The breather that the French bond has taken in recent days has not been enough to get the euro out of the pressure zone. Despite the first measures of the French government to limit the deficit, which led to a partial reduction in the yield difference with Germany, the common currency is still moving below 1.12 dollars , very close to the lowest level of the last seventeen months. The message from the markets is clear. The crisis of confidence is not over, it has simply entered a waiting phase.
The spread of French 10-year bonds over German bonds has fallen to around 134 basis points , far from the peak of almost 160 basis points reached in early October, when the spread was at its highest since the European debt crisis. But the de-escalation is fragile, and investors know that a political upheaval in the French National Assembly is all it takes to open the gap again.
A double political danger
The euro is facing something markets haven’t seen in years. Two of the four largest economies in the eurozone are simultaneously going through political turmoil. In Paris, the fiscal crisis is deepening, while in Madrid, Prime Minister Pedro Sanchez has called early elections for November 29 after his housing decrees were rejected by parliament.
The announcement of the Spanish elections on October 5 pushed the euro to $1.1161 , its lowest point since May 2025. Since the beginning of the year, the common currency has lost more than 7% from its peak.
The problem for investors is not just the exchange rate. It is mainly the fear that political instability will turn into a prolonged crisis of confidence in European government bonds, raising the cost of borrowing and narrowing the margins for governments.
France at the heart of concern
The biggest source of risk remains France . Its public debt is expected to exceed 122% of GDP , the deficit is above 5% and political consensus seems difficult. The new 2027 budget aims to reduce the deficit from 5.4% to 5%, but markets are not easily convinced. Parliamentary resistance and the shadow of the presidential elections in the spring of 2027 make any austerity measure politically expensive.
The yield on France’s 10-year bond hit 5% earlier this month, a level not seen in more than two decades. The country’s financing needs for 2027 are set to reach a record high of more than 339 billion euros. In other words, the eurozone’s second-largest economy will need to borrow more than ever, as investors demand ever higher returns for lending to it.
The widening of the spread is therefore particularly significant. It shows that markets are questioning Paris’ ability to stabilize its public finances . And because France is not a peripheral country but a key pillar of the Eurozone, the concern does not stay within its borders. French bond yields are a benchmark for bank and corporate lending, and the pressures have already begun to reach Italy and Belgium.
Spain opens a second front
Spain presents a different picture. Its economy has been one of the most dynamic in the Eurozone in recent years, and the spread on Spanish bonds remains around 65 basis points, less than half that of the French one. Markets reacted relatively mildly to the announcement of the elections, as the possibility had been discussed for some time.
But the polls raise questions about the stability of economic policy and the ability to form a sustainable government. Protest movements over the housing crisis have shown how difficult it is to push through reforms even in a growing economy. When uncertainty coincides with fiscal turmoil in another major country, the effect on the euro is multiplied.
Most analysts estimate that the Spanish elections will only significantly affect the currency in the event of unexpected results and difficult government alliances. The main focus remains in Paris.
The $1.10 threshold
Markets are now seriously considering a further decline . ING’s Chris Turner believes that the euro’s weakness reflects an increased risk premium due to the fiscal deterioration and leaves open the possibility of a move towards $1.10 . Market calculations show that each additional widening of the Franco-German spread by 10 basis points corresponds to a fall of about 0.4% in the parity.
JPMorgan believes the euro has not fully internalized the risks of the French bond market and sees room for further weakness against the Swiss franc . Commerzbank , on the other hand, is betting on the resilience of German bonds. As long as they remain shielded, it believes the risk of a general collapse of the common currency is limited.
The ECB’s difficult balance
The European Central Bank is also entering the equation. Rising yields are pushing up borrowing costs across the eurozone, while inflation and expensive energy are limiting its options. Expectations for further rate hikes have already waned significantly in recent weeks, taking away a key support from the euro.
Frankfurt is thus faced with a delicate balance. It must protect price stability without letting the turmoil spread to sovereign debt markets. The tool to protect the transmission of monetary policy exists, but activating it for a country with a weak fiscal path is politically and institutionally difficult.
What does it mean for the real economy?
The euro’s decline is not just a concern for trading floors. A weaker currency makes dollar-denominated imports, especially energy and raw materials, more expensive, burdening businesses and households at a time when diesel prices are already at record levels. On the other hand, it makes European products cheaper for buyers outside the eurozone and boosts the competitiveness of exports .
For Greece , the exchange rate has a dual significance. The country is heavily dependent on imported energy products, while tourism and exports are key drivers of its economy. A cheaper euro can make Greece a more attractive destination for American visitors, but it also raises the cost of production and everyday consumption.
The crucial question
The question is therefore not just how low the euro can fall, but how quickly Paris and Madrid will restore political predictability . The coming weeks are full of milestones, from the French president’s debate in Parliament and the ratings agencies’ crises to the Spanish ballot box at the end of November.
A credible fiscal compromise in France could narrow the spread and give the euro room to recover. A new government intervention would turn $1.10 from a threat into a reality. Until then, every political development in the two capitals will continue to be written simultaneously on traders’ screens, in the exchange rate and in European bonds.
