Euro Weakness Persists Amid French Political and Debt Concerns

The euro is under pressure, and France is the main reason. Markets view France as the eurozone’s weakest link, pushing the euro to its lowest point against the US dollar since May 2025. The currency has dropped for four consecutive weeks, with no clear end in sight. Political instability ahead of the April 2027 presidential election is fueling uncertainty, making investors wary of holding euros for months.

French government debt stands at 119% of GDP, and the deficit remains above 5% of output. Bond investors are demanding higher yields, with French debt yields rising 1.2 percentage points since late June to 4.9%. The gap between French and German debt yields is the widest in over a decade, as markets doubt the credibility of France’s budget plans.

Spain, once seen as a stabilizing force in the eurozone, is now adding to the uncertainty. Pedro Sánchez’s housing bill was rejected, and speculation of an early election is growing. Political instability in two of the bloc’s largest economies is weighing heavily on the euro.

Energy costs are another challenge. Eurozone inflation surged to 3.8% in September, its highest in three years, driven by an 18.8% year-on-year rise in energy prices. Since Europe buys oil in dollars, a weaker euro increases the energy bill, further fueling inflation.

The European Central Bank faces a tough dilemma. It raised interest rates in early September to combat inflation, but each hike increases France’s borrowing costs. If the ECB intervenes to support French bonds, it could spark backlash from northern eurozone countries and further weaken the euro.

Despite the euro’s struggles, comparisons to the 2012 crisis are exaggerated. The eurozone now has stronger tools to manage a crisis. However, a prolonged period of weakness is expected until the French election is resolved, which could erode wealth for those holding euro-denominated assets.