Key takeaways: Economist Paul Krugman wrote this week that France is on a "fiscally unsustainable path," and that for the European Central Bank, the country may have become "too big to bail out."

Former ECB President Jean-Claude Trichet said in an interview that French politicians must reach a compromise to rebuild the country's credibility in the eyes of the market — a necessary precondition if central bank support is ever needed in the future.

French Prime Minister Sébastien Lecornu is struggling to push through a highly controversial 2027 budget plan, while a wave of student protests has erupted across the country.

Nobel Prize-winning economist Paul Krugman said France faces a potential debt crisis and may already be "too big to bail out" as far as the European Central Bank is concerned.

Student protests continue to sweep across France; Prime Minister Sébastien Lecornu is fighting to pass a controversial 2027 budget that plans to implement tens of billions of dollars in fiscal austerity.

In a post on his Substack column, Krugman said France's fiscal path is untenable, the interest burden on government debt keeps climbing, and a large budget deficit is further compounding the country's debt pressure.

He raised a key question: against the backdrop of an aging population, France has consistently failed to reform its relatively low retirement age.

"France uses the euro, which makes it easy to project how a loss of market confidence would turn into a devastating crisis... We saw this play out in 2009-2012, first in Greece, then in Portugal, Spain, and Italy," Krugman said, referring to the European sovereign debt crisis of those years, which also prompted the European Central Bank to roll out a series of intervention measures.

The yield on France's 10-year government bonds hit its highest level since 2002.

"At first, investors stop buying the bonds of a certain eurozone country, and the market fears the government will be forced to default because it lacks the cash to pay principal and interest. Default fears trigger further capital flight, which in turn amplifies default concerns and pushes rates higher, deepening the vicious cycle," Krugman noted.

Krugman pointed out that in 2012, then-ECB President Mario Draghi made a famous pledge to the market to do "whatever it takes" to prevent member states from defaulting on their debt. That pledge was widely accepted by the market largely because southern European countries carried out "massive spending cuts."

As long as France continues to "further deviate from fiscal responsibility," bailing out France would be "extremely costly" for the European Central Bank and would also trigger enormous political controversy.

"France may have crossed the line from 'too big to fail' to 'too big to bail out.' In short, it is easy to imagine a scenario in which a severe crisis erupts in France, and that crisis would cause enormous divisions within Europe," he wrote.

The French government must produce a "credible plan"

On Friday, former ECB President Jean-Claude Trichet said in an interview that France must reduce the fiscal deficit of the EU's second-largest economy.

Trichet, who led the ECB from 2004 to 2011, said: "The ball is now in the court of the French government and parliament, and they have a heavy workload to complete."

"Of course, if the situation becomes destabilized, we have a large number of battle-tested and highly effective policy tools. I myself lived through such periods during my time in office," the former governor of the Banque de France said on the program "Squawk Box Europe."

Available tools include the European Stability Mechanism (ESM); the most extreme tool is the ECB's Transmission Protection Instrument (TPI), which was formally launched in 2022 and has not yet been used, designed to address financial fragmentation risks in the eurozone and safeguard market stability.

Photo: On October 8, 2026, at Place de la Bastille in Paris, student demonstrators gather in front of the July Column during a nationwide protest over teaching conditions. Simon Wohlfahrt | AFP | Getty Images

Trichet said that if intervention is desired, the French government would need to actively ask the European Central Bank for help, but France currently states that it does not need external assistance.

"My advice to all political factions in France is that the current political situation is highly complex, but I call on all parties to act responsibly at this moment."

"Regardless of their positions, all factions must realize that it is time to prove to the market that France is a responsible market participant."

"I call on all parties to be as pragmatic as possible in negotiations and to produce credible results. That is precisely one of the conditions for activating the Transmission Protection Instrument (TPI)."

Trichet said that firsthand experience during the sovereign debt crisis shows that self-rescue is the precondition: if you cannot convince market participants, investors, and savers that your country's policies are credible, external assistance will not work.

"There is no doubt that a country must first convince itself that it is on the right path. I believe the governor of the Banque de France and the French government both agree with this."