Is the Eurozone heading towards a new sovereign debt crisis?

High yields on government bond in many advanced economies are leading some to speculate about a looming debt crisis. Lessons from the Eurozone’s experience with Greece in 2010 suggest that while a full-blown drama is yet to unfold, the European Central Bank must stand ready to intervene if needed.

Long-term interest rates in most European countries and the United States have been on a steep upward path since the start of the Ukraine war (see Figure 1). In the UK and America, the yields on ten-year government bonds were 5.4%. and 5.2% respectively, on 12 October – the highest in the industrial world. That had not happened for 25 years in either country.

Much ink has been spilled on analyses of the causes of this interest rate escalation. Potential explanations include higher inflation expectations, rising government debt in a number of countries (including the United States) and the high demand for credit from the giant firms developing artificial intelligence (AI), which are building more and more data centres.

Figure 1: Long-term government bond yields, selected advanced economies, 2010-2026

Source: Federal Reserve Bank of St Louis, FRED

The focus of this article is on what is happening in the Eurozone. As a starting point, Figure 2 plots the spreads of the ten-year government yields of a sample of Eurozone countries with the ten-year German government bond yield. This spread expresses the risk taken by investors in holding these countries’ bonds relative to the risk in holding the German bond.

Two points stand out. First, the recent increases in the spreads are dwarfed by the spreads that existed not only during the sovereign debt crisis of 2010-12 (when these were spectacular), but also compared with the more recent periods of 2018-19 and during the inflationary surge of 2021-23. So, if there is an emerging crisis today, it is still in its very early infancy, which of course does not mean that it cannot happen.

Second, there is the changing position of France. In the past, that country was counted among the low-risk members of the Eurozone. During the sovereign debt crisis, the French spread increased but by much less than the Belgian, Spanish, and Italian spreads did (let alone the Greek spread, which is not shown in Figure 2).

Until 2024, France remained safely in the group of low-risk countries. Now it has become the country with the highest spread in the Eurozone, above Greece, Italy and Spain (the typically high-risk countries). This has led to speculation by analysts of all kinds that France is chasing Greece and that a new debt crisis is brewing.

Figure 2: Spreads of the ten-year government yields of five Eurozone countries with the ten-year German government bond yield

Source: Federal Reserve Bank of St Louis, FRED; London Stock Exchange Group, LSEG

The likelihood of such a crisis remains an open question. Again, some historical perspective is worth stressing. The spreads that we observe today remain small compared with the spreads seen during the 2010-12 crisis when they exceeded 25% on Greek government bonds. The spread on French bonds today is about 1.5%. So, we are very far from Greek conditions.

Comparing the fundamentals of these two countries leads to the same conclusion. The Greek budget deficit in 2010 (when the sovereign debt crisis started) was 11% of GDP, while the government debt-to-GDP ratio was 145%. The current French budget deficit is forecast to reach 5.1% in late 2026, with a corresponding debt-to-GDP ratio of 119%. These are troublesome numbers – but still significantly better than the Greek figures at the start of the 2010-12 crisis.

How likely is a new crisis?

A sovereign debt crisis remains possible, of course. The fundamental reason is that the Eurozone is inherently fragile (De Grauwe, 2011). This fragility can be described as follows.

The governments of a monetary union issue debt in a currency over which they have no control. As a result, they cannot give a 100% guarantee to the bondholders that these will be repaid at maturity. When maturity comes, the governments in a monetary union may not have the necessary liquidity to repay the bondholders and to roll over the debt. They cannot turn to their central banks to provide the necessary liquidity to repay the bondholders. This means that they can run out of cash.

This contrasts with countries with full monetary sovereignty like the UK or the United States. Such countries will turn to their central banks in times of crisis and force them to provide the necessary liquidity. Bondholders cannot beat sovereign governments in full control of the issuance of money, but they can beat governments in a monetary union that do not control the issuance of money.

Bondholders know that government bonds in a monetary union carry this liquidity risk. When distrust among investors with regard to government bonds of a country emerges, these investors will sell bonds of the country in question, driving up the yield on the bonds, with the result that the government of that country finds it increasingly difficult to borrow money at reasonable interest rates.

A liquidity crisis happens when the country can no longer find money, and there is no central bank that can provide the liquidity. The country can then be forced into default. That was the Greek drama.

