France and the limits of liberalism

Immigration, the welfare state, and Keynesian economics are all showing signs of strain.

Photo by Jorge Jaramillo via Wikimedia Commons

I’m writing about this a little bit late, but France has been having some pretty bad riots:

After widespread rioting at the weekend – estimated to have cost several hundred million dollars in property damage and theft – France faces a toxic mix of urban rebellion, political drift and economic crisis…There was rampant looting in Paris, Marseille, Bordeaux and other cities, while the city hall in Limoges, which survived two world wars, was badly damaged by fire and its clock spire collapsed.

The violence at the weekend, which led to some 2,400 arrests, followed weeks of protests by French students angry about crumbling schools, a lack of teachers and dismal job prospects.

If there’s a reason I’m writing about this a bit late, it’s because “rioting in France” is a little like “rain in Seattle” — it’s not exactly an unusual occurrence. In 2023, France had a week of nationwide riots over a police killing. From 2018 to 2020, France was rocked by over a year and a half of near-continuous “Yellow Vest” protests and riots over economic issues. I remember two decades ago, reading about weeks of rioting in the French suburbs, accompanied by endless photos of burning cars. And so on.

French people like to riot. But this time, things are a little bit different, for a couple of reasons. First of all, this wave of unrest is accompanied by serious economic troubles. France’s long-term interest rates, like rates throughout the world, are surging:

But unlike some countries whose rates have also risen, investors have serious doubts that France’s government will take the necessary steps to pay back what it owes. The price that investors have to pay to insure against a French sovereign default has shot up even more abruptly than interest rates:

Source: MacroMicro

Basically, investors are starting to think that France won’t pay back its debt — that instead of raising taxes or cutting spending, the country will simply pay the cost of rising interest rates by borrowing even more money. Instead, investors are starting to worry that France will simply default on its bonds.

In a widely read post a couple of weeks ago, Paul Krugman argued that the problem lies with France’s old-age pensions, which are eating an increasingly enormous amount of the country’s GDP and seem politically immune to any cuts:

The rise in interest rates on French government bonds is largely driven by heightened perceptions of the risk that France could default on its national debt…France is on a fiscally unsustainable path. Debt is already very high as a percentage of GDP, and the French government is adding to that debt by running large budget deficits even though there is no emergency like a war, a severe recession, or a pandemic to justify such deficits. Furthermore, France has an aging population, which means that pension costs will, other things equal, grow much faster than revenue…

France does stand out, even among fiscally troubled nations, in one main way: its persistent inability to get realistic about retirement…The official French retirement age…was only 62 in 2023…The average actual age of retirement…was lower in France than anywhere else in Western Europe…Macron’s center-right government was on track to gradually raise the retirement age to 64, still low by the standards of other advanced nations. But due to opposition by the extreme right and the extreme left parties in France, this rise has been frozen until after next year’s election.

In other words, France needs austerity, but it can’t get it, because the French people demand ever-increasing spending. France’s government already takes up a larger share of GDP than almost any other rich country — significantly more than Sweden or Denmark:

Source: OWID

And indeed, a very hefty chunk of that social spending goes to either old-age pensions or to health (which is heavily weighted toward the old):

Source: OWID

Of course, there’s another way to do austerity besides cutting spending — France could raise taxes. But this will also be tough. France’s taxes are already higher as a share of its GDP than any other rich country, including the famously high-tax Scandinavian countries:

Source: OWID

Could taxes go up even more? It’ll be difficult. In 2019, I wrote about the underwhelming results of France’s previous experiments:

The wealth tax might have generated social solidarity, but as a practical matter it was a disappointment. The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium, which has a large French-speaking population. When these individuals left, France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax…

Another French experiment was the so-called supertax, a 75% levy on incomes of more than 1 million euros. Introduced by socialist President François Hollande in 2012, the supertax added to the exodus of wealthy individuals, most notably actor Gerard Depardieu and Bernard Arnault, chairman of LVMH Moet Hennessy Louis Vuitton. Star soccer players threatened to go on strike, and there was fear that France would become a wasteland for entrepreneurs. Meanwhile, the supertax raised much less money than even the wealth tax had -- only 160 million euros in 2014. The unpopular tax was repealed two years after its adoption.

France is in a difficult position here. Its membership in the EU, and its location near to other French-speaking countries like Belgium, Switzerland, and Luxembourg, make it trivially easy for rich French people to pick up and move to other countries if they see their fortunes under threat of confiscation.

France could, of course, try taxing the middle class to pay for expanded social spending, perhaps by an increase in the VAT. But this burden would fall on many of the same people who are now protesting and rioting in the streets, so it’s probably a political nonstarter as well.

In fact, the current riots are making the strains in France’s bond market worse, by making the politics of austerity seem more intractable. Various groups of protesters and rioters are demanding enormous amounts of additional government largesse — billions of euros of increased spending on schools, increases in pensions, increases in social benefits, and even subsidies for consumer goods like fuel. That demonstrates that there’s still enormous grassroots political pressure for higher government spending; even if France’s leadership doesn’t cave in to this pressure, leaders will probably be averse to making the deep cuts to spending required to put France on a sustainable fiscal path.

