France's Debt Crisis Sends the Euro to a 17-Month Low

France has become the unexpected center of Europe’s financial anxiety. Last week, selling pressure on French government bonds intensified and spread across the continent, pushing the yield on the country’s 10-year debt close to 5 percent — a level not seen since 2002. The yield is a measure of what a government must pay to borrow, and France’s has now climbed above those of Greece and Italy, two countries that were once the symbol of Europe’s debt troubles.

The euro has felt the strain. During Monday’s European trading session, the single currency briefly slipped below 1.12 against the US dollar, touching 1.1161 — its weakest point in 17 months. The euro also weakened sharply against the British pound, the Swiss franc and the Japanese yen. For ordinary Europeans, a softer euro makes imported goods and overseas travel more expensive, and it complicates the inflation picture for policymakers who had hoped price pressures were settling down.

At the heart of the worry is France’s budget. The government is trying to push through an unpopular 2027 budget plan, and investors are questioning whether the country can bring its public finances under control. Emmanuel Moulin, governor of the Banque de France, warned that without serious fiscal consolidation, France risks being “gradually strangled” by rising interest rates. That phrase has circulated widely in financial media because it captures a simple fear: when debt is large, even a modest rise in borrowing costs compounds quickly.

One number traders watch closely is the spread between French and German 10-year bonds — a gauge of the extra risk premium investors demand to hold French debt rather than German. That spread widened by 32 basis points last week to 141 basis points. A wider spread signals that markets see France as a riskier borrower than its neighbor, a reversal of the relationship many investors had long taken for granted.

European stock markets, meanwhile, finished broadly higher, with gains in London, Frankfurt, Paris and Milan. But the calm in equities masks the tension in bond markets, where the cost of government borrowing ultimately feeds into mortgages, corporate loans and public spending. Analysts note that European officials have limited room to maneuver: monetary policy is set for the whole currency bloc, not for France alone.

The story matters well beyond Europe. France is the second-largest economy in the euro area, and its debt is held by banks, pension funds and insurers around the world. If investors begin demanding a lasting premium to hold French bonds, the effects could ripple through global portfolios and revive memories of the eurozone crisis more than a decade ago. For now, most economists describe the situation as a warning rather than a repeat of that episode — but they are watching the spread, the euro and the budget debate closely.

What happens next depends largely on politics and policy choices that will unfold over the coming months. The immediate lesson for global investors is that even wealthy, highly rated governments are not immune to the arithmetic of debt and interest rates. France’s challenge is a reminder that fiscal credibility, once questioned, can be expensive to rebuild.