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Hong Choon-wook, Contributor
CEO of Prism Investment Advisory
Former Head of Investment Management Team at the National Pension Service
Q. Fierce protests are erupting across France. When protests took place in France a year ago, we discussed them together. How do you view these current protests in France?
I could understand why the students are angry. Due to climate change, summer temperatures in places like France, Spain, and London all exceeded 40°C (104°F) this year, making it scorching hot, yet students are attending classes without air conditioning, and there are reportedly swarms of rats roaming around schools.
Anop | French Student
I came out because I am angry. The younger generation in France is exhausted. Some students study with 40 people crammed into a single classroom. Other students have to stay in hallways, and in some places, the ceilings look like they could collapse at any moment.
Hortense | French University Student
We came out to stand with high school students. We can never leave them alone.
Lou | French Student
School facilities are terrible and disastrous. When we study in classrooms exceeding 35°C (95°F) or infested with cockroaches, what on earth can we expect?
I could see why the students are outraged. But watching the demonstrations, I thought, "This is not going to be resolved." With the French Prime Minister announcing plans to hire an additional 3,000 part-time teachers, the government is making efforts in some respects, so there is a possibility the protests might calm down. Still, I felt that "it will be difficult for the students' demands to be accommodated."
Much like South Korea, France is an intensely credentials-driven society. Starting with the Grandes Écoles (France's elite higher education institutions) entrance examinations, there are key institutions that serve as gateways to bureaucratic careers. France is a society where you must graduate from such schools to secure a decent job.
Here is the youth unemployment rate by educational attainment in France and the OECD. Looking at France, the disparity in unemployment rates based on academic pedigree is severe. People call Korea a credentials-driven society, but compared to France, it is practically nothing.
Then, if you ask whether France is not investing in education, there is another puzzling point. This shows educational spending as a percentage of GDP.
Korea appears high only because it spends heavily on private tutoring, but looking strictly at public education spending, it sits in the middle among advanced economies, and France is by no means low. We are also a country that manages education finances poorly, but France could even be regarded as spending its money less efficiently than we do. Is it even realistic to ask them to invest more in education?
To tell a country spending around 4.5% of its GDP—ranking among the heavier spenders on education in the OECD—to spend more on education, it would have to cut back elsewhere. France's tax burden, combined with pensions, hovers around 60%. This reflects government tax revenue relative to GDP. The only country higher than France is Denmark.
Korea's tax burden has surged dramatically in recent years, but there remains roughly a 10 percentage point gap compared to advanced European nations, and France is another 10 percentage points above that average advanced European nation. From the viewpoint of French citizens, the immediate reaction is, "What is going on here?"
In short, the entire country is either structurally inefficient, spending fiscal funds inefficiently, or cannot spend more without restructuring expenditures elsewhere. Raising taxes further would likely trigger fierce tax resistance. In a climate where multiple problems are intertwining—as seen in education spending and the current student protests—if the government says it will collect more taxes, citizens are very likely to push back and ask, "What are you even saying to us right now?"
Elderly Living Better than the Youth? An Inconvenient Truth of the French Economy
Following the COVID-19 pandemic in 2020, advanced economies worldwide deployed massive fiscal spending. Korea did as well. Those expanded fiscal outlays need to normalize. As the economy recovers, fiscal deficits and national debt relative to GDP ought to decline, but they are expanding instead. The fiscal deficit is in a critical condition. It stands at nearly minus 6% of GDP. Let us look at why such massive fiscal funds are being spent.
Looking from the bottom up, there are debt interest, defense spending, industrial policy, and more. All of these must be paid. Interest must be serviced, and defense spending cannot be trimmed. Going forward, defense spending in particular will have to rise. Looking at where France spends heavily compared to countries like Germany or Italy, spikes occur in public safety and pensions.
Why is that? In France, elderly citizens aged 65 and older earn higher incomes than the working-age population aged 15 to 64. Pensioners aged 65 and older have higher incomes than the employed population aged 15 to 64. The country has a pension system so generous that it could well be described as a nation built for the elderly.
Even if France has not reached the crisis levels seen in Italy or Spain during their debt turmoil, simply put, it has arrived at a comparable situation. We examined how national fiscal deficits and chronic spending structures have shifted over the past 23 years. In France, spending on pensions and healthcare surged dramatically. In Italy, expenditures rose substantially from public safety to other sectors, and Spain's pension system can also be seen deteriorating severely.
