Euro Plunges to 17-Month Low as French Debt Fears Reignite Eurozone Crisis Concerns

The euro slumped to a 17-month low against the US dollar in early trading Monday, falling to $1.12 — the lowest level since early 2025. The single currency has shed roughly 5% since the start of 2026, with the latest leg driven by deepening concern over French sovereign debt and broader eurozone fiscal stability.

The sell-off in French government bonds accelerated last week, pushing the yield on 10-year French debt to 5% before a slight retreat. That yield, which reflects the cost France pays to borrow over a decade, has climbed as doubts over the country’s long-term fiscal trajectory mount.

Ricardo Amaro, lead eurozone economist at Oxford Economics, told DW that while the euro’s general slide reflects a repricing of expectations for higher US Federal Reserve interest rates amid rising global bond yields, the recent sharp move was triggered specifically by France. “Investors positioned for higher fiscal risk,” he said.

France’s underlying fiscal picture has deteriorated markedly under President Emmanuel Macron. Since he took office in May 2017, public spending has risen while deep tax cuts have been implemented. National debt has increased by well over €1 trillion ($1.12 trillion), and the debt-to-GDP ratio now stands at nearly 118%. The annual budget deficit regularly exceeds 5%, up from 3.4% when Macron took office.

The widening gap between French and German 10-year bond yields hit its highest level since the eurozone debt crisis last week, a closely watched barometer of European financial stability. Many investors have retreated to perceived safe-haven assets, particularly German bunds, as concerns over low eurozone growth and surging energy prices compound the French fiscal outlook.

**Political Risks Deepen**

Political uncertainty is adding to investor unease. While France’s 2027 budget has been agreed and includes deficit-reduction reforms, the right-wing National Rally, led by Marine Le Pen, remains well-positioned ahead of the 2027 presidential election. Concerns over the party’s potential policy direction are spooking markets, mirroring similar anxieties around the rise of the populist AfD in Germany.

Amaro said the high cost of living has fueled voter anger, driving political instability across the bloc. In Spain, Prime Minister Pedro Sánchez has called a snap election after his housing crisis measures were voted down in parliament.

**ECB Under Pressure**

The euro’s fall and the widening stress in bond markets — including Italy’s — have intensified calls for the European Central Bank to intervene to prevent a full-blown panic.

Deutsche Bank’s Jim Reid said in a note Monday that at one point last week the spread between German and French bonds became so wide it triggered a “mini-panic.” He posed the key question: “The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot.”

Amaro said the ECB faces a difficult balancing act. “Sounding too hawkish would also add to pressure on France’s bond yields, which became an important driver of euro weakness,” he told DW. He expects policymakers to monitor the currency move for now but stop short of direct market intervention.

**Inflation and Crisis Comparisons**

A weakening euro carries its own risks. Amaro warned that a sharper depreciation would “reinforce the inflationary shock at a time when inflation is already expected to stay high into 2027.” A weaker euro raises the cost of imports priced in US dollars, including oil and gas, potentially exacerbating energy price pressures.

The episode revives memories of the 2010-2012 sovereign debt crisis, but some analysts downplay the parallel. Geoffrey Yu, a senior strategist at BNY, said, “Comparisons to 2012 are well off the mark.”

Amaro, however, stressed that the combination of expected ECB rate hikes this year and a worsening inflation outlook makes the current situation one requiring careful management. “Euro weakness shouldn’t be interpreted as an isolated development,” he said.