Euro hits 17-month low amid French debt fears and inflation risks

The euro has plunged to a 17-month low against the US dollar, reaching $1.12 on Monday. This decline, part of a broader 5% drop since the start of 2026, has raised concerns about inflation and fiscal stability in the European Union. Investors are particularly worried about France's growing debt and political instability, which have led to a surge in the spread between French and German government bond yields.

France's public debt has ballooned by over 1 trillion euros since President Emmanuel Macron took office in 2017, driven by increased public spending and tax cuts. The country's debt-to-GDP ratio now stands at nearly 118%, with deficits consistently exceeding 5%. These fiscal challenges, combined with rising energy prices and low eurozone growth, have pushed investors toward safer assets like German bonds.

The European Central Bank (ECB) faces pressure to intervene as anxiety in European bond markets grows. Jim Reid of Deutsche Bank noted a "mini-panic" last week due to the widening gap between French and German bond yields. However, economist Ricardo Amaro believes the ECB will likely monitor the situation without directly influencing the market.

Political instability in France and other EU nations further complicates the economic outlook. The rise of far-right parties, voter dissatisfaction with high living costs, and potential policy shifts have spooked investors. Amaro warns that a weaker euro could worsen inflation, already expected to remain high into 2027, by driving up the cost of dollar-denominated imports like oil and gas.