The euro has fallen to a 17-month low against the dollar. That will make inflation worse in the EU, where political worries and concern over French debt are already troubling investors. Is a fiscal crisis at hand?
The euro hit a 17-month low against the dollar in early trading on Monday, as concerns over eurozone debt, particularly in France, compounded existing investor concerns over global government bond yields and rising oil prices.
The euro has been sliding against the dollar for much of 2026, down around 5% since the start of the year. It reached $1.12 on Monday, the lowest level since early in 2025.
Ricardo Amaro, lead eurozone economist with Oxford Economics, told DW that the general slide can be attributed to a repricing of investor expectations regarding US Federal Reserve policy in terms of higher interest rates in the face of rising global bond yields.
However, he said the latest sell-off was prompted in particular by concerns over France, where ‘investors positioned for higher fiscal risk.’
The France problem
The sell-off in French debt gathered pace last week as doubts grow over its long-term viability. French 10-year government bonds – the cost France must pay to borrow money within 10 years of the debt being issued – rose to a 5% yield before easing slightly.
France has long had underlying fiscal problems. Since President Emmanuel Macron came to office in May 2017, public spending has climbed while he has brought in deep tax cuts. As a result, the country’s national debt has increased by well over pound 1 trillion ($1.12 trillion).
France’s debt-to-GDP ratio now stands at almost 118%. It consistently posts unbalanced budgets. Its annual budget deficit is now regularly more than 5%, above the 3.4% rate when Macron came to office.
For many investors, wider concerns over low eurozone growth levels and surging energy prices have contributed to a renewed focus on France, with many retreating to perceived safer options, such as German government debt.
The difference between French and German government 10-year debt yields reached its highest level since the eurozone debt crisis last week, a closely watched measure of EU financial stability.
What can the ECB do?
The resulting pressure on the euro and on other government bond markets, including Italy’s, means there are calls for the European Central Bank (ECB) to take action to prevent concern over France turning into panic.
Deutsche Bank’s Jim Reid said in a note on Monday that at one point last week, the spread between German and French bonds had become so wide that a ‘mini-panic’ was at hand.
‘The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot,’ he said.
Ricardo Amaro said the situation presents a challenge for the ECB because it needs to act without making things worse. ‘Sounding too hawkish would also add to pressure on France’s bond yields, which became an important driver of euro weakness,’ he added.
He expects policymakers to continue monitoring currency developments between the US dollar and the euro, but to stop short of trying to influence the market for now.
What is at stake?
Uncertainty abounds due to both political and economic pressures. France has been beset by political crises in recent years, where passing annual budgets has become a major test of government stability.
Although the 2027 budget has been agreed, with reforms aimed at reducing the deficit, the right-wing National Rally remains well-placed ahead of the 2027 presidential election, in which Marine Le Pen is likely to be the lead candidate.
Concerns over French economic policy in the event of Le Pen winning the presidency are spooking investors, similar to how the rise of the populist AfD in Germany has raised questions over the future direction of the bloc’s key economy.
Much of the political instability has been driven by voter anger over the high cost of living. In Spain, Prime Minister Pedro Sánchez has just called a snap election after measures to deal with the country’s housing crisis were voted down in parliament.
Amaro says a weakening euro could compound the underlying problem of inflation.
‘Sharper euro weakness would reinforce the inflationary shock at a time when inflation is already expected to stay high into 2027,’ he said.
A weaker euro would increase the cost of imported goods, particularly those that are priced in US dollars. Global commodities such as oil and gas are priced in dollars, meaning soaring energy prices would likely rise further, as would US imports.
The next financial crisis?
With memories of the sovereign debt crisis that afflicted the EU in the early 2010s still fresh, many observers are beginning to wonder if the moves on French debt could be indicative of a new crisis in the eurozone.
Some, such as Geoffrey Yu, a senior strategist with BNY, believe such concerns are misplaced. ‘Comparisons to 2012 are well off the mark,’ he said.
However, Amaro says the fact that further interest rate hikes are expected from the ECB this year, combined with the worsening inflation outlook, makes this a situation which needs to be managed and monitored very carefully.