France faces twin fiscal and social crisis ahead of presidential vote

France has entered a vicious cycle of fiscal and social crises that are reinforcing each other, with financial markets dumping French debt even before two consecutive weekends of mass protests shook the government's position.

Former Prime Minister Michel Barnier told POLITICO that France was "on the brink of a financial crisis" and that the government needed to send a signal to markets. Hundreds of thousands of protesters hit the streets on consecutive weekends demanding higher teacher salaries, better-funded schools and help with rising living costs.

Investors were already selling French debt or demanding historically high returns because of the government's failure to cut a persistently high budget deficit, address €3.5 trillion of debt, restart growth or reform the pension system. The prospect of a presidential runoff next spring featuring Marine Le Pen on the far right and Jean-Luc Mélenchon on the far left — both committed to lowering the retirement age at a cost of billions of euros — are adding to market anxiety.

The riots this past weekend were contained, but authorities estimate they cost tens of millions of euros, much of it expected to be covered by insurance. For context, the Yellow Vest protests of 2018 to 2020 cost the French economy 0.1 percent of gross domestic product, with shops reporting losses of €2 billion.

Prime Minister Sébastien Lecornu's proposed 2027 budget already contains €43 billion in savings, leaving little room for further cuts. A government minister, speaking anonymously, said the administration had "a knife to our throats" with minimal room to manoeuvre given market conditions.

Eric Lombard, who served as economy and finance minister last year, told POLITICO that protests "clearly have an impact on markets." Mario Monti, who steered Italy through a comparable moment as prime minister in 2011, warned that "things can go very fast."

The government faces a stark choice: borrow more and pass the interest burden to the next generation, or wait for the protests to subside on their own.