How France Lost the German Safety Net
IEP BOCCONI ANNUAL EVENT - The widening divide between Paris and Berlin has left French debt exposed and made the political cost of fiscal adjustment harder to bear. A commentary by Marco Buti
IEP Bocconi Annual Event
Marco Buti will speak at the IEP Bocconi Annual Event, “At the Table or on the Menu? Europe, Middle Powers and International Order”, on 18 November 2026 in Milan. He will join the panel on technology, industrial policy and digital sovereignty.
For decades, European economic and financial integration rested on an unwritten axiom: France and Germany were bound together. European partners and market participants took it for granted that Berlin would never let Paris fall.
That assumption can no longer be relied upon. Cyclical factors and the difficult personal chemistry between President Emmanuel Macron and Chancellor Friedrich Merz certainly play a part.
But, above all, there is a deep structural divergence between France and Germany that has widened progressively since the introduction of the euro, along three dimensions.
First, openness to trade. While Germany placed its bet on exports of medium-technology products, the French economy remained significantly more protected and suffered a steady erosion of market share. Second, labour market dynamics.
Structural reforms introduced by Germany in the early 2000s helped raise participation rates, albeit at the cost of stagnant wages. Rigidities in the French labour market, by contrast, produced persistent structural unemployment and held back productivity growth.
Third, public spending. While Germany progressively reduced its expenditure, France’s remained around 57 per cent of GDP, among the highest in the European Union and roughly seven percentage points above Germany’s.
Rather than use the low interest rates of recent years to consolidate its public finances, Paris used public debt to finance current government spending.
The crisis of the two growth models, Germany’s trapped in mature technologies and vulnerable to external threats, France’s turned in on itself, lies behind the nationalist impulses visible in both countries.
The Franco-German divergence has two consequences.
First, as the gap accumulated over time, it translated into different economic and social preferences. Diverging interests became diverging values that now undermine the Franco-German engine.
Second, the perception that the German umbrella is no longer there to protect France has led markets to reassess the risk of French public debt.
Rising yields on French government bonds, the Obligations assimilables du Trésor (OATs), now around 5 per cent, together with the fading drivers of French growth, above all demographics, and a structural inability to generate primary surpluses, risk putting public debt on an unsustainable path.
Perhaps most worrying is the complacency surrounding the European Central Bank’s safety net.
Analysts often present the ECB’s safeguards as a guaranteed shield against market contagion. Yet both the Transmission Protection Instrument (TPI) and Outright Monetary Transactions (OMT) appear difficult to use, given the eligibility criteria for the former and the conditionality attached to the latter. The informal backing Angela Merkel gave Mario Draghi in 2012 would be difficult to reproduce today.
The deterioration of social buffers is adding to this “sustainability trap”.
France’s deep institutional paralysis is accompanied by the weakness of intermediary bodies, including social partners, associations and local authorities, which traditionally act as shock absorbers in times of crisis.
In their absence, popular discontent, yesterday that of the Gilets Jaunes and today that of students protesting across the country, is not channelled through orderly processes. Instead, it erupts directly on the streets, challenging the authority of the state. In these conditions, the political cost of even modest fiscal consolidation becomes prohibitive.
This systemic rigidity reveals a dangerous cultural vulnerability: the French population has no experience of severe sovereign fiscal stress.
Unlike southern European countries, which endured painful adjustments during the eurozone debt crisis of 2010-12, France has never had to face such market pressure.
Take Italy. In the past, under severe stress, its political system developed an unprecedented ability to adopt emergency adjustments, benefiting from strong national solidarity.
One can only hope that this survival instinct endures after the experience of the past four years. France’s centralised, majoritarian political culture, combined with the absence of episodes of acute stress, offers no such flexibility. This is all the more true now that the election campaign is intensifying divisions and dramatically shortening the political horizon of the contenders.
Ultimately, France will have to confront a “sustainability trilemma”: social, fiscal and political. Social sustainability, including a response to the legitimate demands of students, and fiscal sustainability, requiring a gradual reduction of debt, will mean challenging a form of political sustainability built on the privileges of vested interests sustained by public spending.
The test for France, and for Europe, will be to create the conditions to reach that point without first going through a fiscal crisis. The electoral debate offers little reason for optimism.
A previous version of this article was published by Il Sole 24 Ore
IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
