The fiscal chaos that hawks warn will eventually play out in America is already underway in France.

Why it matters: The revolt over fiscal deficits has come for France. A financial market freakout is pushing the government to take steps to rein in spending, a task complicated by political factions that campaigned on expensive promises.

The big picture: Two years after the U.K.'s mini-budget crisis, France is the latest country to face slumping confidence in its ability to manage its finances.

• Investors have been dumping French government debt, making it more expensive for the nation (and French consumers) to borrow.
• France's woes signal less tolerance for excessive spending and big deficits.

What they're saying: "The key lesson right now is that you just cannot have unfunded spending," says Pooja Kumra, a European rates strategist at TD Securities.

• "Europe, even the U.K., is trapped in this situation where the solution to increase growth comes through fiscal spending. But when they spend, markets punish them," Kumra adds.
• This summer, France's then-finance minister warned about excessive spending plans proposed by the far right: "A debt crisis is possible in France." He said a "Liz Truss-style scenario" — a reference to the former British prime minister whose budget sparked financial turmoil — could play out.

Between the lines: France spent big to insulate the public from successive economic shocks — COVID-19, Russia's invasion of Ukraine, and the inflation crisis.

• France's debt has risen to 112% of GDP, from 98% in 2019. The European Union requires members to keep total debt below 60%.

What to watch: U.S. debt held by the public is projected to be 99% of GDP this year. Some economists warn a reckoning from bond investors could be ahead, especially if the proposed spending plans from presidential candidates are adopted (more on this below).

• But the U.S. has an advantage: The dollar is the world's reserve currency, allowing it to borrow much more easily.

The intrigue: France is trying to plug its budget hole against a fraught backdrop.

• The French economy is faltering after an extended period of high interest rates. The French have little appetite for fiscal belt-tightening, as demonstrated by last year's protests over raising the retirement age.
• France's parliament is a political mess with three ideologically opposed parties sharing power. That makes clearing a budget all the more difficult.

What's next: The proposed budget would raise taxes on large firms and the wealthy. But most of the deficit-cutting plan takes aim at government spending, including for health care and regular pension increases.

• The tax hikes "have the potential to lead to a lose-lose situation," Sean Bray, the director of European policy at the Tax Foundation, tells Axios in an email from Paris.
• "In the short term, they won't raise the needed revenue, and in the long term, they will slow much needed economic growth (and therefore future revenue)."

The bottom line: Governments — at least in Europe — can't spend the way they used to without consequences.

The chart above illustrates how France's budget and political drama are playing out in financial markets.

• Borrowing costs have soared: The yield on France's 10-year government bond is 3.06%, roughly 40 basis points above that seen at the start of 2024.

Threat level: Investors are demanding a higher premium to own French government debt compared to the German equivalent.

• The gap has since narrowed, but at its worst in August, the difference was 84 basis points.
• That's the largest since 2012, but still that looks relatively mild compared to the height of Europe's sovereign debt crisis — when the spread was more than 180 bps.

What to watch: Ratings agency Moody's is expected to release its review of French debt any day now, following a downgrade by S&P Global Ratings earlier this year.

Meanwhile, in the U.S. ... Long-term interest rates have been rising, reflecting the possibility of fewer rate cuts — and the potential outcome of a nail-biter presidential race.

The big picture: The labor market and economy are on sturdier footing than many thought. The recent better-than-expected economic news might warrant fewer rate cuts.

• That helps explain the roughly 50 basis point rise in the yield on the U.S. 10-year Treasury note since the Fed rate cut, which was later followed by a strong jobs report.

Another factor to consider is a phenomenon last seen one year ago: Investors demanding extra compensation to lock up money for longer periods, with all the uncertainty that may bring — including ballooning deficits, depending on who wins the White House.

• Bond wonks call this the "term premium," an estimate of which has turned positive for the first time since October 2023, as noted by analysts at LPL Financial.

What they're saying: This could "indicate markets are betting on higher government deficits depending on election odds," LPL Financial chief fixed income strategist Lawrence Gillum wrote in a note this week.

• "Red sweep talk is occurring all over Wall Street and Washington," Interactive Brokers economist José Torres wrote, referring to the possibility that Trump wins the presidency and Republicans control Congress.

If that happens, it could make the fiscal outlook more dicey: It may be easier to push through an extension of Trump-era tax cuts and other big spending plans.

• Deficits are estimated to explode much more under Trump than under Kamala Harris. Economists have also warned about the inflationary risks of Trump's tariff threats.