France is Facing a Fiscal Crisis. A Nobel Economy Prize Winner Said it May Have Become ‘Too Big To Save.’

Nobel Prize winner Paul Krugman said France is in a "fiscally unsustainable path" and may have become "too big to save."

In a new assessment published in his Substack, Krugman said the "spike in interest rates on French government bonds over the past month has been especially large" as the financial markets began to treat the country as the "economic sick man of the Western world."

France's deficit is expected to clock in at 5.1% of its GDP, same as 2025, while 2027's is set to increase to 5.7%.

France is also under the European Union's excessive deficit procedure. The country has committed to a fiscal adjustment path through 2029 aimed at bringing its deficit below the EU's 3% of GDP threshold, according to the European Commission.

As markets consider the possibility that France could default on its national debt, Krugman also noted that even though its interest rates are lower than the U.S.'s, they have risen much faster than other European countries and are now above Italy's.

"I'm going to try to be objective here and acknowledge that France's current situation is really worrisome," Krugman said. "Debt is already very high as a percentage of GDP, and the French government is adding to that debt by running large budget deficits even though there is no emergency like a war, a severe recession, or a pandemic to justify such deficits. Furthermore, France has an aging population, which means that pension costs will, other things equal, grow much faster than revenue," he added.

While several other countries share those characteristics, Krugman noted that Paris still refuses to address its retirement age, which currently stands below 63. "The fiscal pressure caused largely by France's very generous government pension plan has led to cutbacks in other spending, notably on education. France is effectively handing over large subsidies to older French at the expense of everyone else," Krugman noted, adding that ongoing student protests that have become violent can be partially explained by that situation.

A scenario in which France needs to be bailed out would be "extremely expensive," the economist added. "As the second largest economy in the euro zone, France may have crossed the line from too big to fail to too big to save. In short, it's all too easy to describe a really ugly scenario for a French crisis that would be extremely divisive within Europe."

He concluded by claiming that markets are "behaving as if the risk of such a scenario is real but small" at the moment. However, the fact it requires "so much hope that maybe things will go right" is a big cause for concern.

Krugman is not the only one calling on Paris to address its fiscal situation. International Monetary Fund (IMF) head Kristalina Georgieva did so this week, saying the country should "get its house in order."

Asked if the situation could resemble that of the euro zone sovereign debt crisis that took place earlier this century, she said no, noting that the "French economy is growing" and that Europe has a "much more mature system."

"We have the strength of the European Central Bank. We have other instruments that Europe has developed to protect against financial stability risks," she added.