And that, in turn, is probably making it harder to enact any of the spending that the protesters are demanding. When protesters demand increased spending, bond markets respond by charging higher rates on French government borrowing. That increases interest costs for the government, which makes it harder to raise social spending — the exact opposite of what the protesters wanted.

Fundamentally, the French riots show the limits of the European left-liberal welfarism that has been the region’s default approach to governance for the last half-century — and which American progressives want to emulate. The French populace — or at least a powerful chunk of it — simply doesn’t seem to be able to recognize the difference between a sustainable welfare state and an unsustainable one. Instead, social benefits seem to be a one-way ratchet — higher benefits raise expectations for even higher benefits, until even the most milquetoast and inadequate of austerity measures end up causing cities to burn.

That one-way ratchet also calls into question the viability of Keynesian fiscal stimulus — the main tool that left-liberals (including me) prefer to combat deep recessions. Few serious macroeconomists now question that stimulus is effective in raising aggregate demand in a severe downturn. But Keynesian policy requires that fiscal largesse during a bust be matched by fiscal austerity during a boom, so that deficits don’t grow unsustainably. The problem is that while “austerity during the boom” is easy to say, it’s politically very hard to enact.

Hanno Lustig, reading Krugman’s post about the unsustainability of France’s borrowing, recalls the years of the Euro crisis, in which Krugman urged France to spend, spend, spend to fight the recession:

Hanno Lustig@HannoLustig

May come as a bit of a surprise to those of us who were following Paul's writings in the 2010s when he was railing against Eurozone "austerity craziness". With interest rates at the zero lower bound, he argued that fiscal consolidation in a depressed economy was self-defeating:…

Bloomberg @business

Nobel Prize-winning economist Paul Krugman warned that France’s deteriorating public finances are on an “unsustainble path” and at risk of unleashing a debt crisis across the euro area https://t.co/M4BodYe5k6

3:43 PM · Oct 10, 2026 · 101K Views

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35 Replies · 135 Reposts · 685 Likes

Lustig is being a little unfair to Krugman here. In fact, here’s what Krugman actually wrote in 2011, in the first post that Lustig cites:

[W]e won’t always be in a liquidity trap. Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation. And when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter…At a future date, when we’re out of the liquidity trap, public finances will matter…[T]he biggest source of our long-run deficit isn’t the overhang of debt, it’s the prospective current cost of paying for retirement, health care, and defense. So such a crisis — again, it’s very much hypothetical — could spiral into something very nasty, with very high inflation and, yes, hyperinflation.

Krugman was actually talking about the U.S., but he might as well have been talking about France. Keynesians don’t just say “more government spending is good” — they recognize that there are limits, so they urge governments to cut spending during good economic times.

But Lustig has a point, nonetheless. The Keynesian prescription — deficits during the bust, austerity during the boom — requires that whoever is in power during the boom take the political hit for doing the austerity. In practice, you can sometimes find politicians willing to spend their political capital on taking that hit, but it’s tough. Even Macron caved in the end.

When we look at actual French borrowing and spending during the Euro crisis of the early 2010s, it’s clear that neither the austerity Krugman feared nor the stimulus he desired was actually happening. Look at the charts above, and you’ll see that government spending didn’t rise or dip during the 2010s — it just sailed on, unperturbed, as if the recession didn’t even exist. The same was true of French government debt:

Source: OWID

Germany actually did do austerity during the bust. France did not. In fact, they didn’t do anything — they just kept borrowing and spending.

That points to a political-economic problem for Keynesian liberalism. It suggests — as James Buchanan foresaw — that spending is often less likely to be determined by the wise judgement of technocrats, and more likely to be determined by angry ignorant people burning down government buildings.

Finally, France’s riots show the limits of one more pillar of modern left-liberalism — tolerance toward mass immigration.

It’s not obvious that African or Middle Eastern immigrants are disproportionately behind these riots. Viral videos of rioters and looters — including the famous video of the French video game store owner trying to defend his shop against young hoodlums — show a racially mixed crowd of rioters with plenty of white representation. Some past waves of riots have been driven by immigrants and their children — for example, the anti-police riots of 2023. But others, like the much longer-running Yellow Vest riots of the late 2010s, were mostly white.

Still, France’s public appears more and more inclined to blame “migrants” for the chaos in their streets. When the disorder began, the political fortunes of the anti-immigration right-wing candidate Marine Le Pen soared:

Source: Polymarket

In contrast, the chances of the only major left-wing candidate, Jean-Luc Melenchon, didn’t budge. Melenchon is promising lavish increases in social spending, but the public is disinterested; instead, as in Germany with AfD, and indeed all over Europe, the people are gravitating toward whoever promises to stop immigration.

America is not France, of course. Our immigrant mix is very different, and our ability to assimilate large numbers of immigrants is much greater. Our attitudes toward immigration have turned positive again, at least partly as a reaction against Trump’s brutality. But France shows that the left-liberal approach to immigration simply doesn’t work equally well for all countries.

So France’s riots aren’t just one more case of French people going wild in the streets. They demonstrate the limits of European-style left-liberalism — the lavish welfare state, the tolerant attitude toward mass immigration, and the trust in Keynesian demand management. Left-liberalism built some very beautiful and kindly societies, but its powers are not infinite.

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