The decline of Europe's welfare state begins in France

France now pays more for its debt than Greece, Italy, Spain or Portugal, and its public deficit has not fallen below 5% of GDP in six years. The country is the clearest case of a social model that was sustained by debt and now collides with demographics and higher interest rates.

Europe remains one of the most prosperous regions in the world. Post-World War II development turned several economies on the continent into some of the richest. That growth in GDP, GDP per capita and wages since the 1950s made it possible to raise taxes without breaking social cohesion. In the 1950s, the tax burden was around 30% of GDP or less. Today in France it exceeds 50%. First came prosperity. Then came the largest and most protective welfare state in the world. The order matters: it was not built on future growth, but on growth that had already peine.

Now growth is weak. The competitiveness of European companies is languishing and the negative GDP per capita gap with the US keeps widening. To maintain its level of protection, Europe issues debt. Taxes no longer suffice. France is the great paradigm. Several economists have warned that the decline of the welfare state in Europe is already a reality, and France is the proof. Thomas Mayer, founding director of the Flossbach von Storch Research Institute and former chief economist at Deutsche Bank, sums it up: "The welfare state has been the main driver of rising public debt. It is now collapsing because the public debt it has created is no longer sustainable."

## France pays more for its debt than Greece or Italy

The market does not wait for parliamentary debates. France pays more for its debt than Greece or Italy. Also more than Spain and Portugal. Its benchmark sovereign bonds, the OATs, have to offer higher yields than those of European partners who were once branded as unruly. It is an uncomfortable shift in hierarchy. Paris no longer finances itself as the core of the eurozone, but as the student that needs a risk premium to convince investors. The historical reference weighs heavily: for years it was taken for granted that the French bond was a safe haven. Now it competes on price with countries that were on the brink of a bailout.

UniCredit Research calculations suggest the implicit interest rate on the debt could rise from 2% in 2025 to around 3.5% by the end of the decade. That figure is not explosive on its own. The problem is the stock it applies to. With around €3.4 trillion in public debt, every point of interest turns into an enormous bill. If interest spending rises, there is less room to reduce the deficit. And if the deficit does not fall, the debt keeps growing. UniCredit Research warns of a possible "sovereign-fiscal vicious circle." The wheel is easy to describe and hard to stop: more interest, more deficit, more debt, and once again more interest.

Louis-Vincent Gave, strategist at Gavekal Research, notes that France has been the "bad student" of the eurozone over the past decade. While public debt stagnated in Italy or fell in Greece, Portugal and Spain, France's kept rising. And that happens, he writes, even though France already has the most burdensome and cumbersome tax system in the region. The country does not have a revenue problem. It has a spending problem, a growth problem and a financing cost problem. When all three come together, the room for manoeuvre narrows without any need for a sudden crisis.

## A deficit stuck at 5% and a debt of 3.4 trillion

French public debt stands at around **€3.4 trillion** and the deficit has not fallen below **5% of GDP** in six years. Brussels sets the minimum passing grade at 3% of GDP. France has spent entire fiscal years above it. The Finance Ministry has admitted that debt will reach **119.3% of GDP** in 2026 and 121.7% in 2027. The European reference limit is 60% of GDP. It is more than double. The picture is not that of a country about to collapse tomorrow, but neither of one that is correcting course.

According to the IMF database, the country's public debt will reach levels not seen since 1932. This is not a prediction from a blog. It is the framework investors use to price risk. Over the last six years, the public deficit has not fallen below 5% of GDP. That sentence, repeated on bond trading desks, explains why OATs pay more than those of countries that were in bailout programmes a decade ago. The comparison with Italy, Greece, Spain or Portugal is no minor detail. France used to be the strong partner. Now it is the uncomfortable benchmark.

Philippe Riès, former economics editor and head of the Tokyo and Brussels bureaus of Agence France-Presse, describes a European model that is "obsolete" and "collapsing under the weight of global competition and demographic trends." It is sustained, he says, by growing public debt that has reached levels unknown in peacetime. Riès uses a harsh image for France: a shipwreck kept afloat thanks to the lifeboat of the euro system. The single currency allows borrowing in a huge market backed by the ECB, but it does not erase the imbalances. It only postpones them. And postponing has a price, especially when rates are no longer at their lows.

