What can the UK learn from the French crisis?

At a time when investors have been fretting about the sustainability of UK debt, it is perhaps reassuring to know that someone has it worse. This time, it’s France. The government has just collapsed, defeated by the impossibility of managing the budget. The new Prime Minister is installed, but it is difficult to see how he will fare any better in the face of a population that won’t weather benefit cuts or further tax hikes. 

For the time being, the crisis appears to be contained, but there is a question over whether there are any lessons for the UK amid the French crisis. French government bond yields, for example, have been relatively well behaved, which might suggest that the UK government could safely increase borrowing without significant disruption to the gilt market.  

French bonds defy expectations

John Chatfeild-Roberts, manager of the Jupiter Merlin Balanced Portfolio, points out that conventional economic theory would suggest that the type of political turmoil, economic prolapse and fiscal disfunction currently afflicting France should have led to a full-blown financial crisis: “investors would have run a mile from French bonds, the currency would have been dumped like so much toxic waste, there would have been a run on the banks and social breakdown and rioting on the streets. The International Monetary Fund would be stepping in to take control and restore order.”

But this hasn’t happened. He points out that at 3.44%, the yield on the French government 10-year bond has barely shifted. However, he also believes the UK should be nervous about thinking it might be able to get away with higher borrowing because of the French example. France has friends in high places: it is not only in the eurozone but is one of its cornerstone members. That affords it certain protections. 

John adds: “If France fails, so does the eurozone and with it its central currency and the national bond markets of 20 countries in aggregate accounting for 14% of global GDP.” The assumption is that won’t be allowed to happen and that is keeping the bond market sweet. 

UK fiscal position compared with France

In reality, the situation for the UK is precarious, but in a different way. The annual and structural deficit are lower. The UK’s fiscal deficit is around 4.8%*, compared with 5.8% for France**. France’s aggregate debt is also higher. Debt to GDP is currently hovering around 114%***, compared with 96.1% for the UK****. However, the UK doesn’t enjoy the same broader economic support that allows France fiscal flexibility. 

That means the pressure remains on Rachel Reeves at the November Budget. The bond vigilantes are keeping her on a tight rein, with the slightest hint of a misstep punished by higher yields. In recent weeks, long-dated gilt yields have been creeping higher again, prompting plenty of hand-wringing from economists and pushing the Bank of England to halt its quantitative tightening regime.

If debt levels can’t be raised, and Labour backbenchers won’t stomach welfare cuts, tax cuts remain on the table for the November budget. Liam O’Donnell, manager on the Artemis Short-Duration Strategic Bond, says: “For gilts, higher taxes are a double-edged sword. All else being equal, tax hikes lead to lower growth, raising the possibility of more interest rate cuts from the Bank of England, which would be supportive for gilts.

“However, the government’s recent U-turn on welfare reform and the winter fuel allowance show that its willingness to rein in spending is low, sending a worrying signal to markets…Higher taxes should lead to increased revenues, unless growth weakens so much that the tax take falls, in which case I expect the government would be forced to issue more debt.”

Opportunities in UK government bonds

However, this doesn’t necessarily mean that gilts are a bad investment. Liam adds: “If Reeves does deliver tax hikes in her November Budget and restore credibility (the jury is still out on whether she can achieve this), then UK government bonds would offer great value…It is also worth asking how far gilts could possibly underperform over the next three-to-five years considering current valuations.”

This is also the view of Colin Finlayson, manager of the Aegon Strategic Bond fund. He points out that the Debt Management Office is currently keeping a lid on the problem by issuing shorter-dated government debt. However, he believes that longer-dated bonds are likely to remain volatile as a result of the waning credibility of US fiscal policy and the political difficulties of reducing spending. 

“Governments need to make tough decisions to cut spending and borrow less. Given the politics, this is unlikely in the near term,” he says. In the meantime, yield curves will steepen, with long-dated borrowing becoming increasingly more expensive. “Concern about long-dated bonds will continue to be a feature of the market in the coming period.” He is focused on short-dated bonds in his portfolio. 

The muted response from bond markets to the French crisis should not be taken as a sign that governments can borrow with impunity – particularly the vulnerable UK. In reality, longer-dated bonds are likely to remain fragile and strategic bond managers are steering clear. 

*Source: Trading Economics, UK Government Budget 2024

**Source: euro news, 27 March 2025

***Source: Reuters, 9 September 2025

****Source: UK Parliament, Public finances, 21 August 2025