The French government is on the brink of collapse over attempts to tackle its high levels of debt.
The key issue is that France spends more than it takes in. Its already high public debt recently rose to around 114% of gross domestic product (GDP). This makes France the country with the third highest debt ratio in the eurozone, behind Greece and Italy.
In absolute terms, France has the largest debt burden in the currency area, amounting to approximately €3.3 trillion ($3.9 trillion). Additionally, France's public spending is among the highest in Europe.
The current government has plans to change that with an austerity budget that includes savings of €43.8 billion.
The issue has sparked a political crisis, which, if investors lose confidence, could raise concerns about France's economic stability and raise its borrowing costs.
French Prime Minister François Bayou had warned of exactly such a scenario if France fails to change its debt trajectory across party lines and implement an austerity budget. Currently, there is no majority in parliament to support this.
A recent assessment by US investment bank Goldman Sachs called stabilizing public debt France's greatest economic challenge.
The country must also urgently resume structural reforms to boost growth, it said. Bayrou had called for increased production and planned to achieve this by eliminating two public holidays. But that alienated a majority of the population, further fuelling opposition to his austerity plans.
Interest rates for French government bonds have already increased and are now higher than for Greek ones and almost as high as rates on Italian bonds.
"Investors are concerned about France's high and still rising public debt. Bond yields have already risen significantly more in France than, for example, in Italy, and the yield on 10-year French government bonds is now barely below that of Italy," commented Commerzbank Chief Economist Jörg Krämer.
Krämer also expressed doubts that France, under a new prime minister, will be able to reduce its budget deficit from the current 5.8% to 4.6% of GDP next year, Finance Minister Eric Lombard's goal. Krämer considers this unrealistic due to the lack of a parliamentary majority for reforms.
Despite the looming crisis, European Central Bank (ECB) President Christine Lagarde does not expect France to seek financial assistance from the International Monetary Fund (IMF) to stabilize its finances.
She believes the French banking system is better positioned than during the last financial crisis, but she said she is closely watching events in her native country.
"Any looming government collapse in a eurozone country is concerning," she said in an interview with Radio Classique a few days ago.