## The demographics that break the welfare equation

The underlying problem is not only fiscal. It is demographic. Mayer recalls that **baby boomers** had fewer children from the mid-1960s onwards, enjoyed the demographic dividend for decades and are now retiring en masse with a much longer life expectancy. Many started working at around 30, want to retire at around 65 and can live two more decades. The equation is simple and brutal: they expect **35 years** of work to finance **50 years** without working. "This will not work," he warns.

The system was built when the ratio between workers and pensioners was a different one. There were more people contributing, fewer retirees, and growth allowed benefits to rise without raising taxes to infinity. Today the economy grows less, European competitiveness is languishing and the GDP per capita gap with the US keeps widening. Social protection is maintained, in part, by issuing debt. Taxes no longer suffice. That mix works as long as rates are low and markets are confident. When one of the two legs fails, the adjustment appears. No social explosion is needed for the system to come under strain. It is enough for interest payments to eat up a larger share of the budget every year.

And there is a political detail that complicates everything. That generation holds an enormous number of votes. Any cut in benefits, increase in the retirement age or deep reform of the system becomes a political bomb. It is not a hypothesis. The successive failures of pension reform and the levels of street protest make that clear. Mark Doding, head of fixed income investing at BlueBay, describes it bluntly: there is "some hope" that a widening spread will force policymakers to put France on the right track, but fiscal consolidation remains unpopular with an electorate used to living beyond its means. The remark is telling because it is not about markets, it is about votes.

## The 2027 elections, the ECB and the debt limit

The ECB has warned France. **Emmanuel Moulin**, Governor of the Banco de France and member of the ECB's Governing Council, has said that France will have to solve its growing debt problem on its own and cannot expect the European Central Bank to come to the rescue if markets keep raising financing costs. He called it "flawed reasoning." "Believing that some miraculous solution will come from the ECB amounts to dodging one's own responsibilities," he declared. If the deficit is not addressed, the risk is paying ever more and suffering a gradual strangulation. It is not a market threat. It is the logic of an account that does not add up.

The Transmission Protection Instrument, known as the TPI, is not an automatic rescue button. Moulin recalls that it is reserved for critical situations that threaten the transmission of monetary policy and is only used if national-level measures are adopted. In other words, the ECB can act against an unjustified market crisis, but not against a crisis that was anticipated and warned about while the government fails to apply what it knows needs to be applied. Riès adds that the years of extraordinarily low, even negative, rates should have been used to tackle the debt. Paris took the opposite path. Now the adjustment comes when financing the deficit is more expensive and when the political system has less capacity to absorb unpopular reforms.

Politics poisons everything. The **2027** presidential elections are on the horizon. Marine Le Pen, leader of the National Rally, is the favourite in the polls to win the first round, according to Commerzbank Research, with more than a third of voters backing her. Her economic proposals include limiting immigration, cutting EU spending, lowering VAT on certain products and restoring the retirement age to 60. At the other end, Jean-Luc Mélenchon, of La France Insoumise, proposes cancelling French debt held by the ECB, returning the retirement age to 60, eliminating subsidies to certain companies and creating a wealth tax. Gave points out that both options essentially promise more social spending or measures hard to square with bondholders. The alternative is legislative gridlock that delays urgent reforms. And in the meantime, the debt keeps its course.

France may become the laboratory where Europe discovers that the welfare state built during the second half of the 20th century cannot remain intact in a society different from the one that created it. Fewer workers per pensioner, longer retirements, reduced potential growth and an ever larger debt force a cost to be shared that for years was hidden behind borrowing. Mayer takes the diagnosis to a provocative conclusion: Europe risks becoming "an old people's home for poor pensioners." Riès suggests that, in the event of a French crisis, Brussels, the ECB and the IMF could end up forcing Paris into an adjustment its domestic politics has been unable to deliver. France would then be much more than a French problem. It would be the first major warning that Europe can no longer promise the welfare state it financed during the demographic and economic era that made it possible with the same ease. This is an economic analysis, not investment advice.