Euro drops as France and Spain face financial and political turmoil

The euro is facing renewed pressure in currency markets as France and Spain grapple with financial and political challenges. France is struggling with high deficits and rising long-term borrowing costs, coupled with a political stalemate over solutions. Meanwhile, Spain's prime minister, Pedro Sánchez, has called a snap election for November 29, which could either strengthen his position or pave the way for a populist right-wing government.

The euro has fallen below $1.12, its lowest level since May 2025, marking a roughly 4% decline since September 8. This downturn echoes the eurozone crisis of the early 2010s, though the European Central Bank (ECB) now has more tools to manage market stress.

Former ECB board member Lorenzo Bini Smaghi has called for the central bank to suspend its quantitative tightening program. In a Financial Times opinion piece, he argued that continuing this policy, where the ECB does not replace maturing government bonds, puts additional pressure on long-term rates. He noted that the ECB has bond-buying tools to address yield spikes but questioned why the bank persists with quantitative tightening amid current market stress.

Bini Smaghi emphasized that the ECB is better equipped than in the early 2010s to handle financial market tensions that could threaten the stability of the single currency. However, he highlighted the confusion among market participants over the ECB's decision to continue shrinking its balance sheet during a period of rising borrowing costs.