It should be noted that it does not really matter whether the distrust that triggered this process is justified or not. In the case of Greece in 2010, it certainly was. But it could be argued that the distrust that gripped other countries of the Eurozone in 2010 (for example, in Belgium, Ireland, Portugal and Spain) was triggered by contagion – a transmission of fear and panic from one country to the other that was not founded on fundamentals but was triggered by collective panic among bondholders.

In research published back in 2013, Yuemei Ji and I provide evidence for this phenomenon during the sovereign debt crisis. At a certain moment, upward surges in the spreads of a number of countries occurred in a correlated way, independent of underlying fundamentals and instead driven by sentiments of fear and panic.

How might policy-makers respond to a new debt crisis?

The problem of the Eurozone sovereign debt crisis in the early 2010s was solved by the European Central Bank (ECB) having the task of ‘lender of last resort’. In 2012, the ECB promised that in times of crisis it would buy unlimited amounts of the government bonds of the country in crisis. This solved the debt crisis in no time. Suddenly, the distrust disappeared.

Similar problems occurred during the pandemic in 2020-22 when Eurozone countries were hit by another large crisis. In this case, the government bond markets were not affected and there was no indication of fragmentation in these markets, mainly because the ECB created a new programme of liquidity provision (the pandemic emergency purchase programme, PEPP) aimed at buying government bonds in distress.

Even with large deficits and debt positions, the UK and the United States will not end up in a sovereign debt crisis. The central banks of those countries will be forced by their governments to buy government bonds. This coercion does not exist in the Eurozone: no government can force the ECB to do so.

The problem of France today is that distrust based on high budget deficits and public debt has arisen. But what is even worse is the political impasse in that country. There is an inability to draw up a budget, and there is the prospect of a victory of extreme parties who will pursue even more budgetary adventures. A budget deficit of about 5% and a debt-to-GDP ratio of 119% can be overcome relatively easily in well-run countries, but not so easily in countries where political decision-making is paralysed and where future political prospects may intensify this malfunctioning.

What the ECB will do if a debt crisis arises with France is subject to speculation. There can be little doubt that the central bank will have to intervene and start buying French government bonds if the French spreads continue to increase. If the ECB refuses to do so, an existential crisis will arise in the Eurozone.

France is not Greece, which could be trumped by the ECB and the European Commission in 2010. It is possible that should the Front National come to power in France, such a refusal by the ECB would be the reason for Marine Le Pen to realise her old dream and leave the Eurozone. That would certainly trigger an existential crisis for the Eurozone. This perspective continues to hang over the Eurozone like a sword of Damocles: as long as this is the case, small triggers can lead to a conflagration.

This time around, one idea is that the ECB should halt the so-called ‘quantitative tightening’ (QT) programme, which involves reducing its government bond holdings. This programme tends to raise the yields on these bonds, increasing the risk that small triggers lead to a full-fledged crisis.

For other countries in the Eurozone – such as Belgium and Italy – questions remain as to whether they are targeted by financial markets. They have similar fiscal positions as France. And as we saw during the 2010-12 crisis, contagion effects from one country to the others were strong and led to a systemic crisis in the Eurozone.

Once fear sets in, it can degenerate into panic sales of government bonds with uncontrollable effects on other countries. This is probably the main reason why the ECB will have to step in: to contain the contagion to other countries and to avert a systemic crisis.

Where can I find out more?

Bond turbulence means it is time for the ECB to put QT on hold: October 2026 Financial Times opinion piece by Lorenzo Bini Smaghi, a former member of the ECB’s executive board.

Governance of a fragile Eurozone: A 2011 study by Paul De Grauwe.

Self-fulfilling crises in the Eurozone: an empirical test: A 2013 paper by Paul De Grauwe and Yuemei Ji, published in the Journal of International Money and Finance.

The fragility of the Eurozone: has it disappeared? A 2022 paper by Paul De Grauwe and Yuemei Ji, published in the Journal of International Money and Finance.

France’s budget process is flawed and increases the risk of a debt crisis: July 2026 Le Monde opinion piece by Olivier Blanchard, former chief economist of the International Monetary Fund (IMF).

What’s the matter with France? A substack post by Paul Krugman on 8 October 2026.