France is in a financial crisis. That much is clear. What isn’t so clear is exactly why.

This seems silly even to ask. The destruction and violence last weekend were appalling, even given the famous French willingness to take to the streets and the barricades. The most likely winner of next year’s presidential election is Marine Le Pen, who inherited France’s far-right movement from her father, a poisonous Holocaust denier and Nazi-sympathizer. Her closest competition comes from the veteran hard-left socialist Jean-Luc Melenchon, who has proposed setting fire to government debt. Isn’t it obvious that investors would flee from such a nation?

But it’s not that clear. The yield on French debt is still lower than that of the UK (and until this week, lower than US yields). Its deficit, as a share of gross domestic product, is barely half that of the US. China operates a higher primary deficit. Government debt is slightly more elevated than GDP, and above the average for the euro zone. Italy’s is much higher. Besides, if this were really what was making the bond vigilantes mad, their target should be Japan, where government debt is more than triple GDP.

France is still benefiting from the absurdly low yields at which it was able to borrow, so its interest payments are also lower as a share of GDP than many others. With more than two-thirds of its electricity generated by nuclear power (compared to zero in Germany), it is less exposed to the most serious rising cost of the day than any other country in Europe.

France’s politics are hideous, and the deep divisions within the electorate (driven in particular by immigration) must come to a reckoning next spring. But it’s scarcely alone in this. Germany’s Alternative für Deutschland, which has won a state election in recent weeks, looks even more hostile to international markets. However, the experience of four years’ rule in Italy by Giorgia Meloni, who comes from an even more alarmingly fascist lineage than Le Pen, shows that aggressive right-wing populists can and do behave pragmatically once in power.

The nation’s debt was already under full-blooded speculative attack before student protests spiraled into arson and vandalism. It’s not yet clear whether this has improved Le Pen’s polling performance, but prediction markets already had her as favorite and haven’t budged.

Prosaically, this crisis was long a simmering threat, and only boiled over because a sharp rise in US bond yields (no fault of President Emmanuel Macron or anyone else in France) has forced a shift in the mathematics for borrowers across the world. That arithmetic doesn’t add up for France because its welfare state is plainly unaffordable, and most importantly because it is part of the euro zone. The euro’s fundamental flaws remain unfixed, even after the existential crisis it suffered from 2010 to 2012 — which means there is a real risk that French problems will be repeated elsewhere in Europe.

The French Welfare State France collects a lot from its citizens. Tax takes 44.2% of GDP, the most of any major developed country. That thwarts any hope to resolve a crisis with tax hikes.

The state has been extremely — even exceedingly — generous in return. The retirement age is 62, the lowest of any of the biggest developed economies. The US and Japan make people wait until 67. Protests from the hard left and right forced the Macron government to back down from a plan to raise this to 64 (still low by international standards) until after next year’s election. France is not unique in having an aging population that is growing ever harder to finance, but its largesse and the intense political opposition to rolling it back make the numbers particularly hard to reconcile.

These commitments give Paris very little room for maneuver, even if other countries have a more obvious financial problem. Its greatest handicap is that since 1999, it hasn’t controlled its own currency. The citizenry has been angry for decades about the accompanying high cost of living that is increasingly spilling into the streets.

The Euro Zone France was a leader in creating the euro; monetary union was the demanded by President Francois Mitterrand in 1990 in return for agreeing to German reunification. A political concept more than an economic one, the common currency would ensure that a bigger and more powerful Germany kept the interests of the rest of Europe at heart.

But it was always incomplete, as there was no common fiscal policy to go with the single currency. Once peripheral countries ran into budget difficulties after the Global Financial Crisis, thanks to lower tax revenues in the recession and the need to prop up stricken banks that held huge quantities of European government debt, the structural flaw was laid bare.

By barring individual governments from devaluing their currency to deal with a debt problem, the euro zone subjected its members to much tighter financial market discipline than countries outside it, like the UK or Switzerland.

For example, Spain suffered a severe crisis in 2011 that led to the government’s collapse when its outstanding sovereign debt was only 40% of GDP. The equivalent for the UK — also a member of the European Union at the time — was 94%. But Britain had retained its own currency and never came under attack. Indeed, the euro zone entered 2011 with a deficit of only 4% of its total GDP, less than half that of the US, which then stood at about 10%. The currency straitjacket created the problems.

The crisis might have forced the necessary reforms to create a coherent fiscal policy. The European Central Bank held back while the upheaval raged for two years, felling governments in Greece, Ireland, Portugal, Spain and Italy, in the hopes that politicians would at last create the needed institutions. The EFSF (European Financial Stabilization Facility) and then the ESM (European Stability Mechanism) were added to the alphabet soup as ways to backstop disorder, but fiscal union didn’t happen. French difficulties now make clear that the problems are unresolved.

Last year’s excitement over the need for the continent to rearm in the face of growing threats from Russia and falling support from the US awakened hope that it would bring common borrowing for defense purposes in its wake. It’s yet to come to fruition.

Neither have the more politically attainable banking or capital markets unions, as euro-zone members seek to boost national champions. Progress stalled after the 2012 “whatever it takes” pledge by Mario Draghi, then head of the ECB, that the central bank would rescue the euro at any cost. It alleviated the immediate crisis, but guaranteed that fiscal alignment wouldn’t happen.

European Central Bank Nevertheless, the ECB was the undisputed victor of the crisis. As the euro zone’s sole coherent institution with the ability to act swiftly, its promise was enough.

But that victory can be misunderstood. It’s not difficult for a body with the power to print money to resolve a financial crisis. The euro zone as a whole, with 17 members, couldn’t move fast even if national interests were aligned (which they emphatically weren’t).

Missteps since then contributed to the growing crisis in France. In July 2022, the ECB introduced a new mechanism, the Transmission Protection Instrument, allowing it to buy sovereign bonds with no preset limit, in a bid to stop different members’ yields from moving too far apart. Then, as now, US yields were rising sharply, and that had prompted a bulge in the spread at which Italian and Spanish yields traded compared to German bunds.

Robin Brooks of the Brookings Institution argues that it had the lasting effect of subsidizing a “carry trade” in the euro zone’s riskier credits, in which investors could feast on high yields knowing that the central bank would be there to help if bond prices fell too far. “The ECB’s track record of bailing out high-debt countries means investors think it’ll buy them out of their positions in bad states of the world,” he says. “The result is where we are now.”

Brooks points out that French bonds received their biggest monthly inflow of foreign money ever this June. At the time, oil prices were falling and Iran and the US had a memorandum of understanding. He suggests that investors were “reloading their ECB-subsidized carry trade” in the expectation that conditions would stay fair. Instead, the war took a turn for the worse. Carry traders needed to unwind a big overhang of debt. It should be no surprise that a major selloff resulted, creating the kind of sudden dislocation that can cause a crisis.

That raises the risk of contagion elsewhere and, for him: “At the root of all this sits the ECB, which subsidizes this carry trade through its past actions to cap yields.”This crisis will need to be resolved in France. If the warring political factions cannot agree on a way to trim the welfare state, severe punishment from the bond market looks inevitable.

But it has its roots in Brussels and Frankfurt, as well as assumptions about the welfare state that long predate the current anger. And while a combination of political timing and the flaws in the euro zone have ensured that France reaches crisis-point first, more will follow until Europe somehow resolves the contradictions that have vitiated the single currency, and with it the entire European project, for almost three decades. Either that means following economic logic and getting countries to surrender much more control over their own spending, which will not be easy (to put it mildly) — or taking the perilous step of trying to undo the euro. It’s a big dilemma, but the protesters on French streets will not sympathize.