Europe’s Twin Headache: Economists Warn About Debt Pressures in UK and France

Warning lights are flashing in London and Paris as economists caution that rising debt, fragile politics, and market unease are straining the coffers of Britain and France, Europe’s second- and third-largest economies, respectively.

Neither country faces an immediate financial crisis, analysts say, but both are vulnerable to the kind of debt buildup, shaky fiscal credibility, and political struggles that have often preceded crises in the past.

In both the UK and France, public debt has climbed to uncomfortable levels—the highest since the 1960s for London and the largest in the eurozone for Paris.

With high borrowing levels and fluctuating interest rates, repayment of the debt gets more expensive.

National budget presentations are due this fall—in October in France and in November in the UK—and are expected to test their governments’ ability to balance competing fiscal and political pressures.

Fragile politics add to market unease.

In London, Prime Minister Keir Starmer’s Labour government is under pressure over self-imposed fiscal rules that limit its ability to increase spending or cut taxes.

In Paris, President Emmanuel Macron must govern without a parliamentary majority following the government’s collapse on Sept. 8, making budget approval contentious and markets nervous.

Citing political instability and rising debt, Fitch Ratings downgraded France’s credit rating on Sept. 12 to its lowest score on record.

“There are certainly warning signs flashing and pressure on the UK Chancellor Rachel Reeves and the new government in France to do something,” Russ Mould, investment director at UK investment platform AJ Bell, told The Epoch Times.

He noted that party politics and “a lack of public appetite” for spending cuts and higher taxes limit what the governments can do.

Britain’s public sector debt stands at 96.1 percent of gross domestic product (GDP), the highest since the 1960s, while France’s is 114 percent, among the largest in the eurozone.

Servicing that debt has become more expensive as the Bank of England has raised and then slightly lowered interest rates since 2021 to fight inflation, with rates now settled at 4 percent, pushing up the cost of government borrowing.

In France, where the European Central Bank (ECB) sets rates, borrowing has also become more expensive: The ECB’s main rate jumped to more than 4 percent last year from zero percent in 2022, before easing to just above 2 percent in June.

Politics, Debt, and Triggers

In their analysis, shared with The Epoch Times, economists at London-based consultancy Capital Economics said many of the conditions that have led to fiscal crises in the past are now present in Britain.

“This does not mean a fiscal crisis in the UK is imminent or inevitable. The missing ingredient is a trigger,” the firm’s Sept. 5 economic update reads.

The UK’s Labour government, elected in 2024 on a pledge of fiscal responsibility, stressed the poor economic inheritance of a 22-billion-pound ($29.6 billion) “black hole” in public finances from the previous Conservative administration.

Its attempts to cut public spending have been met with a rebellion by its own lawmakers.

Economists say these setbacks leave Reeves facing a difficult balancing act, given fiscal rules that prohibit further tax increases and preclude a return to austerity for public services.

“Whatever the chancellor does in the budget on 26th November, the government must continue to fly the flag of fiscal rectitude to keep the bond market onside,” Capital Economics stated.

“It needs to persuade bond markets of its commitment to fiscal discipline, while at the same time reducing the budget deficit in a measured and gradual way.”

The economic update listed a number of possible triggers for a UK fiscal crisis, including politicians breaking their own budget rules, failing to cut spending or raise taxes, global market troubles, or investors losing faith in Reeves.

Budget Standoff

In France, newly appointed Prime Minister Sebastien Lecornu faces the challenge of restoring stability and ending the budget deadlock, after his predecessor, François Bayrou, failed to pass proposals that included cutting two public holidays and raising taxes by approximately $20 billion.

These plans sparked backlash from the right-wing National Rally, led by Marine Le Pen.

Alexandre del Valle, a French Italian professor of geopolitics and international relations at IPAG Business School, told The Epoch Times that the same challenges will resurface under Lecornu.

“The new government does not plan to make real public spending cuts. The political class needs to understand that you can’t add taxes on top of taxes. People are fed up. France is in a very dangerous situation,” he said.

Del Valle criticized the government’s spending as wasteful, pointing to costly local projects, the outsourcing of civil servants’ work to international consultancies, and high salaries for government officials.

To ease tensions, Lecornu dropped Bayrou’s proposal to eliminate two public holidays and announced that lifetime benefits for former government members will end on Jan. 1, 2026.

For former prime ministers, police protection will be limited to three years, extendable only for security reasons, and the use of a state-funded car and driver will be capped at 10 years.

The changes are expected to save about 4.4 million euros ($5.2 million) annually.

Del Valle called for bigger structural reforms to strengthen fiscal discipline, such as the so-called “golden rule” in fiscal policy, which allows deficits only to fund long-term investments rather than everyday spending.

But he said France is unlikely to adopt it and that leaders would avoid the decision out of fear of public protests.

Crisis Parallels

British economists, including Jagjit Chadha, former head of the UK’s National Institute of Economic and Social Research, warn that the UK faces strains reminiscent of the 1970s, when the country sought help from the International Monetary Fund (IMF).

Mould disagrees.

“The UK didn’t actually need that loan in the end, and it repaid it incredibly quickly. So I think we need to be very careful with what we say there,” he said.

According to Capital Economics, the possibility of an IMF bailout in either country is “wide of the mark.”

However, it warned that conditions are worsening and that bond yields have risen relative to risk-free rates in both countries.

These yields represent the interest governments must pay investors when they borrow, so a rise signals both higher borrowing costs and heightened concern in markets about fiscal policy.

The UK’s 30-year gilt yield climbed to about 5.7 percent on Sept. 2, its highest level since 1998, reflecting mounting investor concern over fiscal policy.

France’s 10-year bond yield was near zero percent in 2020, but today it is hovering above 3.4 percent.

Capital Economics stated that the UK has become more reliant on foreign investors to hold its debt, raising the risk of a sudden pullback during periods of stress.

Still, the consultancy does not expect Britain to be forced into an IMF bailout.

In France, the government’s collapse is likely to leave the budget deficit wide and debt still climbing, Capital Economics said, noting that spreads on French bonds could rise further, potentially exceeding Italy’s, although it sees little risk of broader contagion across the euro zone.

“Bond vigilantes are paying great attention,” Mould said. “If there are further downgrades of French debt, then some bond funds may be unable or unwilling to hold it. That is an uncomfortable situation for France.”

He said that while the UK has more flexibility outside the eurozone, its finances have deteriorated sharply over the past decade.

Borrowing costs are now higher than for countries such as Portugal, Italy, and Greece, once at the heart of Europe’s debt crisis.