Apparently Accelerating National Debt is Not Just a US Problem

Investment Analysis Clubs Macro Economic Trends and Risks
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As challenges mount and workforces dwindle, much of Europe risks going broke — just not as quickly as France.

French Prime Minister François Bayrou’s budget bombshell on Tuesday wasn’t just a wake-up call for France.

Rather, it was the clearest and most pressing evidence yet that an aging and increasingly impotent Europe is heading for bankruptcy unless it embraces major change: digitization, decarbonization and defense all need to be financed, against a backdrop of demographic decline. But it has little or no room for maneuver, due to two more ‘D’s — debt and deficits.

And while Bayrou’s presentation, featuring spending cuts, tax increases and even the scrapping of two public holidays, conveyed the impossibility of carrying on with business as usual, the reactions to it only showed how hard changing course will be.

France isn’t alone in its predicament.

U.K. Prime Minister Keir Starmer was forced by a backbench revolt of his own MPs to abandon welfare cuts he deemed necessary.

But other capitals are having to grapple with many of the same pressures that are troubling Paris — especially when it comes to demographics and the fateful decline in the ratio of workers to pensioners: Germany’s central bank estimates that the workforce will start shrinking in absolute terms, just as Chancellor Friedrich Merz’s huge debt-funded spending plans kick in.

Public debt stands at around 114% of GDP

a €3 trillion debt mountain

Bond markets have taken notice: yields on 10-year French debt have climbed 30 basis points over the past year to 3.3%.

Germany’s Basic Law, the country’s constitution, stipulates that the state may only spend as much money as it takes in.

For expenditures necessary for the country’s defense, the debt brake will be virtually nullified.

Germany is about to flood Europe with debt, and Spain might be the first to feel it. Over the next four years, Berlin plans to issue up to €850 billion in bonds, marking one of the most aggressive borrowing sprees in EU history.

More German debt means more competition in the bond markets, and for countries like Spain and Italy, that could result in higher borrowing costs or new yield pressure, creating a fresh headache for the ECB.

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It’s possible that there is no solution. Remember a few years ago when France tried to make small tweaks to their very generous retirement rules? Seems like the people violently opposed changing the retirement ago from 62 to 65 or something like that. Add slightly longer life expectancies for retirees, and very low birth rates, and eventually you simply run out of money to pay for it all.

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Not as long a government bureauCritters can spend OPM with zero restraint.

OPiuM us highly addictive.

The Captain

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The German economy shrank more than expected last quarter and now the employment figures don’t look good.

German industrial firms generated revenue of over €533 billion in the second quarter of 2025, down 2.1% year on year, EY found, citing official statistics office data. This followed a 0.2% decline in the first quarter.

The number of people employed in German industry also declined by 2.1% in the second quarter, to 5.43 million. Compared to six years ago, the workforce contracted by 4.3%, with some 245,500 jobs lost since 2019, EY said.

The sharpest fall in jobs was seen in car manufacturing, down 6.7% in the second quarter. In absolute terms, that amounted to around 51,500 jobs lost in a year.

DB2

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https://www.nytimes.com/2025/09/07/business/france-government-collapse-economy.html

Italy was once Europe’s emblem for political instability, with a mounting debt and deficit and few options to fix the mess. Now, it’s France’s turn, and the situation is about to get worse.

On Monday, President Emmanuel Macron’s government is expected to fall for the second time in just nine months after a confidence vote in Parliament.

outsize government spending and falling tax receipts strained finances.

government spending, long the highest in Europe, for a reason: Much of it goes toward financing a generous social welfare system. Last year, an eye-popping 57 percent of the nation’s economic output was channeled into financing hospitals, medicines, education, family reproduction, culture and defense, not to mention generous pension and unemployment benefits.

Part of the overspending comes from the unexpected twin shocks of the Covid pandemic and a European energy crisis unleashed by Russia’s invasion of Ukraine.

Just as problematic are the tax cuts that Mr. Macron has given to businesses and to the rich. Tax receipts have fallen to 51 percent of gross domestic product from 54 percent since Mr. Macron took office in 2017 with promises to boost France’s competitiveness and lure foreign investment. He made generous employment tax breaks permanent and curbed a national wealth tax, earning praise from investors — and the nickname “president of the rich” from his detractors.

The result has been more borrowing and higher debt.

France is a too-big-to-fail economy and is not about to go bankrupt.

That said, “things are bad,” said Bruno Cavalier, chief economist at Oddo bank in Paris.