Is this how the great international borrowing spree ends?

Jeff Guo and Erika Beras open by comparing heavily indebted governments to a person driving a car they cannot afford, using new credit cards to pay the interest on old ones. The United States, United Kingdom, Italy, France, and Canada have all accumulated extraordinary amounts of debt; the episode says Canada’s government now owes more than $8 trillion. The central question is not simply whether France has borrowed too much, but how much debt is too much for any wealthy country. France is presented as a particularly worrying case because it is the world’s seventh-largest economy, yet investors have begun to wonder whether its government will eventually repay them. Its aging population, rising health-care costs, and expensive pension system require continued borrowing, while the country is running a large budget deficit. At the same time, French farmers, workers, students, and other groups are protesting for more government spending rather than cuts. NPR correspondent Eleanor Beardsley describes protests that began with students complaining about a lack of teachers and crumbling school buildings, then expanded after the government proposed reducing spending. The demonstrations became a broad “cost of living” movement, with hundreds of thousands marching; some October protests involved looting, arson, police violence, and tear gas, although Beardsley says most protesters were peaceful. Protester Julie Bia told her that debt was “just used to keep people in line” and asked why France should not stop paying when there is “so much money” in the world. The episode’s answer is that the money must come from investors, who are becoming less willing to lend cheaply.

Thomas Philippon, an NYU macroeconomist and longtime adviser to the French government, explains how wealthy countries reached this point. In the 1990s, economists commonly treated national debt above 60 percent of GDP as the upper limit of safety for advanced economies. The United States was around 54 percent in the early 2000s, while current figures cited in the episode are roughly 102 percent for the United Kingdom, 126 percent for the United States, and 137 percent for Italy. France followed the same path. Its debt was near 60 percent of GDP in the 2000s, partly because that level was associated with eligibility for the euro. The 2008 financial crisis led France to borrow heavily for economic stimulus, but it did not subsequently pay the debt down. By 2020, debt had exceeded 100 percent of GDP, and the COVID-19 response pushed it to about 120 percent. Philippon says that, since World War II, there has not been another period in which so many rich countries borrowed so much for so long. Low interest rates made the borrowing spree seem manageable. After the financial crisis, rates in the United States and Europe fell close to zero and stayed there for years, allowing governments to borrow almost for free. In 2019, economist Olivier Blanchard argued that there might be no need to repay debt if economic growth remained faster than the interest rate accumulating on it. He said even debt at 200 percent of GDP might be manageable if it could be stabilized. But Blanchard acknowledges that he did not anticipate COVID, the war in Ukraine, Iran-related crises, or the impact of AI. Inflation and global turmoil have now pushed rates higher, making old debt increasingly expensive.

As interest rates began rising, economists started looking for the first country that would reveal how much borrowing the new environment could tolerate. Philippon and colleagues on France’s Council of Economic Analysis published a 2024 report warning that France was moving in the wrong direction. They did not call for immediate debt reduction or harsh austerity. Their proposal was more limited: gradually balance the budget over seven years so that France would stop adding to its debt while it still had time to adjust. Philippon stresses that he is not a conventional fiscal conservative. He previously advised members of France’s center-left Socialist Party, and he believed his warning might carry more credibility precisely because it came from someone who was not normally demanding spending cuts. His argument was that France was not yet in an immediate crisis: economic growth had so far kept the debt manageable, but continued borrowing could eventually make the situation unstable. The French government did not follow the report’s advice. Philippon jokes that it “didn’t do anything,” and France’s debt position continued to worsen. Then the market supplied a direct warning: the interest rate on French 10-year bonds rose from roughly 3 percent to nearly 5 percent, its highest level since the 2000s. Investors began charging France an additional premium over other euro-area governments because they viewed it as increasingly risky. The episode frames this as the point at which the international borrowing spree may be running into the limits created by higher interest rates.

The hosts note that France’s debt-to-GDP ratio is about 120 percent, while Greece’s is about 136 percent and Italy’s is even higher. Yet investors are charging France more to borrow than Greece, a country that required a painful bailout during the financial crisis. The explanation from Philippon is that debt numbers alone do not determine risk. Investors care most about the trajectory: they would tolerate France’s current ratio if they believed there were a credible plan to reduce it gradually toward 100 percent. Greece currently benefits from the opposite perception. Its debt ratio was once above 200 percent and has been declining, so investors see movement in the right direction. France, by contrast, has repeatedly promised that it will eventually address its debt without delivering. Philippon says the market has begun to lose the benefit of the doubt it once gave France simply because it assumed the country would “eventually” get back on track. Political instability is central to that loss of confidence. Investors question whether the French government can raise taxes or reduce spending, especially as the far left and far right gain strength without presenting plans that investors consider realistic for balancing the budget. The spread between French and German borrowing costs functions as a fear index because Germany is widely expected to repay its debts. That spread rose in 2024 as President Emmanuel Macron, previously viewed as economically responsible, began losing control, and it spiked again as the recent protests began. Philippon says the protesters’ demands—such as decent conditions for students—may be legitimate, but the resulting political disorder makes borrowing more expensive.

Olivier Blanchard now studies the point at which high debt becomes genuinely dangerous. He calls it a “danger zone,” although he says nobody knows exactly where the threshold is and suspects France may already be there. Once investors lose faith, higher interest rates make it harder for the government to service its debt. That worsens the country’s financial outlook, which leads investors to demand still higher rates, creating a self-reinforcing spiral. Blanchard compares the mechanism to a bank run on a national scale. He says it is difficult to predict when confidence will suddenly collapse because the process depends on investor mood. He was so concerned about the power of perceptions that he considered writing a newspaper editorial explaining the potential disaster, then worried that describing the process too concretely might itself frighten investors and help trigger the doom loop. The two economists see three broad possibilities. France could voluntarily become fiscally responsible by cutting spending and balancing its budget, though current politics make that unlikely. If conditions deteriorate, the European Central Bank could use measures created after the financial crisis to stop a country from spiraling, and a European rescue fund could offer emergency loans. Such help would almost certainly come with conditions requiring France to tighten its budget, and the rescue fund has never had to bail out a country this large. Philippon’s preference is for France to act now, because waiting could force sudden, excessive cuts that would hurt vulnerable people more than a gradual adjustment would.

The episode turns the French warning back toward the United States. The U.S. has more debt and an even larger annual budget deficit, while its political dysfunction can look as severe as France’s. The hosts argue that the difference is not that America is fiscally healthy. The United States controls its own currency, the dollar retains enormous international “cachet,” and the U.S. economy is growing faster than France’s. Most important, Philippon and the hosts say, investors still believe the United States will eventually correct course. That credibility allows the U.S. to borrow at lower rates despite its debt and deficits. France is losing that confidence because investors increasingly doubt that its political system can make the tax increases or spending reductions needed to stabilize the debt. The broader lesson is that there is no universal debt number at which a country automatically fails. Blanchard’s earlier argument—that a country can outgrow debt when growth exceeds the interest rate—can work while borrowing costs remain low. But when rates rise, growth slows, and investors question a government’s ability to act, the same debt can become dangerous. France therefore serves as a possible early warning for all the countries that treated cheap borrowing as the new normal.