Wolfgang Munchau: The end of the Euro

Summary

Wolfgang Münchau argues that France’s rising public debt, weak growth, and political gridlock could create a sovereign-debt crisis with consequences for the wider eurozone. In his view, markets are less concerned about political ideology than about whether any French political bloc can produce a credible budget. He warns that the eurozone’s monetary union lacks a corresponding fiscal and political union, leaving it vulnerable to crises—especially when larger economies are involved.

France: Debt, growth, and market concern

• France has the largest sovereign debt in Europe in absolute terms, according to the discussion, and one of Europe’s higher debt-to-GDP ratios.
• France’s economy is growing at roughly 0–1% annually. Münchau says relying on growth to stabilize debt might work with 3–4% annual growth, but not at current rates.
• Investors are reportedly selling French assets because they consider the political and fiscal outlook too risky—not, Münchau says, because of a speculative attack or deliberate bond-market manipulation.
• He sees political risk in the prospect of Marine Le Pen leading France. He characterizes her spending plans as insufficiently funded, saying the numbers do not add up. For example, she proposes €20 billion in savings on EU contributions while opposing France’s departure from the EU or eurozone.
• The French–German government-bond spread reportedly widened to around 175 basis points (1.75 percentage points) before easing somewhat. Münchau says it had not yet signaled an immediate crisis.
• France faces a large debt-refinancing year “next year,” according to the interview. Governments typically refinance maturing bonds by issuing new ones—a process known as rolling over debt—at prevailing market rates.

Debt spiral and possible triggers

Münchau describes a “death loop” in which higher borrowing costs increase government interest expenses, worsening the budget and potentially forcing still more borrowing. He cautions that there is no universal threshold, but offers these rough reference points:

• 5% borrowing costs: not necessarily enough on their own to trigger a spiral.
• 6%: could become dangerous, depending on circumstances.
• 7–8%: levels he says would “almost certainly” be critical.

He notes that US debt-service costs already exceed defense spending, using this comparison as a warning about how interest costs can crowd out other spending. Possible triggers for a crisis could include an election poll, riots, or an unforeseen shock. He says a crisis could begin before a presidential election is held.

Spillover risks: Belgium and Italy

• Münchau sees Belgium as vulnerable for reasons similar to France: difficult coalition politics, competing demands for tax cuts and spending increases, and a high debt-to-GDP ratio.
• He places France and Belgium around third and fourth in Europe for debt relative to GDP, behind Italy and Greece.
• He cautions against interpreting debt rankings without considering borrowing costs: much Greek debt is held by European institutions on relatively low-cost terms.
• Italy is also a potential source of risk. Münchau says the situation would differ from the earlier euro crisis because France and Italy are much larger than the countries then at its center.

ECB and EU responses

Münchau says European institutions have tools to respond, but inflation makes intervention more difficult than during the previous euro crisis.

• One option would be a support program involving the EU or IMF, with loans conditional on austerity measures.
• The ECB’s Transmission Protection Instrument (TPI) could potentially be used to buy French bonds. Münchau describes it as more flexible than a conditional bailout, but notes that it has not been tested in court and could face legal or political objections.
• He says ECB support could expand the money supply and add to inflation. He cites inflation above 3%, with domestic inflation of roughly 3–4% across Europe, as limiting the room for action.
• He also points to higher energy prices, tariffs, and more expensive Chinese goods as factors contributing to a higher-inflation environment.
• By contrast, ECB intervention during the earlier crisis took place when inflation was very low or negative, making monetary support easier to justify.

Default and euro-exit scenario

Münchau discusses a severe, though not inevitable, scenario in which France defaults:

• French government bonds are used as collateral by banks seeking funding from the ECB. A default could make them unacceptable as collateral, severely disrupting French banks’ access to central-bank funding.
• He argues that France could then be forced out of the eurozone and introduce a French franc or parallel national currency.
• Such an exit could trigger a broader loss of confidence in euro assets and encourage other countries to leave.
• A national currency would likely depreciate, potentially improving the competitiveness of French companies. France might also be able to default on some debt and use its own central bank, but Münchau stresses that the resulting interest-rate and economic outcomes are uncertain.
• Leaving the euro would not remove the need for fiscal adjustment: France would still face pressure to adopt austerity, even if its debt-service burden changed.

Outlook and broader European context

Münchau says he expects another eurozone crisis but gives no precise date. He argues that the euro is structurally vulnerable because monetary union was not accompanied by a fiscal union—for example, shared borrowing, a common finance minister, or a common spending policy. He says a crisis could ultimately put the euro at risk, while acknowledging that political choices could still avert or delay one.

The interview also discusses possible UK re-entry into the EU. Münchau argues that any serious debate should consider what kind of EU Britain would be joining, including its regulatory approach and potential effects on industries such as AI. He does not expect Britain to rejoin.

Assets, instruments, and sectors mentioned

• French and German government bonds and the French–German bond spread
• The euro and a potential French franc
• The European Central Bank (ECB), including the Transmission Protection Instrument (TPI)
• IMF and EU rescue lending
• Sovereign debt, refinancing and rollover markets, bank collateral, and central-bank funding
• Energy prices, Chinese goods and tariffs, and European AI and technology regulation

Disclosures

No financial-advice disclaimer is stated. The discussion is a political and macroeconomic interview, and the crisis and euro-exit scenarios are presented as risks and forecasts, not certainties.

Presenters and sources: Freddie Sayers, interviewer and UnHerd presenter; Wolfgang Münchau, interviewee and UnHerd contributor. Münchau also refers to his past reporting at the Financial Times (2008–2020).