The euro has plummeted to a 17-month low against the dollar as investors punish the single currency, largely over France’s intractable debt problem. Once relegated to the Eurozone’s periphery, sovereign debt risk has progressively moved toward the center of the monetary union, now reaching France, a key pillar in the entire European project.

French long-dated bond yields have surged to their highest levels in nearly a quarter of a century as the country’s political gridlock over how to address its debt pile shows no sign of abating. The government is trying to push through spending cuts, but with a presidential election coming into view, opposition politicians vying to replace President Emmanuel Macron are in no mood to sign under anything resembling austerity.

RT takes an in-depth look at what’s happening in the new sick man of Europe and whether the turbulence in France could trigger a major crisis or intervention by the European Central Bank

France’s fiscal flop

France’s finances are a mess. The country’s public budget deficit stood at 5.1% of GDP in 2025, while its debt-to-GDP ratios hit 115%. Both figures are well above EU limits. These are numbers more commonly associated with wartime or at least a deep recession. The rhetoric of its political class notwithstanding, France is not, in fact, at war.

France has accumulated more than €3.5 trillion in public debt, which is becoming more expensive to finance as the yields on its bonds have risen dramatically over the past year. French Prime Minister Sebastien Lecornu is seeking to push through cuts to public spending worth €54 billion in the 2027 budget, but his minority government is facing stiff resistance. Meanwhile, neither of the leading candidates in next year’s presidential election, Marine le Pen of the right-wing National Rally Party and Jean-Luc Melanchon of the Socialist Party, has offered credible proposals to address the debt.

Le Pen has proposed putting a “golden rule” to restrain French deficits to a public vote via a referendum, thus likely condemning it to failure, while Melanchon is calling to simply cancel roughly a fifth of France’s public debt while increasing public spending.

Meanwhile, Paris has committed to billions in increased defense spending in the coming years. A major update to the country’s defense budget authorizing an additional €36 billion for 2026–2030 was signed off on by lawmakers in June.

“France must prepare itself to confront simultaneous, prolonged and high-intensity crises, including on its own soil,” according to Defense Minister Catherine Vautrin.

Bond market troubles

The “prolonged and high-intensity crisis on French soil” that Vautrin must have had in mind is the country’s own bond market.

The yield on France’s 10-year OAT has now climbed to around 4.87%, even briefly hitting the 5% mark in late September, its highest level since 2002. The spread between the French 10-year OAT and German 10-year Bunds rose by 50 basis points in September to reach 128 basis points, the highest level in 14 years.

France now pays more to borrow than Greece and Italy, once the Eurozone’s most worrisome members. France’s 5-year sovereign credit default swaps – a tradable insurance policy against default or debt restructuring – have climbed to approximately 87 basis points, their highest level since early 2013.

Compounding the problem is the fact that foreign investors own around 50% of France’s government debt, which exposes the country to divestment risk. Japanese funds, for example, are overweight French bonds more than benchmark weightings would recommend. If they become skittish, the selling pressure could intensify. French banks, meanwhile, who would be far less likely to fire-sell the bonds, are estimated to only hold around 8% of government debt.

Is a sovereign debt crisis brewing?

The spread between the borrowing costs of France and Germany is already at its widest level since the height of the Eurozone sovereign debt crisis in 2012.

Jim Reid, a veteran analyst at Deutsche Bank, said: “The big question is whether this is the start of a new euro sovereign crisis or whether markets have already overshot.”

Bank of France Governor Emmanuel Moulin has said that France must do everything in its power to avoid a sovereign debt crisis, thus tacitly acknowledging the risk of one. With France financing a massive €340 billion in borrowing requirement next year, the interest expense is compounding rapidly.

What could a French debt crisis look like?

If French yields continue to rise, the government would eventually have to refinance increasingly large quantities of debt at much higher rates. The higher interest bill would cause a larger deficit, which would necessitate still more bond issuance, thus pushing rates even higher. This is called a doom loop, and once such a mechanism takes hold, it can cause a sudden, self-reinforcing crisis.

