The euro fell to a 17-month low against the US dollar. This will increase inflation in the EU, where political worries and concerns about French debt are already worrying investors. Is a new fiscal crisis looming?
The euro's exchange rate against the dollar has collapsed to values not seen in 17 months. This is happening against the background of growing risks related to debts, especially in France, concerns about government bond yields and rising fuel prices.
The euro has been falling against the dollar for most of 2026, having lost about 5% of its value since the beginning of the year. On Monday, it reached $1.12, its lowest level since early 2025.
France has serious fiscal problems
Ricardo Amaro, an economist at “Oxford Economics", told DW that the overall decline could be due to a change in investors' expectations about the US Federal Reserve's interest rate policy. However, he pointed out that the latest depreciation of the euro was probably caused by concerns about France.
Paris has long had severe fiscal problems. Since President Emmanuel Macron took office in May 2017, public spending has increased while he introduced significant tax breaks. As a result, the country's public debt has increased by more than 1 trillion euros.
The country's debt-to-gross domestic product ratio is currently almost 118%. Budgets are out of balance, and deficits regularly exceed 5 percent. Concerns about low growth in the eurozone and a surge in energy prices have led many investors to look again at France's problems, while many have turned to safer options such as German government bonds.
The spread between the yields on 10-year French and German government bonds hit its highest level since the eurozone debt crisis last week. It is a closely watched indicator of financial stability in the EU.
Will the European Central Bank intervene?
The pressure on the euro and on European government bond markets, including Italy, has led to calls for the European Central Bank (ECB) to take action to prevent anxiety from turning into panic. Jim Reid of „Deutsche Bank“ said on Monday that at one point last week the spread between German and French bonds had become so wide that a "mini-panic" had set in.
Economist Ricardo Amaro believes this will be a challenge for the ECB to act in a way that doesn't make the situation worse. He expects policymakers to continue to monitor currency trends between the US dollar and the euro but to refrain from trying to influence the market.
In recent years, France has been gripped by political crises, with the adoption of annual budgets becoming a serious test of the government's stability. Although the 2027 budget, which has been approved, includes reforms aimed at reducing the deficit, Marine Le Pen's far-right party continues to lead in the polls for the 2027 presidential election.
Inflation further complicates the situation
The prospect of a Le Pen victory is scaring investors, as is the rise of the far-right Alternative for Germany party in the Federal Republic. Much of the political instability is due to voter dissatisfaction with the high cost of living. In Spain, Prime Minister Pedro Sanchez called early elections after measures to tackle the country's housing crisis were rejected in parliament.
According to Amaro, the weakening of the euro could deepen the inflation problem. “A sharper weakening of the euro would amplify the inflation shock, and inflation is already expected to remain high into 2027,” he said. A weaker euro would raise the price of imported goods, especially those denominated in U.S. dollars. The prices of global commodities such as oil and gas are determined in dollars, meaning that the surge in energy prices is likely to continue, as are those for U.S. imports.
Memories of the EU debt crisis have many observers worried that the signals from France could lead to a similar development. Some economists are skeptical, but Amaro warns that the expected rise in interest rates from the ECB and inflation mean the situation needs to be watched closely.
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Source: www.dw.com