Bond market turmoil and the simultaneous mass student protests at French schools are not a coincidence and point to the generational tradeoffs made in government spending, according to Nobel laureate Paul Krugman.
In a Substack post on Thursday, the economics professor at the City University of New York’s Graduate Center acknowledged that the high debt and deficits driving up French bond yields lately are not unique to the eurozone’s second largest economy.
In fact, the U.S. is guilty of the same fiscal sins, especially as aging demographics push entitlement spending up faster than revenue comes in.
“But France does stand out, even among fiscally troubled nations, in one main way: its persistent inability to get realistic about retirement,” Krugman added.
That’s as France’s official French retirement age, when workers can collect full benefits, was just 62 in 2023, while the average actual age of retirement was lower than anywhere else in Western Europe at only 60.4 years.
Meanwhile, French students are rioting in the streets to protest missing teachers, run-down classrooms, and buildings that aren’t equipped for rising temperatures. Protestors blame years of underinvestment in public education.
Krugman drew a straight line from France’s retirement largesse to the student unrest, highlighting the generational tensions over how to allocate public resources to baby boomers versus the country’s youth.
“Thus the fiscal pressure caused largely by France’s very generous government pension plan has led to cutbacks in other spending, notably on education,” he wrote. “France is effectively handing over large subsidies to older French at the expense of everyone else. Mass national student demonstrations should come as no surprise.”
Of course, U.S. debt is also on an unsustainable trajectory as spending on seniors jumps amid more baby boomer retirements. But even some Republicans have expressed openness to tax hikes to keep Social Security’s trust fund solvent.
For his part, French President Emmanuel Macron attempted to raise the retirement age to 64, but intense political pushback has stalled those efforts.
And the front-runner in France’s presidential election next year, far-right leader Marine Le Pen, has vowed to roll back the official retirement age to 62 and even previously suggested dropping it to as low as 60.
“This would be extremely expensive and is symptomatic of a general unwillingness on the part of France’s rising right to face reality,” Krugman said. “Again, this is hardly unique to France — think of all the false promises and claims Donald Trump has made. But for now, at least, financial markets believe that fantasy economics is an even bigger problem for France than for the rest of us.”
Indeed, markets are pricing in growing odds of a French debt default. Earlier this month, French 10-year bond yields jumped to the highest since 2002, and the premium over equivalent German yields widened to the most since the eurozone debt crisis in 2011.
Those metrics later eased, but France’s fundamentals remain troubling, with anemic GDP growth, a budget deficit estimated at about 5.4% of GDP, and rising debt-service costs as yields jump.
France’s debt-to-GDP ratio is expected to climb to 122% next year from 119% this year, and the government’s latest plan failed to halt the surge in bond yields as investors doubted its credibility.
Thierry Wizman and Gareth Berry, global strategists at Macquarie, also drew a connection between the French debt crisis and the student protests.
In a note Wednesday, they warned that the longer the protest go on, the more likely it is that the government will cave and approve more spending, which would make the debt situation worse.
That would drive up yields on French bonds, making borrowing to fund that spending even more expensive—and thus worsen the problem that the rioters are complaining about.
“France is veering toward a full-blown civil crisis because of its political polarization, which heretofore had been manifested mainly in the political realm itself, and at the ballot box only,” they wrote. “And rather than being isolated events, we think a direct and self-reinforcing causal connection can be drawn between the rise in France’s debt yields and the street riots of the past few days.”
