London -26 September 2026 — EBM WEEKEDN READ — By Brad Adams
For most of the past fifteen years, Europe’s governments could borrow almost for free, and they planned their budgets as if that would last forever. It has not. In early September, Britain’s 10-year gilt yield rose to 5.29%, its highest since August 2007, while Germany’s equivalent reached levels last seen in 2011. The euro’s supposed safe haven, the German Bund, climbed above 3.3% for the first time since May 2011, and French yields hit their highest since November 2008. The global bond sell-off is no longer a market story. It is becoming a budget story, and every finance minister in Europe is about to feel it.
How the Cheap Money Ended
The immediate trigger was the energy shock from the Iran war, which pushed inflation back up just as central banks thought they had tamed it. On 10 September, the European Central Bank raised its deposit rate by a quarter point to 2.5%, its second hike since the war broke out. Six days later, the Federal Reserve followed with its first rate rise in more than three years, taking its benchmark rate to 3.75%–4%, and signalled that another could follow.
Central banks, however, only control short-term rates. The more worrying signal comes from long-term borrowing costs, which reflect what investors demand to lend to governments for a decade or more. At his press conference, Fed Chair Kevin Warsh attributed higher 10-year yields to economic strength, competition for capital and geopolitical factors.
Join The European Business Briefing
New subscribers this quarter are entered into a draw to win a Rolex Submariner. Join 40,000+ founders, investors and executives who read EBM every day.
SubscribeThat phrase, competition for capital, is the key to understanding what has changed. Governments are no longer the only big borrowers in town. They are competing with the AI boom, with rearmament, and with the energy transition, all of which need enormous sums at the same time. When everyone wants to borrow, lenders can name their price.
France Is the Test Case
If you want to see what the end of cheap money looks like in practice, look at Paris. France’s finance ministry projects that its debt interest bill will rise to €74.2 billion in 2027 from €64.8 billion this year. Defence spending will increase by €6.4 billion under the country’s military programming law. Excluding defence, all other ministries combined will get just €1.5 billion more.
Read those numbers together and the new reality is plain. France will spend more on extra interest next year than on extra defence, and roughly six times more than it will add to every other government department put together. Bondholders are becoming the fastest-growing claim on the French state.
The market has noticed. France now expects a deficit of 5.4% of GDP in 2026, having originally aimed for 4.6%. In late August, French 10-year borrowing costs were slightly above Italy’s, despite France carrying a lower debt ratio, a reversal that would have been unthinkable a few years ago. The next test arrives this week, when France’s draft budget for 2027 is due on 30 September. It lands just months before a presidential election in April 2027.
The Slow Poison of Rising Rates
The danger of higher rates is that the damage arrives slowly and then all at once. Governments do not refinance all their debt at once. France’s average debt maturity is around eight and a half years, so every year a slice of old, cheap debt is replaced with new, expensive debt. The European Commission expects French interest payments to rise from 2.6% of GDP in 2026 to 2.8% in 2027.
These look like small numbers, but they compound quietly. Each year of higher rates locks in costs for years to come, which is why today’s yields will shape budgets well into the next decade. And unlike most spending, interest payments cannot be cut, negotiated or delayed. They are paid first, and everything else fights over what is left.
What is left is under pressure from every direction. French social security spending is projected to rise by €17 billion to €838.3 billion in 2027, driven by healthcare and pensions. Europe’s ageing populations mean that bill only grows.
Guns, Pensions or Bondholders
This is the choice Europe spent a decade avoiding. Every major government has promised to spend far more on defence, and European industry is already reorganising around that promise, with car factories being repurposed to build military equipment. Governments have also promised to protect pensions, fund the green transition and shield households from the energy shock.
Under cheap money, those promises could all be financed with borrowing, because borrowing cost almost nothing. At 4% or 5%, they cannot. Something has to give, and the political systems of most European countries are poorly equipped to decide what.
Why Business Should Care
It would be a mistake to treat this as a problem only for governments. Government bonds set the floor for almost every other borrowing cost in the economy. When the state pays more, companies and households pay more too, on mortgages, corporate loans and every refinancing that comes due.
The effect is already visible in the sectors hit hardest by the Hormuz crisis. Airlines running short of cash will find lenders far less forgiving at these rates than they were in the pandemic, when money was nearly free. Across Europe, a generation of managers who have never run a business in a world of expensive money is about to learn how.
My Read
My view is that the era of near-zero borrowing is not coming back, even if the Iran war ends tomorrow. Rates may fall from here, but the structural demand for capital from defence, energy and AI means Europe is unlikely to see the money of the 2010s again. Governments that planned their budgets on the old assumption are now discovering that the bill arrives with interest.
France is simply the first to be tested because it has the weakest combination of high debt, persistent deficits and political deadlock. Italy, Belgium and the UK face versions of the same arithmetic. The real question is not whether Europe’s governments must choose between guns, pensions and bondholders, but which of them will make that choice before the markets make it for them. Wednesday’s French budget will show whether Paris has an answer. The bond market is already doubtful.
Related Analysis
