France’s debt problem is becoming Europe’s problem. Why markets are worried

France’s worsening public finances are emerging as a concern for European markets, with rising borrowing costs, political uncertainty and fears of contagion putting pressure on the euro and government bonds.

The euro fell below $1.12, touching its lowest level against the dollar since May 2025. The currency has lost about 1.2 per cent this month and around eight cents from its January peak of $1.20.

But the bigger concern for investors is not the currency move itself. It is whether France’s fiscal problems could spill over into the wider eurozone, particularly if markets begin demanding higher returns to hold the debt of other heavily indebted countries.

Why France is at the centre of the worries

France is struggling with a large budget deficit and a growing public debt burden at a time when government borrowing costs are rising.

The French government has proposed a €54 billion savings programme aimed at bringing the budget deficit down from 5.5 per cent of GDP this year to 5 per cent next year. Prime Minister Ssbastien Lecornu has warned that without additional measures, the deficit could instead reach 6.5 per cent.

The proposed savings include reductions in pension spending and funding for government departments, although defence spending has been excluded.

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The problem is that cutting spending has become politically difficult.

President Emmanuel Macron’s government is facing strikes and protests, while political divisions in parliament are making it harder to push through fiscal consolidation. The approach to France’s finances is also becoming increasingly important ahead of the country’s next presidential election.

Bond markets are sending a warning

One of the clearest signs of investor concern is coming from France’s government bond market.

The yield on French 10-year government bonds last week reached its highest level since 2002 before easing on Friday. Higher yields mean the government has to pay more to borrow, potentially making an already difficult debt position even harder to manage.

The spread between French and German 10-year borrowing costs has also widened sharply. It reached its highest level since 2012, when the eurozone was in the middle of its sovereign debt crisis.

Germany is generally treated as the benchmark for eurozone government debt because of its stronger fiscal position. A widening gap between French and German borrowing costs therefore indicates that investors are demanding a higher risk premium to hold French debt.

That creates a potentially difficult cycle. Higher borrowing costs increase the cost of servicing existing debt, which can put further pressure on public finances and make deficit reduction harder.

Could France’s problems spread?

France is one of the eurozone’s largest economies and its government bond market is among the biggest in the bloc. A sustained rise in French borrowing costs could therefore have consequences well beyond France.

Investors may begin reassessing the debt positions of other highly indebted eurozone economies. That could push up borrowing costs across the region and put additional pressure on banks, governments and businesses.

The concern is not that Europe is already facing a repeat of the sovereign debt crisis of the early 2010s. The European Central Bank has significantly stronger institutional tools than it had at that time.

But markets remain sensitive to signs that fiscal problems in one major economy could spread through sovereign bond markets.

UniCredit currency strategist Roberto Mialich said investors were still considering a further decline in the euro, including a possible move towards $1.10.

He pointed to rising political tensions in France and Spain, along with fears of contagion across European sovereign debt markets, as factors putting pressure on the currency.

Spain adds another layer of uncertainty

France is not the only source of political uncertainty in the eurozone. Spain’s Prime Minister Pedro Sanchez announced a snap election on Monday after rightwing parties blocked emergency housing legislation. Spain’s benchmark Ibex 35 index nevertheless rose 0.5 per cent on Monday.

The political uncertainty comes as investors are already dealing with concerns over government debt and higher borrowing costs across developed economies.

Why the euro is under pressure

The euro’s decline reflects these broader concerns rather than a single market event.

The currency has also been affected by wider shifts in global markets, including a sell-off in government bonds and uncertainty linked to the war in Iran.

At the same time, the European Central Bank faces a difficult policy environment. Inflationary pressures linked to the conflict could limit its ability to respond to weaker growth or financial stress through easier monetary policy.