A loss of confidence would be perilous as Macron resorts to borrowing cash to prop up the welfare state

Which country in Europe has the most total government debt? Italy, perhaps, as it grapples with a depression that appears to have gone on for decades? Or maybe Greece after it nearly brought down the euro? Or even Spain after its wild boom of the early 2000s?

In fact, it isn’t any of those. As of this month, it is France. In hock to the tune of €2.67 trillion (£2.32 trillion), this month it finally overtook Italy as the Continent’s biggest debtor – and the third biggest globally.

Sure, in some ways that is affordable. France is a bigger economy than its southern neighbour, so the ratios are not so alarming as the total figures. And the country has a resilient industrial base, with at least a few world-class companies. Yet reforms are also going backwards; that debt is widely dispersed around the world, making it vulnerable to sudden changes of sentiment; vaccine scepticism means it may never eliminate Covid-19; and it is the most politically unstable country in the G7.

If anyone wants to put a small bet on the next “black swan” to hit the markets, an implosion of French debt should be right at the top of the list. Anyone who follows the eurozone economy will be used to worrying about Italian debts, and this week will be no exception. With his plan to reboot the economy, Mario Draghi, the prime minister and former ECB President, is pushing borrowing up to unprecedented levels.

Italy’s debt-to-GDP ratio will climb to 160pc, the highest ever, slightly overtaking the record set in the immediate aftermath of the First World War. And yet France is busily matching it euro-for-euro.

After borrowing another €211bn in 2020, and keeping up that rate in the first quarter of this year, it now owes €2.67 trillion, compared with €2.64trillion for Italy, and €2.3 trillion for Germany (and a mere €1.3 trillion for Spain). Of course, it is a larger economy, so the debt ratios are not so high. Its debt currently stands at 115pc of GDP, well below Italy’s jaw-dropping levels. The trouble is, quantities matter as much as ratios. In truth, France’s debts could very easily turn sour. Here’s why.

First, Draghi is taking a huge gamble in Italy, of that there can be no question. But there is at least a logic to his plan. The country is embarking on a modernisation of its economy, alongside a huge stimulus programme. It may or may not work, but it has a chance.

In France by contrast, reforms have gone backwards. The energising first couple of years of the Macron presidency are a distant memory as his administration gets bogged down in coping with Covid-19. Right now it is spending vast amounts of money propping up old industries – another billion euros was spent only last week effectively nationalising KLM-Air France and everything we know about state-owned airlines says it will be back for more – instead of creating new ones.

For all the talk of reforms, bus routes have been deregulated, and, er, that is about it. All the extra borrowing isn’t an “investment” to lift future growth. It’s just debt to fund an expensive welfare system.

Next, take a look at who owns it. In Italy, 70pc of government debt is owned by the Italian banks, which swiftly pass it on to the ECB. According to Eurostat data, however, half of France’s debt is held by the rest of the world: indeed, since France is now the third biggest debtor in the world after the US and Japan, and since Japanese debt is also most owned domestically, French debt is arguably the second largest traded commodity in the world.

The problem is this. If French banks owned all that paper, arms could be twisted in a panic to support the price. But global institutions will ditch the notes at the first sign of trouble.

Next, France is the most vaccine sceptical country in the developed world. One survey earlier this year by the World Economic Forum found that only 40pc of the population wanted a jab compared with 77pc in the UK. That may rise as the vaccines prove their worth.

Even so, if the French continue to resist vaccination on the scale needed to hit herd immunity then Covid-19 will continue to circulate, even if at lower levels, and the country may have to keep restrictions in place for longer than its neighbours. The result? A deeper depression, and yet more debt.

Finally, there is the overhanging political risk. No French president has been re-elected since Jacques Chirac in 2002. No other G7 country runs through leaders so quickly. Worse, Marine Le Pen, the major opposition leader, may have dropped her plan to pull out of the euro, but France remains the EU country where hostility to the single currency is strongest. If there is only the slightest risk of that €2.7 trillion of debt getting denominated into “new francs” then investors need to get out of the trade long before it happens.

A financial crisis always comes from something that has somehow slipped under the radar of the financial system. In retrospect, it looks obvious it was a problem, but no one was talking about it at the time. No one is worrying about France’s mounting debt pile right now. The yield on its 10-year bonds is less than 0.01pc, and the country has no trouble raising fresh money on the markets.
The ECB is busily buying any paper that gets left in the market. And yet, right now, France ticks all the boxes for a crisis of confidence. Its massive debts could easily blow up any day – it is just a question of how and when