Germany and the Netherlands remain very stable. Italy and Spain, which forcefully pursued structural spending reforms, at least have a future. That is because they learned their lessons during the European debt crisis of 2010 to 2012 and implemented fiscal consolidation measures; in fact, Italy, currently led by Prime Minister Meloni, now has lower government bond yields than France. During the European debt crisis, France was the country acting like an occupying force, ordering those nations, "Pay back your money. Otherwise, tighten your budgets." Yet when the lid was opened, France proved to be in far worse shape than Italy, Spain, or Greece. It has become a situation where others ask, "Who do you think you are?"
From Enforcer of Austerity to Party in Crisis: The Populism Trap France Has Fallen Into
If economic growth is rapid, national debt can be kept under control. Faster economic expansion generates higher tax revenues. But in a stagnant economy, what about tax rates? Government expenditures relative to GDP, including pensions, approach nearly 60%, bordering on the levels of state capitalism. In a nation functioning at such state-capitalist proportions, consolidating fiscal outlays and trimming the fiscal deficit should be an obvious priority, yet they are unable to do so.
Why can't they? France can be seen as split into three political camps. The far-left party led by Mélenchon insists on "canceling national debt." While the government is struggling after failing to pass the budget amid efforts to raise the pension retirement age from the current 62 to 64 or above, pension outlays continue to mount. Meanwhile, far-right figure Marine Le Pen advocates lowering the eligibility age to 60. She pledges to slash France's fiscal deficit to 3% of GDP by the year after next.
Where, then, would those cuts come from? Even if the pension eligibility age were pushed back to 70, the country is currently wrestling with whether it faces insolvency and whether educational funding can even be properly distributed to students. Promising to lower it to 60 while reducing national debt and shrinking fiscal deficits relative to GDP—how is that any different from Trump? That is the identical rhetoric Trump consistently uses. After sparking conflict and unleashing severe inflation, he tells the Federal Reserve, "The appropriate interest rate for the U.S. is 1%. Lower interest rates. Lowering rates is how you resolve inflation." That is precisely what he says.
Donald Trump | U.S. President (Sept. 17, 2026)
Interest rates are too high right now. They are not at an appropriate level.
Such figures are currently France's leading contenders for the upcoming presidency. At present, Le Pen's approval rating sits around 38%. Far-left Mélenchon polls around 18%, and the leader of Macron's party stands at about 15%. If no candidate secures a majority in the first round, a runoff takes place, but in a runoff between Mélenchon and Le Pen, regardless of who prevails, the nation's future becomes virtually impossible to predict. People wonder, "If Mélenchon becomes president, will he truly write off the national debt?" "If Marine Le Pen becomes president, will she truly lower the pension age?" The trouble is that French voters favor those two candidates above all others.
Looking at further shifts in public finances over the past 23 years, the baby boom generation born between 1946 and 1964 constitutes the largest demographic bloc. That dominant population cohort votes strictly for its own interests in elections. Regardless of what becomes of the country's long-term future, or how disgruntled younger generations may be, I view that discontent as protests stoked by Mélenchon and the far left. In fact, Mélenchon reportedly visits the protest sites to declare his support. Viewing this, many observers also regard the current student demonstrations as a show of force aimed at rallying left-wing momentum ahead of next year's elections.
As an economist examining France's finances, I cannot help but feel that a massive crisis is at hand. Sizable fiscal deficits alongside chronic sectors like healthcare and pensions represent areas that cause immense backlash whenever touched. If outlays are reduced, voices will inevitably claim, "The state cut pensions and drove people to their deaths." While offering less from the outset is one matter, stripping away entitlements that have already been granted is politically almost suicidal.
France Had a Chance to Save Itself: Why Macron's Reforms Failed
When President Macron founded a new party in 2017 and achieved landslide victories in both the presidential and parliamentary elections, he instantly became a star of European politics, and his international profile remains substantial today. There were three core policies he pursued.
The first was nurturing startups. He pledged to foster startups. The second was investing in green industries, stressing the need to transition from fossil fuels to eco-friendly sectors. Third was cutting corporate taxes. The objective was to create a business-friendly environment on the grounds that tax burdens were excessively high. Yet just one year into his tenure in 2018, the renowned Yellow Vest protests broke out.
Yellow Vest Protesters (December 2018)
France right now is not itself. We will fight to the end to build a proper country.
