With or without European Union: Britain and France are facing fiscal crisis — Phar Kim Beng

With or without European Union: Britain and France are facing fiscal crisis — Phar Kim Beng


Wednesday, 27 Aug 2025 3:00 PM MYT


AUGUST 27 — When Chancellor Rachel Reeves stepped into office promising stability and discipline, few imagined that within months Britain would again be haunted by the spectre of an International Monetary Fund rescue similar to the one of the mid-seventies. Yet today, government borrowing costs are nearing levels not seen in nearly three decades.

Yields on long-dated gilts continue to climb, and the cost of servicing debt threatens to crowd out other priorities.


The warnings are stark: Britain may need corrective measures amounting to tens of billions of pounds to retain fiscal credibility. Reeves faces the unenviable choice of imposing further tax hikes — already politically toxic — or slicing into public spending at a time when the electorate is weary of austerity.

The comparison to the IMF’s intervention almost half a century ago, when the pound collapsed and the Treasury had to be rescued with external financing, is no longer just academic nostalgia; it is creeping into contemporary commentary.


Economists such as Jagjit Chadha of the National Institute of Economic and Social Research and former Bank of England policymaker Andrew Sentance point to the combination of persistent deficits, high debt levels, and market skittishness as conditions ripe for external scrutiny. Reeves herself insists that Britain’s fundamentals remain strong.



The pound has held up, exports continue to recover, and the balance of payments has not collapsed. But with each increase in gilt yields, investor confidence erodes further.

The deeper problem is structural. Outside the European Union, Britain has lost access to certain stabilising mechanisms.


While Brexit has not plunged the economy into chaos, it has deprived the UK of the broader fiscal umbrella the EU provides for its members in times of crisis.



Outside the European Union, Britain has lost access to certain stabilising mechanisms. While Brexit has not plunged the economy into chaos, it has deprived the UK of the broader fiscal umbrella the EU provides for its members in times of crisis. — Reuters pic



Reeves must therefore lean on fragile domestic revenue streams and the goodwill of international markets.

Across the Channel, France is discovering that EU membership is no panacea. Finance Minister Éric Lombard has warned openly that Paris may be headed towards an IMF bailout.

France’s debt now exceeds three trillion euros, and its budget deficit is more than five per cent of gross domestic product, well above EU stability thresholds.

Markets have noticed. French bond yields are rising faster than those of Italy, long considered Europe’s weakest fiscal link. Investors increasingly price French sovereign bonds with a risk premium, a development that undermines France’s credibility as the EU’s second-largest economy.

Unlike Reeves, French Prime Minister François Bayrou is not just battling markets but also political instability. His proposed package of nearly forty-four billion euros in cuts and tax rises has triggered revolt within his governing coalition.

Even loyal allies call the measures suicidal, while opposition parties from both the far-left and far-right have seized the chance to mobilise strikes and blockades scheduled for early September 2025.

Polls show nearly two-thirds of French voters support these protests. A no-confidence vote looms, with Bayrou’s survival far from guaranteed.

France’s plight underscores the fragility of the EU’s fiscal architecture.

Membership offers access to the European Central Bank and collective rescue mechanisms, yet it does not immunise Paris from punishment when deficits spiral.

The contrast with Germany, whose fiscal prudence continues to anchor the euro, is glaring.

France now risks becoming the “new Italy” — a chronic fiscal laggard dragging down the credibility of the entire Eurozone.

Placed side by side, Britain and France’s crises reveal a sobering truth: European states are vulnerable with or without the EU.

Britain outside the EU faces the full exposure of markets without supranational backstops.

Reeves cannot call on the European Central Bank or EU solidarity funds. She must either reassure bondholders herself or risk the humiliation of turning to the IMF.

France inside the EU enjoys technical safeguards, yet political volatility and entrenched spending habits erode investor trust.

The EU can provide frameworks, but it cannot manufacture domestic discipline in Paris.

Both economies are being judged harshly by markets because they share a common ailment: the inability to match spending ambitions with sustainable revenues.

In Britain, the structural hole left by Brexit and years of under-investment widen the gap.

In France, a culture of welfare expansion collides with weak growth and resistance to reform.

The IMF’s spectre is not just a financial matter — it is deeply political. For Britain, being forced back into the arms of the IMF would be a humiliation reminiscent of the country’s post-imperial decline.

For France, an IMF programme would be even more damning: how could the Eurozone’s second anchor state, supposedly protected by EU solidarity, require external rescue?

The irony is that both states now face similar investor scepticism despite diverging institutional arrangements. Reeves cannot hide behind the EU, and Bayrou cannot blame Brexit. The markets see through excuses: what matters is fiscal arithmetic.

The double-whammy of fiscal stress in London and Paris carries implications far beyond national borders.

First, for the EU: France’s weakness threatens the credibility of fiscal discipline rules already stretched by southern members.

If Paris can breach limits without consequence, smaller states may demand the same leniency, unravelling the stability pact altogether.

Second, for post-Brexit Britain: The UK’s struggles highlight how sovereignty brings exposure. Freed from EU rules, Britain is freer to chart policy — but also freer to stumble without institutional cushions.

Third, for international markets: A simultaneous loss of confidence in two of Europe’s largest economies risks contagion.

Rising yields in Britain and France could spill into global bond markets, especially as the United States under President Trump pursues protectionist tariffs and investors seek havens.

Finally, for global institutions: If both Britain and France flirt with IMF intervention, the Fund’s role as lender of last resort in advanced economies may re-emerge.

This would be a sharp reversal of its post-two-thousand-eight focus on emerging markets.

For South-east Asia, these parallel crises in London and Paris should serve as a cautionary tale.

Even advanced economies, cushioned by global prestige and deep financial markets, are not immune from market discipline.

What then of Asean states, many of which face their own rising debt burdens, weaker currencies, and external vulnerabilities?

Malaysia, for example, is already balancing its ambitious industrial policies with growing fiscal pressures. Indonesia, though buoyed by commodity revenues, faces mounting subsidies and infrastructure commitments. Thailand struggles with political uncertainty layered atop sluggish growth.

In all three cases, the lesson from Europe is unmistakable: populist promises, unchecked spending, and over-reliance on foreign investors can quickly become recipes for external intervention.

The IMF may not be an imminent presence in Asean’s capitals, but the ghost of Europe’s troubles should haunt finance ministries from Putrajaya to Jakarta. The task is not only to grow, but to grow sustainably; not only to borrow, but to borrow with discipline. If Britain and France — two pillars of global finance — can stumble toward crisis, Asean must not assume immunity.

In the end, the fiscal choices made today in Kuala Lumpur, Bangkok, and Jakarta will determine whether Asean strengthens its credibility or risks a future of humiliating dependence.



* Phar Kim Beng, PhD is the Professor of Asean Studies at International Islamic University of Malaysia and Director of Institute of Internationalisation and Asean Studies (IINTAS).