Krugman Warns France's Debt Crisis Could Trigger Eurozone Crisis

France’s debt trajectory has reached a point where European rescue mechanisms may no longer be viable, according to Nobel laureate economist Paul Krugman. Writing on a Substack blog on Thursday, Krugman warned that the country is on a fiscally unsustainable path. The warning comes as Prime Minister Sébastien Lecornu struggles to pass a 2027 budget that requires tens of billions of dollars in fiscal consolidation.

Krugman pointed to a low retirement age and an aging population as key structural issues. He described a classic debt spiral where investors stop purchasing government bonds, triggering default fears and capital flight. This cycle pushes interest rates higher and deepens the financial strain.

"France's reliance on the euro means that it's all too easy to see how this loss of confidence could turn into an ugly crisis... We saw this movie in 2009-2012, first in Greece, then in Portugal, Spain and Italy," Krugman wrote. He noted that the European Central Bank’s 2012 intervention succeeded only because southern European nations agreed to massive spending cuts. Bailing out France without similar fiscal responsibility would be extremely expensive and politically divisive.

Former ECB president Jean-Claude Trichet, who led the bank from 2004 to 2011, urged French leaders to prioritize deficit reduction. Speaking to CNBC on Friday, Trichet emphasized that political compromise is now essential for the EU’s second-largest economy. "The ball is in the camp of the French government and parliament, and they have hard work to do," he said. He added that market stability depends on France proving its credibility to investors and savers before relying on external support.

Trichet outlined available safety nets, including the European Stability Mechanism and the Transmission Protection Instrument, a market stabilization tool finalized in 2022. He stressed that Paris must formally request assistance to activate these measures, a step the French government currently says is unnecessary. Any ECB intervention would require France to demonstrate credible fiscal adjustments first.

With a presidential election approaching, political leaders face pressure to deliver a credible economic plan. Trichet warned that France must convince itself and international markets that it is moving in the right direction. Without demonstrable progress on the deficit, the country risks isolating itself from eurozone financial support.