The uncomfortable truth about the G7's fiscal health is that its two most influential members—France and the United States—have abandoned any pretense of budgetary discipline, and markets are beginning to notice.
While Germany frets over its constitutional debt brake and Japan continues its decades-long experiment in yield curve control, Paris and Washington have settled into a comfortable bipartisan consensus that deficits simply do not matter. The numbers suggest otherwise. France's debt-to-GDP ratio has crept past 112 percent, with the Barnier government's promised austerity measures already crumbling under political pressure. The United States, meanwhile, is running a deficit exceeding six percent of GDP during what should be an economic expansion—a fiscal posture typically reserved for recessions or wars.
The French paradox
France presents the more acute case study in democratic dysfunction. President Macron's pension reforms were supposed to demonstrate fiscal seriousness; instead, they consumed his political capital while barely denting the structural deficit. The country now faces the worst of both worlds: a government too weak to cut spending meaningfully, yet too proud to admit it needs help. Bond spreads against German bunds have widened to levels not seen since the eurozone crisis, and rating agencies are circling.
The European Central Bank's implicit backstop provides some comfort, but Christine Lagarde has made clear that monetary policy cannot indefinitely substitute for fiscal responsibility. France is testing that proposition.
American exceptionalism, fiscal edition
The United States enjoys privileges France does not: the dollar's reserve currency status, a Federal Reserve with unlimited firepower, and investors with nowhere else to park trillions in safe assets. These advantages have bred complacency. Neither party in Washington shows any appetite for deficit reduction; the debate has shifted from whether to cut spending to how much more to borrow.
The Congressional Budget Office projects debt-to-GDP exceeding 120 percent within a decade under current policy. Interest payments alone now consume more than defense spending. Yet Treasury auctions remain well-subscribed, and yields, while elevated, have not spiked catastrophically. The market's patience is not infinite, but it has proven remarkably elastic.
The contagion question
What happens if France or America hits a genuine funding crisis? For France, the answer involves either a painful ECB-imposed adjustment program or a eurozone-shaking default. For America, the scenarios are murkier and more destabilizing—a dollar crisis would ripple through every asset class on earth.
The other G7 members are not innocent bystanders. Britain's post-Truss trauma has imposed temporary discipline, but structural pressures remain. Italy's debt burden exceeds France's in percentage terms, though its current government has shown surprising fiscal restraint. Canada and Germany look virtuous by comparison, though both face their own demographic spending pressures.
Our take
The G7 was supposed to model responsible governance for the global economy. Instead, its two most powerful members are engaged in a slow-motion fiscal experiment with no exit strategy. Markets have been forgiving because alternatives are scarce—but forgiveness is not the same as endorsement. The next recession, whenever it arrives, will find France and America with depleted fiscal ammunition and bloated balance sheets. That is not a crisis yet. It is something worse: a crisis deferred.
