In a post published Thursday on the Substack blog, Krugman said France was on a “fiscally unsustainable path,” facing growing interest on its public debt while exacerbating its high debt-to-GDP ratio with large budget deficits.
A key problem is the country’s inability to tackle the relatively low retirement age as the population ages, he argued.
“France’s dependence on the euro means it is all too easy to see how this loss of confidence could turn into a nasty crisis… We saw this movie in 2009-2012, first in Greece, then in Portugal, Spain and Italy,” Krugman wrote, referring to the sovereign debt crisis that triggered massive ECB intervention.
“First, investors stop buying a eurozone country’s bonds, raising the specter that the government will be forced to default because it simply does not have the liquidity to pay the interest and principal on its debt. The fear of default then leads to even greater capital flight, which increases default fears and the interest rate, and the vicious cycle deepens.”
The ECB’s famous assurance to markets in 2012 by then-President Mario Draghi that it would do “whatever it takes” to avoid domestic defaults was accepted largely because southern European countries engaged in “massive spending cuts,” Krugman noted.
Saving France would be “extremely costly” for the ECB and politically controversial as long as the country moves “even further away from its budgetary responsibility”, he continued.
“France may have crossed the line between too big to fail and too big to save. In short, it is too easy to paint a truly horrific scenario for a French crisis that would be extremely divisive in Europe,” he wrote.
The French government must “propose something that is credible”
Speaking to CNBC on Friday, former ECB chief Jean-Claude Trichet urged politicians to find a compromise to reduce the deficit in the EU’s second-largest economy.
Trichet, who led the ECB from 2004 to 2011, said: “The ball is in the court of the French government and Parliament, and they have a lot of work to do. »
“Of course, if there is destabilization, the instruments are very numerous and have proven very effective in the past. And I have of course experienced such a period in my time,” the former governor of the Bank of France told CNBC’s “Squawk Box Europe.”
These instruments include the European Stability Mechanism and, at the most extreme end, the ECB’s Transmission Protection Instrument (TPI), an as-yet-unused measure finalized in 2022 and intended to ensure market stability in times of fragmentation in the eurozone.
Protesters gather for a student demonstration at Place de la Bastille with a view of the Colonne de Juillet monument in Paris, October 8, 2026, as part of a national protest movement against learning conditions.
Simon Wohlfahrt | Afp | Getty Images
Intervention would require the French government to go to the ECB for help, which it believes is not necessary, Trichet said.
“My recommendation to all political sensibilities in France, and you know that the situation is complex in terms of political preparation for the presidential election, but I would ask everyone to be responsible in these circumstances.”
“All political sensibilities, whatever they may be, must understand that it is time to prove to France, a market player, that they are responsible.”
“I call on them, of course, to be as effective as possible in their discussions and to prove that they can provide something that would be credible. This is of course one of the conditions for activating the IPT,” he said.
Trichet said his own experience during the sovereign debt crisis showed that “you have to help yourself first, because we cannot win if you yourself do not convince market participants, investors and savers of your credibility.”
“Of course, we must convince the country that it is going in the right direction. That goes without saying. This is the conviction, if I understand correctly, of the governor of the Bank of France and the French government,” he added.
Gn bussni
