Source: French to English Tester Published on: 2026-03-31
Source: The Conversation – France (in French)– By Éric Mengus, Associate Professor in Economics and Decision Sciences, HEC Paris Business School
The rise in energy prices has been accompanied, for France, by an increase in the cost of debt issuance, up to 3.9%. You would not appreciate it if that were the rate on your bank loan. Paradoxically, it is less concerning from the perspective of national public finances than from the outlook for growth and the evolution of the deficit in the coming months.
Since the outbreak of the conflict in the Middle East at the end of February, the cost of debt issuance for France has increased significantly for the State.ten-year debt ratehas risen from 3.3% to nearly 3.9%, a rate unprecedented since 2009. The last few days have marked a certain easing of these rates – with the prospect of a possible resolution of the conflict, as well as more frequent passages of tankers through the Strait of Hormuz tolerated by Iran – but they remain high at over 3.7%.
Paradoxically, this rise in rates is not necessarily worrying in itself for French public debt, insofar as it will be accompanied by inflation. However, greater concern should be directed towards the evolution of the public deficit – 152.5 billion euros, or 5.1% of GDP according tolatest data from Insee.
The public deficit will be put under pressure due to possible lower tax revenues resulting from the consequences of energy prices on economic activity. It may be even more so if the State implements measures such asenergy shield in 2022– an estimated cost of 26.3 billion euros between 2021 and 2024. Of course, a deterioration of the deficit may be accompanied by an additional increase in the cost of debt, further worsening the difficulties encountered by French public finances.
Financial Market Expectations
It should be noted that, for the moment, this increase in rates is not specific to France. Other countries, such as theGermany, also see the cost of their debt increase. The difference in interest rates between France and Germany over the past month still remains far from the peaks it experienced last October – thespread, orthe spread between French and German borrowing costs was around 80 basis points.
The main reason: inflation resulting from increases in energy prices leads financial markets to anticipate amore restrictive monetary policyIn the future. Specifically, these potential interest rate increases anticipated by the market are incorporated almost uniformly into the yields of public debts in the euro area. On the other hand, this rate increase does not seem specific to France, unlike in the second half of last year when difficulties in obtaining a budget had caused French rates to diverge more from German rates.
On the monetary policy side itself, these interest rate hikes are not certain. For now, theshock is perceived as being less strongthan it was in 2022 at the time of the war in Ukraine. The macroeconomic context is considered different from what it was then at the end of the Covid-19 pandemic. The monetary policy response in this context is, for the moment, to:
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Ignoring shocks to energy prices, the “look through” orlook throughin English ;
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Only react if the shock becomes stronger and/or more persistent, or if the private sector begins to anticipate more inflation, which can lead to arisk of self-sustaining inflation.
Public debt and inflation: what links?
What consequences will more inflation then have for French public finances? In principle, an unanticipated inflation shock is favorable for public finances. A large portion of France’s debt — around 90% — is not indexed to inflation. An increase in the latter leads to a reduction in the real value of what the French public sector has to repay.
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The fear of inflation raises concerns about an increase in interest rates
This beneficial effect of inflation is reduced if it is accompanied by a contraction in economic activity and a lower growth rate. Thegrowth prospectsFor this first quarter of 2026, data from INSEE do not go in this direction: 0.2% in the first quarter, the same in the second.
For the entire euro area, in thedifferent scenarios described by the ECB, the overall net effect on debt tends rather towards a reduction of it: the shock will generate more inflation than growth reduction.
Explosive cocktail
The slightest economic activity will very likely lead to a deterioration of the public deficit, which will then weigh on the level of public debt. Without even adding new measures to support the economy, the public sector will see its tax revenues decrease and its expenditures increase, notably due to unemployment insurance – these are the automatic stabilizers. This would mean that the slight improvement of the deficitrecorded last yearwill be short-lived.
Additional measures to mitigate the costs of the energy shock would very likely be associated with a further increase in debt, as was the case with thetariff shield in 2022.
These pressures on the public deficit will take place in an already complex context in which the deficit has been above 5% for several years without a political consensus to bring it down to lower levels. Additional difficulties in controlling this deficit could lead France to return to levels ofspreads(difference between borrowing costs) compared to Germany significantly higher.
In the longer term, if the shock on energy prices persists, it is possible that a situation complicated from an economic and social point of view will arise: inflation, reduction of economic activity, constrained public spending leaving little room for support policies. This mix is likely to complicate a year preceding multiple electoral deadlines.
Éric Mengus does not work for, advise, own shares in, receive funds from any organization that could benefit from this article, and has declared no other affiliation than his research institution.
–ref. Attention, the Ormuz crisis is putting pressure on France’s debt –https://theconversation.com/attention-the-hormuz-crisis-puts-pressure-on-france-s-debt-279466