If there is one country that can ill-afford a prolonged Strait of Hormuz closure, it is France, the Eurozone’s second-largest member country. Even before the Strait’s closure, France had unsustainable public finances. Those finances were proving difficult to correct in the context of its sclerotic economy, its fragmented politics, and its being stuck in a Euro straitjacket. The energy and fertilizer price spike resulting from the Strait’s closure will substantially exacerbate France’s public finance problem. In turn, that raises the real risk of another round of the Eurozone sovereign debt crisis, especially given the French government’s high dependence on external borrowing to finance its gaping budget deficit.
Even before the US-Israel and Iran war, France was running a budget deficit of more than five percent of GDP and a primary budget deficit of over three percent of GDP. According to the IMF, France’s prospective budget deficits are set to increase its public debt to GDP ratio from 115 percent in 2025 to 130 percent of GDP by 2030. That would take France’s public debt to a level similar to that which precipitated the 2010 European sovereign debt crisis.
The Strait of Hormuz’s closure has already seen a sharp spike in France’s energy and fertilizer costs. The price of oil and natural gas has increased by around 60 percent, while fertilizer prices have increased by around 50 percent. A prolonged closure of the strait, coupled with further damage to the energy infrastructure of Iran’s Gulf neighbors, risks further substantial increases in these prices on a more permanent basis. The European Union energy commissioner is warning that the Iran war will result in higher European energy prices for a very long time.
There are multiple ways in which higher energy and fertilizer prices could exacerbate France’s already shaky public finances. One way would be by causing an economic slowdown. Cash-strapped consumers would have less to spend on non-energy-related products, and agricultural production could be constrained by lower yields due to lower fertilizer application. The Bank of France is projecting that in a severe case, in 2026, France’s inflation could increase to over three percent while its economic growth could slow to around 0.3 percent. Were that to happen, France’s tax revenue collections would fall well below their budgeted levels.
Higher energy prices could also increase public spending due to the need to cushion households from higher energy bills and the need for significantly higher interest payments. Unlike the Federal Reserve which has a dual price and employment mandate, the European Central Bank (ECB) has a single inflation mandate. That is inducing J.P. Morgan and Barclays to predict that the ECB will be forced to raise interest rates three times this year to contend with higher Eurozone inflation. Meanwhile, over the past month, France’s 10-year government bond yield has increased by around 50 basis points to 3.7 percent or to its highest level since the 2010 Eurozone sovereign debt crisis.
To date, France has had great difficulty in regaining control over its public finances due to its highly fragmented politics. Underlining this fragmentation is the fact that over the past four years, France has gone through five prime ministers and that the 2026 budget was passed only after protracted debate and two non-confidence votes. We have to expect that it will become politically even more difficult for France to get a handle on its public finances in the run-up to the spring 2027 presidential election, especially should the French economy succumb to stagflation.
Even if France had the political will to address its unsustainable public finance, its Euro straitjacket would highly complicate any budget austerity effort. Not having a monetary policy or a currency of its own, France would not be able to cut interest rates or to depreciate its currency as an offset to its budget belt-tightening. Indeed, it is now having to contend with the possibility that the ECB will be forced to raise interest rates to contend with overall Eurozone inflation exceeding its two percent target.
We have to hope that the Strait of Hormuz is soon opened, and that energy and fertilizer prices begin to return to more normal levels. If not, world economic policymakers should prepare themselves for the fallout from a possible sovereign debt crisis in France, a country that has an economy and a debt level many times the size of that of Greece.
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