He implemented policies raising fuel taxes by around 25 to 35% while offering government subsidies for switching from diesel cars to electric vehicles. Gas stations were set ablaze and demonstrations erupted nationwide. An episode very similar to the current student protests took place. He suffered a tremendous political setback, having to abandon the initiative and disburse nearly €10 billion in subsidies to truck drivers.
Eight years have passed since then. What has become of the EV market today? It belongs to China. Honestly, among Europe's Big Six—Renault, Peugeot, BMW, Volkswagen, Mercedes-Benz, and others—it is uncertain how many will survive. Right here in Korea, Tesla's Model Y ranks number one in vehicle sales. Hyundai's Grandeur and Kia's SUVs hold second and third. The world has already moved in that direction.
Yet protests erupted in France, and amid violent backlash, both far-left Mélenchon and far-right Le Pen joined the demonstrators to deliver speeches backing their actions. The Macron administration was defeated in that struggle. The country possessed opportunities, but failed to capitalize on them. As industrial competitiveness collapses, job hunting becomes harder, and only individuals with connections, networks, and elite credentials can gain entry into the shrinking labor pool. That is how the issue must be understood. While citizens may naturally feel frustrated and criticize the situation by saying, "You are incompetent" or "The system is broken," the retreat of the Macron government in 2018 served as a major underlying catalyst. This graph clearly depicts that very retreat.
The yellow line indicates the fiscal budget plan relative to GDP presented by the Macron administration in early 2018. It was a roadmap to achieve a budget surplus over the subsequent three years. The strategy aimed to cut corporate taxes while raising fuel duties to suppress oil consumption, drive an EV transition, and invigorate the economy. However, the actual outcome is represented by the blue line: the fiscal deficit relative to GDP. You can see that all of those pledges failed.
Further misfortune struck in 2020 with the outbreak of the COVID-19 pandemic, which drove the fiscal deficit to minus 9% of GDP, followed by massive liquidity injections in late 2021. Then in the 2022 presidential election, Macron was re-elected. It was a narrow runoff victory against Le Pen, followed by a crushing defeat in the parliamentary elections. Although re-elected on the premise of having navigated the nation through crises, he forfeited his legislative majority and political initiative. When he dissolved parliament and called snap elections in 2024, his party suffered an even heavier blow.
At this point, nothing can proceed without the cooperation of Le Pen and Mélenchon. Consequently, regarding measures for fiscal consolidation, even the 2027 budget framework reveals no political resolve to improve the fiscal balance. Submitting a budget proposal that slashes public spending would cause the cabinet to fall. Votes of no confidence are triggered, and this pattern plays out every single year.
Soaring French Bond Yields: Why They Recall South Korea's 1997 Nightmare
While everyone would agree that France's economy is experiencing distress, whether this signifies outright national collapse requires careful thought. First, nations like Japan and the United States carry far greater public debt burdens than France. Conditions are messy enough that Macron almost appears normal. One might wonder whether any nation today is truly free of such strain.
Why, then, did this issue flare up so abruptly in recent months? The jump in U.S. Treasury yields appears to have been the decisive factor. Starting in July, U.S. Treasury yields began climbing rapidly. Following the FOMC meeting, Federal Reserve Chair Kevin Warsh remarked that "the market is tightening on its own."
Kevin Warsh | U.S. Federal Reserve Chair (July 2026)
The bond market is sending similar signals as well. As a result, tightening is appearing in both nominal and real interest rates. Over the past 42 days, the Fed has not taken distinct action, but the market has already produced considerable effects.
Holding or raising policy rates is one consideration, but Kevin Warsh made remarks highlighting that rising market interest rates are effectively tightening the real economy. That served as a catalyst, and bond yields began surging from that juncture. The timing of the surge in U.S. yields directly coincided with the jump in French bond yields.
Market sentiment shifted to: "With U.S. yields so high, why bother buying French government bonds? It is better to buy U.S. Treasuries offering higher returns—why buy French paper?" Secondly, France holds a presidential election in May of next year, and Le Pen appears poised to win. Only the first- and second-place finishers advance to the runoff, and because either outcome portends severe headwinds, international investors—particularly Japanese capital, which traditionally invests heavily in such markets—are growing uneasy.
With Japanese rates anchored at zero for an extended period, capital raised through corporate debt or bank loans at around 1% interest had been channeled into U.S. assets as well as French sovereign bonds for currency hedging and in anticipation of euro appreciation. Those funds are now becoming anxious. While France is a G7 member and the European Central Bank is unlikely to let France go bankrupt, buying French government bonds nonetheless highlights a distinct risk.
