There is also a second option in the ECB’s arsenal, Outright Monetary Transactions, OMT, created during the euro area sovereign debt crisis. However, using OMT requires an European Stability Mechanism program and associated conditionality, making it a very different instrument politically and institutionally.

France continues to benefit from one of the largest and most liquid sovereign bond markets in the world, and Bruegel’s analysis does not anticipate the disappearance of demand for French debt. The risk described is a prolonged period in which the state finances itself at higher yields, while debt refinancing gradually transfers these costs to the budget.

Rising interest rates reduce the room available for other spending precisely when the government is trying to correct the deficit. The 2027 budget already provides for an interest bill of EUR 91.2 billion, while the official public debt report estimates that the interest burden for all public administrations could rise from 2.2% of GDP in 2025 to 3.7% in 2030.

France thus enters the period leading up to the 2027 presidential elections with budgetary adjustment under way, but without immediate debt stabilization. The evolution of yields will depend on global markets, economic prospects and the credibility of the fiscal path that Paris manages to maintain after the budget is adopted.

https://2eu.brussels/ro/news/datoria-frantei-ar-urca-la-1217-din-pib-in-2027-iar-bruegel-vede-spatiu-limitat-pentru-interventia-bce