Above is a chart of the "yield" on German and French government debt. Much like US Treasury "bonds", "bills", and "notes", the European debt also have specific names. The German bond is called the "bund", while the French bond is called the "BTAN".
The "yield" charted above refers to the interest rate charged by the market on this debt. Usually, when the economy is doing well, investors charge a higher interest rates for governments to borrow, because the private sector sees lots of other good opportunities to put its money. When the economy isn't doing well (like now), investors charge the government just a little to borrow, because they don't see anywhere else to put their money (If you read Krugman, you get this).
But notice something about this chart.
From late 2010 until summer 2011, both German and French borrowing costs rose at about the same rate, as the European economy's prospects brightened. But crucially, in the downswing since May 2011, the interest rate on German "bunds" have fallen a lot faster than the interest rate on French BTANs.
This could mean one of two things.
First, it could mean that investors think that prospects for the French economy have not really deteriorated nearly as much as prospects for the German economy.
If you believe this one than I have a bridge to sell you.
The only other possibility that investors are beginning to price in credit risk -- the risk that France will default -- into France's borrowing costs. They aren't rushing as quickly into the safety of French government bonds because they are no longer considered as safe.
Note that this is not the long term French OAT debt. BTANs are the medium term bonds (Bons du Trésor à taux fixe et à intérët annuel), these with a maturity of just 2 years. So the markets are pricing in a credit risk for France of two years.
And in case you think my interpretation is mistaken, there is always the credit default swap market:
On Monday, France's CDS levels widened by 14 basis points—a huge jump in CDS market terms—and it now trades at 160 basis points. German and UK CDS levels now trade at 74 basis points and 80 basis points, respectively. A spike in French swaps, in particular, has some market watchers worried that France may soon be engulfed in the European sovereign debt crisis.
Let's be clear:
France has not defaulted on its sovereign debt since 1812. If France defaulted, it would be a blow to Western civilization of epic proportions.