What risk? People asking, "Why did you ever buy French government bonds?" That is what unfolds. If global investors are asked whether France will go bankrupt, the answer is "I don't know." You may recall that Italy and Spain experienced fiscal crises in 2012, and Greece faced the Grexit crisis in 2015. At that time, the European Central Bank deployed even more liquidity than the U.S. Fed to rescue the European economy. Hence, it is widely understood that the European Central Bank will step forward to keep France afloat.
The issue is that a rescue does not come without strings attached. The European Central Bank and the IMF, which extended emergency loans to Italy, Greece, and Spain, demanded strict fiscal austerity. Yet none of France's next presidential frontrunners seem likely to accept those conditions; at the very least, figures with zero intention of complying appear set to take power.
Doesn't this evoke memories of South Korea during the 1997 IMF crisis? Why did our nation succumb to a currency crisis in October 1997? The presidential election was a massive factor. With the presidential race set for December, Korea was effectively engulfed in a foreign exchange crisis from October following speculative currency assaults in Hong Kong. Do you remember how, immediately following the election, IMF Managing Director Michel Camdessus arrived and pressured President-elect Kim Dae-jung to sign off on the IMF's austerity demands? That is why concerns center on whether damage control can be achieved before a disaster strikes, rather than attempting to clean up after the fact.
Q. Unlike Greece or Spain, France represents a massive share of the EU economy. If France totters, the EU might struggle to absorb the shock. I have even seen reports suggesting the ECB cannot intervene and is drawing a line.
Looking strictly at the economic data, the yield spike at the end of the chart is striking. In a span of just two to three weeks, yields climbed by nearly 1 percentage point.
Such a sharp spike indicates that market participants are gripped by fear. Those currently offloading bonds believe that a peaceful resolution is improbable without the dread of a default-like scenario or missed interest payments—similar to Korea's 1997 IMF bailout—or the terror that runaway bond yields will make new bond issuances an unsustainable sovereign interest burden. This rise in yields is no minor blip; it reflects tangible fears that a substantial dislocation could occur across bond markets.
Q. Could France become the first defaulting country of the high interest rate era?
It cannot be ruled out. While one would hope to dismiss it, the reason we cannot is the question of whether France can shoulder interest rates around 5%. The blue bar represents the forecast released by the French Ministry of Economy and Finance, standing at 120%.
If bonds maturing over the next 10 years are refinanced at a 5% interest rate, the state will have to pay interest equivalent to 6% of GDP each year. At present, the entire national budget deficit itself is 6% of GDP. During the 2020 COVID shock and the 2012 to 2013 European debt crisis, the European Central Bank purchased massive volumes of debt through quantitative easing. Bonds issued back then carried extremely low coupons, some even in the 1% range.
Those debt instruments issued a decade ago are now sequentially reaching maturity, but can France endure a 5% coupon on newly floated debt? Furthermore, as noted, the Macron administration strove to revive economic momentum by slashing corporate taxes, supporting startups, and aggressively driving eco-friendly policies.
Yet examining World Bank statistics from the start of Macron's tenure in 2017 up through this year's projections, France's per capita GDP rose by a mere 1.8% over the entire nine-year span. That is the sum total of per capita income growth. In Korea, if the economy expanded by 1.8% in a single year, headlines would lament sluggish growth, yet France experienced that over nine full years. Economic growth has virtually ground to a halt.
If I were running the headquarters of a multinational enterprise, I would not invest in France. When considering, "Where should we build a facility in Europe?", wouldn't alternatives like "Let's build in Poland or Ireland" emerge first? Labor costs are lower, and Ireland provides tax incentives. Would any company genuinely invest in a nation where political conflict is careening toward extremes? In an environment shrouded in uncertainty, if a sovereign cannot command international confidence, can a nation growing at under 1% withstand 5% interest rates?
Q. Across the globe, states are pouring massive capital into AI and national defense. If France needs capital but cannot borrow, it might soon become hard to recognize France as the advanced nation it is today.
That is correct. If matters persist along this trajectory, even if it falls short of sovereign default, there is no guarantee France will avoid the fiscal crises experienced by Greece in 2009, or Italy and Spain between 2010 and 2012. Credibility must be rebuilt. Yet even Greece, Italy, and Spain back then only accepted humiliating fiscal austerity terms and endured agonizing belt-tightening after multiple cabinet changes; their economies barely began recovering when authorities unleashed stimulus as global and European commerce froze during COVID-19. They are countries that endured prolonged, grueling "lost decades" where finding an inflection point proved exceptionally difficult.
