Euro Hits 17-Month Low as French Debt Fears and Spain Election Rattle Markets

The euro fell to around $1.116 during Monday trading, its weakest level since May 2025, after four consecutive weeks of declines. Concerns over France’s ability to control its budget deficit have been a major driver of the move, with a recent sell-off in French government bonds reviving worries about sovereign risk across the euro area.

Political developments in Spain added to the pressure after Prime Minister Pedro Sánchez called an early general election for Nov. 29. The announcement followed parliament’s rejection of key housing measures amid widespread protests over the country’s housing crisis. The election introduces new uncertainty into an economy that has otherwise been one of the euro zone’s stronger performers.

So far, however, Spanish financial assets have shown greater resilience than their French counterparts. Spain’s 10-year government bond yield moved only modestly following the election announcement, while the country’s borrowing premium over Germany remained substantially below France’s. Investors have continued to view Spain relatively favorably because of its stronger economic growth and fiscal position.

France represents a more significant concern. The government’s proposed 2027 budget aims to reduce the deficit from an expected 5.4% of GDP in 2026 to 5% next year, but investors remain skeptical that the plan will be sufficient to stabilize public finances. French borrowing costs have climbed sharply, with the 10-year government bond yield approaching levels not seen in more than two decades.

The widening gap between French and German borrowing costs has become an important measure of market anxiety. The spread between 10-year French and German yields has risen to roughly 150 basis points, highlighting investors’ growing demand for compensation to hold French government debt. The sell-off has also raised concerns that fiscal stress could spread into other parts of the euro-area bond market.

The pressure comes at a difficult moment for the euro zone, which is dealing with persistent inflation, elevated interest rates and weak growth alongside rising government financing costs. These conditions complicate the European Central Bank’s policy outlook because tighter financial conditions could weigh on economic activity even as inflation remains above target.

For markets, the euro’s decline increasingly reflects more than differences in monetary policy between Europe and the United States. Investors are also attaching a larger risk premium to Europe’s fiscal and political outlook, particularly in France. With Spain heading toward an early election and France facing difficult budget decisions ahead of its presidential election, political developments are likely to remain an important driver of the currency and European bond markets.