Why is the euro falling? France's budget crisis explained

Daily Market View | Blog By David Stritch, Senior FX Analyst, Caxton

Why is the euro falling? France's budget crisis explained

The euro is falling because investors are losing faith in France's ability to bring its public finances under control. On Monday 5 October, EUR/USD dropped to around 1.1118, its weakest level since May 2025. GBP/EUR climbed towards 1.18 as the gap between French and German borrowing costs widened to levels last seen in the 2011 eurozone debt crisis.

Key takeaways

• EUR/USD opened at 1.1257 on 5 October and fell to about 1.1118 during the day. That is down 4.6% this year and the euro's fourth straight weekly loss against the dollar.
• The extra yield investors demand to hold French government bonds rather than German ones has widened to around 140–150 basis points. That is the highest since 2011.
• France's deficit was 5.4% of GDP in 2026. The government is aiming for 5% in 2027, but a divided parliament makes that hard to deliver, and without cuts the deficit could drift back towards 6%.
• Sterling is the relative winner, with GBP/EUR at multi-month highs. Oil above $100 a barrel adds to the pressure on Europe.

What happened?

French government bonds sold off sharply, and the euro went down with them. Over the past week, the spread between French 10-year bonds (OATs) and German Bunds widened to around 150 basis points on Friday before settling near 140–145. Put simply, the market now charges Paris about 1.4 to 1.5 percentage points more than Berlin to borrow for ten years. That is the widest gap since the eurozone debt crisis.

The trigger is the 2027 budget. Prime Minister Sébastien Lecornu's government set out its draft last week, ahead of the 6 October deadline to submit the Finance Bill. It plans about €54 billion of savings, including a public-sector pay freeze and limits on pension indexation, with the aim of cutting the deficit to 5% of GDP. Public debt is already around 119% of GDP and is projected to pass 120% next year.

The problem is not the plan on paper. It is whether it can pass. No group holds a working majority in the National Assembly, left-wing parties and unions have called the measures austerity, and strikes have already started. Some analysts expect the arguments between government, Assembly and Senate to run well into the first half of 2027.

Why does it matter for currencies?

When a big economy's bonds sell off because of fiscal worries, money tends to leave its currency as well. France is the eurozone's second-largest economy, so its problems are the euro's problems.

It has been a hard decade for government bonds everywhere. COVID, the energy shock after Russia's invasion of Ukraine, and now the closure of the Strait of Hormuz have damaged public finances from Tokyo to Paris and from Washington to Johannesburg. In that environment, bond markets look for the weakest link, and France has been picked out.

What stands out is that France is singled out less for the size of its deficit than for its parliament's apparent inability to change direction. Commerzbank's Hauke Siemssen has warned that recent bond market moves "increasingly resemble a sovereign debt crisis." There is also a structural point. The European Central Bank's Transmission Protection Instrument, its tool for calming disorderly bond markets, comes with fiscal conditions France may not currently meet. That leaves fewer obvious backstops.

What is the market watching next?

The next stage of the budget debate in the French parliament is the main thing to watch. Behind it sits the presidential election on 18 April 2027, which makes promises of fiscal discipline harder for markets to believe.

Outside France:

• Federal Reserve minutes (Wednesday 8 October) will be read for the US rate outlook after September's weak jobs report, which showed only 29,000 jobs added.
• Bank of England pricing matters too. Markets expect further UK rate rises, which is part of why sterling is holding up against the euro.
• Oil. Brent was trading around $102 a barrel on 4 October and there is still no sign of a deal to reopen Hormuz. Europe imports most of its energy, so high oil prices weigh on both its growth and its public finances.

What does this mean for businesses and individuals with currency exposure?

If you pay or receive euros, this move affects you directly, though in different ways.

• UK businesses paying eurozone suppliers are better off now than for much of the year, with GBP/EUR at multi-month highs. The question is whether to lock in part of that improvement or leave it open.
• Exporters earning in euros see those receipts worth less when converted back into sterling or dollars. If you have euro invoices due over the next quarter, the risk of further weakness is real.
• Anyone holding wealth in euros, whether property, savings or investments, has seen its value fall in sterling and dollar terms this year.
• People planning large one-off transfers, such as a property purchase or a business acquisition, should note that moves like this one can wipe out or add thousands within days.

The usual ways to manage this are a forward contract, which fixes an exchange rate today for a payment later, or rate alerts that tell you when a pair reaches a level you have set.

David's view

I expect this pressure on the euro to continue until France produces a budget that parliament will actually pass and that markets find believable. A budget plan that cannot get through parliament does not ease the bond market's concerns. Until then, the euro's weakness looks more like a reassessment of the risks than a short-term dip. The euro is oversold in the short term, so sharp bounces are possible, but I would treat them as relief rallies rather than a turn in the trend unless the politics change.

FAQ

Why is France's deficit a problem for the euro?
France is the eurozone's second-largest economy, so doubts about its finances raise borrowing costs across the bloc and push investors out of euros. The concern is less the deficit itself than whether parliament can agree to reduce it.

What is the OAT–Bund spread?
It is the gap between the yield on French 10-year government bonds and German ones. A wider spread means investors see France as riskier, and at around 140–150 basis points it is at its widest since 2011.

Is the pound strong right now?
Against the euro, yes: GBP/EUR is at multi-month highs. Against the dollar, sterling is broadly flat on the day and down around 1.8% this year.

Will the euro keep falling?
No one can say for certain. Markets will take their lead from the French budget process and, further out, the April 2027 presidential election, so a credible budget agreement could support the euro.

How can a business protect itself from euro volatility?
Common tools are forward contracts, which lock in a rate for a future payment, and rate alerts. Which one suits you depends on your cash flow and how much risk you can take.

If euro volatility affects your margins, your supplier payments or the value of your assets, now is a sensible time to review your currency exposure. Talk to Caxton's FX dealers about whether a forward contract or a rate alert would give your business more certainty over the months ahead.

This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.