For France, escaping this trap before falling in is paramount. Yet when asked whether that is achievable, people answer, "I am not sure." The prospect of a sovereign default, a debt moratorium, or coerced severe fiscal austerity unfolding within the next 10 years cannot be dismissed entirely.
Europe's Lost 15 Years: Where Will Capital Fleeing Europe Head?
Europe is presently enduring a "lost 15 years." The only economies demonstrating genuine growth are nations like Poland, Italy, and Spain. These countries possess powerful resolve. Having weathered debt crises, Italy and Spain accepted humiliating fiscal discipline and are now gritting their teeth to generate economic expansion. Poland, leveraging the war in Ukraine, serves as Europe's arsenal and defensive bulwark, achieving rapid growth supported by rising education levels.
France and Germany depend heavily on the automotive industry. Yet they are failing to respond effectively to the electrification transition. When even firms that excel at hybrid models, such as Korean carmakers, are under pressure, the outlook for their European counterparts is deeply troubling. Moreover, they failed to erect robust tariff barriers against Chinese electric vehicles. Because Chinese enterprises are acquiring defunct European automakers and entering the market under those heritage badges, bypass channels are already established, leaving doubts about whether the influx of Chinese vehicles across Europe can be checked. Unlike the U.S., which imposed massive tariffs on China, Europe has drifted into a structure incapable of mounting an effective defense.
Q. Barring a dramatic shift, is Europe being relegated to third or fourth tier?
In equity markets, that is already a reality. Twenty years ago, Europe made up 30 to 40% of global equity market capitalization; today, it accounts for 10%. Market participants recognize this first. I have frequently been asked, "You advocate global diversification, so why don't you invest in Europe?" It has been quite some time since I stopped allocating capital to Europe. I concluded, "This is a region that can simply be bypassed." There is very little optimism on the horizon.
Optimistically, it would be ideal if funds departing Europe flowed into South Korea. However, from an investor's perspective, having navigated six grueling years from the 2010 European debt crisis through the 2015 Greek turmoil and Grexit scare, it is difficult to feel confident that European or French challenges will resolve swiftly. If I were a fund manager, even if I disagreed with Trump's America, I would conclude there is no viable alternative. Not because the U.S. is uniquely endearing, but because there is no alternative capable of absorbing such vast liquidity, leaving little choice but to move into the United States.
That fuels dollar strength, and a strong greenback has historically never been favorable for us. For global allocators, holding dollars provides solid liquidity and allows them to reliably capture foreign exchange gains from dollar appreciation. Furthermore, Korea's market has already advanced significantly. Even if the benchmark index, which stood near 3,000 points this time last year, underwent a pullback, it is currently trading in the mid-6,000s, and the exchange rate is favorable. They are unlikely to place massive bets on South Korea.
Q. From a retail investor's standpoint, is it prudent to keep the core investment anchor in the U.S. and the dollar right now?
While I may disagree with the Trump administration's policy direction, the U.S. appears to be steering toward a system through these midterm elections where the executive cannot unilaterally run unchecked, whereas France is seen as likely to descend into deeper dysfunction. In such an environment, the U.S. dollar offers stability and unmatched liquidity. You can actively buy and sell as conditions dictate. Market depth spans diverse asset classes, with bid-ask orders placed at scales of billions to tens of billions of dollars.
Consider, for example, an apartment complex of 5,000 units. If Korean homeowners relocate once every eight years, roughly 600 households out of 5,000 would relocate and execute transactions each year. Excluding Sundays, that represents a market generating roughly two fresh listings every single day. Would it be easier to trade in that market, or in an isolated 100-unit standalone apartment building? That illustrates how the U.S. market operates. Order books are deep. Buy and sell orders valued at tens of billions of dollars are posted across the identical price tier.
A market where anyone can readily execute transactions is referred to as a deep market, and Europe—particularly its sovereign bond market—is also nominally very deep. With sovereign debt surpassing 100%, bonds issued across Europe's roughly $30 trillion economy circulate at volumes of $30 trillion to $40 trillion, making it an immense marketplace. However, the critical flaw of the European market is that even though paper is denominated in the same currency, the euro, Italian yields, German yields, and French yields all diverge. Consequently, one cannot truly describe it as deep. Investors appear to be acutely sensing that underlying risk.
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