Behind France's latest riots, investors are starting to doubt the country will ever cut pensions or raise taxes, and the cost of insuring against a French default has jumped.
France's streets are on fire again. The weekend's unrest caused hundreds of millions of euros in damage, some 2,400 arrests, and a fire at Limoges city hall, which had survived two world wars; its clock spire collapsed.
Riots are normal; a spooked bond market is not
French people riot. In 2023 a police killing set off a week of nationwide unrest; from 2018 to 2020 the Yellow Vests protested and burned things for over a year. This time is different: investors are seriously wondering whether France will pay its debts.
French government bond yields are rising, but the price investors pay to insure against a French default has shot up even faster. They suspect the government will neither raise taxes nor cut spending, and will simply borrow more to cover the interest.
Pensions are the switch nobody can touch
Paul Krugman argues the problem is old-age pensions, which eat a growing share of GDP and seem politically untouchable. In 2023 France's official retirement age was just 62, and its actual retirement age was the lowest in Western Europe.
Macron planned to raise the official age gradually to 64, still low by rich-country standards. The far left and far right opposed it together, and the increase is frozen until after next year's election.
France's government spending is a larger share of GDP than Sweden's or Denmark's, and much of it goes to pensions and health care. Raising taxes is hard too: France's tax burden is already the highest among rich countries, above the famously high-tax Nordics.
A 2019 wealth tax raised only a few billion euros, about 1% of total tax revenue, while at least 10,000 wealthy people left for Belgium. Economist Eric Pichet estimated the lost income and other taxes cost almost twice what the wealth tax brought in.
In 2012 Hollande's 75% 'supertax' on incomes above 1 million euros raised just 160 million euros in 2014 and was repealed two years after it passed.
Protesters demand money, the market charges more
Protesters want more spending on schools, pensions, benefits and even fuel subsidies. The bond market responds by charging higher rates on French borrowing, which raises the government's interest bill and leaves less room for social spending — the opposite of what the protesters want.
The piece calls this the limit of left-liberalism: once benefits can only ratchet upward, even the mildest austerity sets cities on fire.
Why it matters
A welfare state is in most danger not when people march for more, but when its creditors start calculating whether they will be repaid. Street anger and bond yields push each other up, and the same people end up paying.
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