If this becomes severe enough, questions would inevitably arise about the viability of France within the Eurozone. Such questions certainly were asked about Greece in 2012, and even about Italy in 2018 and 2022. Of course, casting doubt upon the viability of a core member is of a whole different magnitude, but if the crisis progresses such doubts would arise.

Hypothetically, if there were skepticism about France’s future in the single-currency union, the nature of a French bond would change. A German bond, for instance, would still be a straight-up €100 claim, whereas a French bond would be a €100 claim but contingent on France remaining in the Eurozone. Such a contingency might seem fantastic, but if the risk of France leaving chaotically were seen as even somewhat plausible, the market would price it, and unpredictable knock-on effects could ensue.

The end game of a sovereign debt crisis would be an informal two-tier market, where a euro deposited in Paris is not actually the same as a euro deposited in Frankfurt. This is not so fantastic. In fact, exactly this scenario coalesced in Greece during the peak of its crisis and forced the Greek government to implement capital controls, which remained in place for four years.

The ultimate job of the European Central Bank is to preserve the fungibility of the euro. A French-issued bond can carry a different credit risk from a German bond – that is the adjustment the yield provides – but a euro itself cannot have a French price and a German price.

There’s a long road separating different sovereign credit risks from a two-tier euro market. The former doesn’t inevitably lead to the latter. But those two points can be connected by that road and under certain conditions the distance could theoretically be traversed quite quickly.

Would the European Central Bank ever let that happen?

The short answer is no, although central banks are not omnipotent. But the ECB does have tools with which to intervene. For starters, the bank could stop letting its bond holdings shrink. 

A more potent tool would be to buy French bonds outright. In the summer of 2022, the ECB bank introduced a new tool called the Transmission Protection Instrument (TPI), which allows for intervention in government bond markets when the ECB believes yields have become out of line with fundamentals.

The TPI has never been used, but its mere existence is seen by many analysts as a conditional put option written by the ECB on sovereign spreads within the Eurozone. In other words, there is believed to be a level beyond which the ECB will not let spreads or yields rise before intervening. This can be thought of as a distant cousin of the famous “Greenspan put,” a belief on Wall Street that then-Fed Chairman Alan Greenspan would lower interest rates whenever the stock market experienced a major downturn.

The ECB says it will only exercise the TPI against unjustified, disorderly moves. The risk, however, is that European governments – such as France’s – will be less inclined to impose discipline on their finances if they believe the ECB will shield them from the discipline of the market. A game of chicken between Brussels and Paris could easily ensue, with the former implicitly threatening to hang the latter out to dry for its profligacy, while the latter would point to the threat to the whole system if the former doesn’t intervene. 

Analysts have speculated as to whether the surge in French yields is already enough for the TPI to be activated. So far, the consensus is that the ECB has no grounds to step in. Given the appalling state of France’s finances, it would be hard to argue that the move in French yields is detached from fundamentals. Second, the moves have so far been orderly rather than chaotic, an important consideration when emergency measures are being contemplated.

Is there contagion?

Contagion is the ultimate “black swan” fear in any budding financial crisis because it takes a localized problem and turns it into something unpredictable and subject to panic. There is currently considerable anxiety in Europe about the destabilizing effect of what is happening in the French bond market, but so far no panic.

Up until recently, in fact, there hadn’t been particularly strong signs of contagion from the French malaise.

However, the recent weakness in the euro is a sign of trouble: the currency is selling off sharply largely due to problems in one country, although high energy prices are also a factor. Meanwhile, institutional investors betting that French yields would normalize have been crushed and have been forced to sell off other assets to cover their losses. Italian debt, which has generally been outperforming its French counterpart, may be the next area to watch, as its bond spreads and credit default spreads have widened considerably in the wake of the French crisis.

Whether the EU muddles through again or finally faces a serious reckoning remains to be seen.