LONDON (Realist English). On October 5, 2026, the euro continued to fall, reaching its lowest level since May 2025. Investors are selling off the single currency amid a sharp rise in the cost of French debt and fears of a political deadlock ahead of the 2027 presidential election.
What happened to the euro
The euro fell more than 0.8% during Asian trading hours, reaching $1.1161 — its lowest since May 2025. Later, the currency recovered slightly and traded around $1.1178. Over the past month, the euro has lost about 2.5%, and the decline has continued for the fourth consecutive week.
Pressure on the euro came not only from French problems but also from expectations about Fed rates. Weak US labor market data for September reduced the probability of a Fed rate hike in October from 64% to less than 20%. However, the dollar still strengthened thanks to high US bond yields and capital inflows into safe-haven assets.
French debt crisis
The key trigger for the euro sell-off is the situation in France. The spread between the yield on 10-year French bonds (OATs) and German bunds reached 150 basis points — the highest since 2011–2012, when the eurozone was experiencing a debt crisis. In just the past week, the spread widened by 34 basis points — the sharpest weekly widening in 17 years.
French 10-year bonds now trade at a yield exceeding that of Italian and Greek securities. This means the market perceives France as a riskier borrower than countries that until recently were considered the “periphery” of the eurozone.
Reasons for concern
Investors are worried about a combination of several factors:
— France’s government debt reached about 119% of GDP in the second quarter of 2026, and according to European Commission forecasts, will exceed 120% in 2027;
— The budget deficit is expected at 5.4% of GDP in 2026, significantly above the 5% target;
— Political deadlock: parliament is divided, and less than six months remain until the presidential election in April 2027. The opposition is unwilling to support unpopular austerity measures;
— Borrowing plan: France plans to issue a record €340 billion in medium- and long-term bonds in 2027, which will increase pressure on the market.
The government presented a 2027 budget with an austerity package of €54 billion, but the market doubts these measures will be adopted by a divided parliament.
Stock market reaction
European stock markets are trading mixed:
— The pan-European STOXX 600 index gained 0.2%, recovering part of last week’s losses;
— The French CAC 40 fell 0.8%, becoming the main underperformer among major European indices;
— The German DAX declined 0.13%;
— The British FTSE rose 0.25%, the Italian FTSE MIB lost 0.2%, the Spanish IBEX gained 0.37%.
Schneider Electric plunged 7.2% after announcing the largest acquisition in its history — the purchase of American software company PTC for $22.6 billion.
Impact on the eurozone
Analysts warn of the risk of “contagion” to other eurozone countries. Bond spreads for Italy, Belgium, and Greece have already begun to widen. JPMorgan notes that the euro has not yet fully priced in the “tail risks” associated with French debt and may continue to fall, especially against the Swiss franc and Japanese yen.
The European Central Bank (ECB) has a tool to protect against “unjustified” spread widening — the Transmission Protection Instrument (TPI) — but its application to France is difficult, since the current movement reflects genuine budget concerns rather than market panic.
“Restoring confidence will require a convincing commitment to fiscal consolidation. However, a long-term solution will depend on the political scenario after the 2027 elections,” note Bloomberg Economics economists.
