Britain is not alone in suffering higher government borrowing costs, as yields on 30-year gilts have reached levels not seen since 1998. In France, Prime Minister François Bayrou has just lost a vote of confidence in parliament, resulting in the resignation of his government after only nine months. The country is in a political crisis once again.
Government borrowing has become more expensive recently for all major economies in the eurozone. The German 30-year interest rate is at its highest level since 2011, and Italy, France, the Netherlands and Spain are also feeling the pressure. However, the situation is particularly serious in France, where public spending has risen to no less than 58 per cent of GDP, while the tax burden on employees now stands at 47 per cent, one of the highest levels in the OECD.
Despite these huge revenues for the French government, the budget deficit is expected to reach 5.7 per cent of GDP this year. Earlier this year, rating agency Standard & Poor’s decided to maintain France’s credit rating at AA-, but with a negative outlook.
Just before the fall of his government, Bayrou argued that French debt had been accumulated to guarantee the “comfort of the baby boomers” at the expense of the next generation. French President Emmanuel Macron and his allies cannot look back on a successful track record. About half of the French debt accumulated under his presidency can be attributed to the pension burden. Over the past decade, French public debt has also risen from 90 to 120 per cent of GDP, while the eurozone average has remained relatively stable at around 90 per cent. France has not had a balanced budget since 1974, but in recent years the budget deficit has worsened, unlike that of Italy. As a result, the yield spread between French and Italian 10-year bonds has narrowed to its lowest level since 2005, reducing investor confidence.
German social spending hit a record €47 billion in 2024 and is projected to rise further in 2025, but the country’s economy is declining
French Finance Minister Eric Lombard also recently warned that seeking assistance from the IMF for France is “a risk that lies ahead of us,” given the rapidly rising national debt. It may have been a strategy to sell the Bayrou government’s proposed measures, but even if these measures were adopted, France’s budget deficit would only fall from 5.4 per cent of GDP in 2025 to 4.6 per cent in 2026. Not only does this violate EU rules on budget deficits, it also does too little to prevent French public debt from spiralling out of control.
After Bayrou’s fall, a left-wing Prime Minister may now come to power, with a likely focus on hiking taxes. Then, the tax burden in France is already among the highest in Europe.
Belgium
In neighbouring Belgium, taxes are even higher. In no other OECD country is the tax burden on employed single childless people as high as over there: more than 50 per cent of a gross salary is skimmed off by the state, according to OECD data. In the Netherlands, the figure is only 35.1 per cent, suggesting that it is possible to have a welfare state without a crushing tax burden.
To be able to reduce taxes, and generate economic growth, politically painful reforms are needed. In the case of Belgium, that means introducing reform to the social security budget, which provides for health care insurance, disability and sickness benefits as well as unemployment benefits. For years, the health care budget has remained ring-fenced. In percentage of GDP terms, Belgian public health care spending has effectively doubled since the early 1970s, from around 4 per cent of GDP then to around 8 per cent today. This increase is much bigger than other social spending.
During his last term, Belgium’s federal health care Minister, Frank Vandenbroucke, a rabid socialist, has negotiated that health care spending will be allowed to grow with an average annual 2.5 per cent above inflation, and it is scheduled to grow almost as much under the new Belgian federal government, which entered power early this year, even if there now is an intent to find some savings. The question is whether this is sustainable, as this year, Belgium’s federal and regional governments are on track for a combined 35 billion euro budget deficit, which amounts to around 6 per cent of the country’s 570 billion euro GDP. Extra defence spending and the interest rate burden on the country’s 106 per cent of GDP public debt burden are major challenges here.
The Health Care Minister’s proposed method to find savings through greater state control has however provoked a massive backlash from the medical sector itself. In early July, for the first time in two decades, a general doctors strike was called. In particular, doctors complain about his plans to further regulate what they can charge to patients. Due to the problematic financial situation of Belgian hospitals, these sometimes require doctors to provide them with some of the top-up fees doctors are allowed to charge to patients in return for a private hospital room. As a result, hospitals have also expressed concerns that such plans may further trouble their finances.
Some other concerns are that Vandenbroucke is grabbing more power for the government to suspend the licenses of doctors, that he refuses to introduce austerity for state affiliates which play a role in health care provision, and that he is merely going after the relatively high salaries of certain medical professions, like specialist doctors or dentists. Another complaint is that he is resisting letting patients pay a bit more to see general practitioners and specialists.
A key complaint here is that the Minister refuses to properly listen. An unprecedented alliance of doctors, health insurance funds and hospitals has come out against Vandenbroucke’s draft framework law, explicitly complaining that: “we are concerned about the way in which such reforms are being implemented. They are being developed at breakneck speed, without thorough prior debate and outside the existing consultation structures.” Patrick Emonts, President of the largest doctors union, ABSyM-BVAS, has flatly warned that Vandenbroucke’s plans “lead us to an authoritarian system.”
In sum, in response to financial constraints, largely caused by government distortions of market functioning in the medical system, the Belgian federal health minister pushes for more central planning and state control in order to mend the problems caused by earlier rounds of government intervention.
The European Central Bank to the rescue?
At the end of August, Friedrich Merz, the Chancellor of Germany, Western Europe’s leading economy, stated bluntly at a conference of his Christian Democratic Union party that “the welfare state that we have today can no longer be financed with what we produce in the economy.” According to the Wall Street Journal, he thereby expressed “the unspeakable”, a “taboo in modern Western democracies: admitting that the size of the modern welfare state is no longer affordable.”
Merz thereby called for a “fundamental reassessment” of the benefits system, something which immediately drew criticism from his social democratic coalition partner SPD.
German social spending hit a record €47 billion in 2024 and is projected to rise further in 2025, but the country’s economy is declining. GDP has contracted by 0.3 per cent in 2023 and 0.2 per cent in 2024, following the failure of large-scale experiments with energy supply and an end of cheap Russian gas provision.
What to expect next? The tragedy is that most Western European welfare states are now part of the eurozone. That means that their capacity to burden citizens with unsustainable debt levels has greatly increased.
Since the European Central Bank committed in 2012 to do “whatever it takes” to save the euro, which was understood as creating as much money as necessary to keep interest rates low, the likes of Italy, France and Spain have seen their government gross debt to GDP sharply increase. Yes, public debt levels in the Netherlands and Germany have slightly decreased, but given Germany’s troubling economic situation, it is unlikely that there will be much political willingness to provide yet another round of eurozone emergency bailout transfers.
This means that most of the burden will fall upon the ECB — as always — to keep the ship steady. It will use the oldest trick in the book in public finances, perfected by banana republics: create ever more money — or allow banks to do so, to suppress interest rates, to allow governments continue with unsustainable spending patterns.
Politicians in the eurozone may therefore well be able to continue making unsustainable promises to voters, who will obviously ultimately foot the bill for all of this, as the value of their savings is being depreciated, as the state acquires greater control. As these voters will continue to find out, there is no such thing as a free lunch.
