French 10-year bond yield premium over Germany is up over 100bps since late February to 175bps, closing in on its 2011 record high of around 190bps. The spread can widen to about 250bps if Italy’s 2018 budget crisis is any guide and drag EUR/USD down to 1.1000.
Political gridlock and public anger over the high cost of living are making it virtually impossible to repair public finances ahead of next year’s French presidential election. The election will be held on April 18, 2027, with a runoff vote on May 2.
The Italian Job
Italy’s 2018 budget crisis erupted when the Five Star Movement and League coalition rattled markets with plans to boost spending and challenge EU fiscal rules. As a result, Italian 10-year bond yield premium over Germany surged roughly 200bps to reach a high of 340bps in October 2018. France’s widening so far is just over half that size, leaving room for the spread to rise further.
France’s budget position is worse than Italy’s was then. France’s projected 2026 budget deficit of 5.4% of GDP is more than double Italy’s 2.2% in 2018. Crucially, Italy ran a primary surplus of 1.3% of GDP, while the IMF estimates France’s 2026 primary deficit at nearly 3% of GDP.
That means France needs to borrow to cover both spending and interest payments, making it harder to stabilize the debt-to-GDP and leaving public finances more vulnerable to higher borrowing costs and weaker growth.
The Silver Lining
France’s weaker fiscal backdrop does not mean the crisis will follow Italy’s full course. Euro exit fears played a substantial role in the Italian debt market selloff, whereas those concerns remain muted today. The Sentix euro breakup index stood at 2.4% in September compared with around 13% during Italy’s 2018 crisis.
Importantly, a solid 79% of French respondents support the euro according to the Spring 2026 Standard Eurobarometer. This should prevent France’s fiscal woes from turning into a broader crisis of confidence in the euro.
In parallel, the ECB’s Transmission Protection Instrument (TPI) introduced in July 2022 reduces the risk of France’s fiscal troubles spilling over to other Eurozone economies. TPI allows the ECB to purchase sovereign bonds with no preset limit, subject to fiscal and debt sustainability checks.
The TPI backstop cannot fix France’s public finances or eliminate a justified fiscal risk premium. But it can counter unwarranted selling in eligible Eurozone bond markets, helping contain contagion and the drag on EUR.
The End Game
Italy’s experience also shows how confidence can recover once fiscal confrontation gives way to compromise. Its December 2018 budget agreement with the European Commission helped ease market stress. France’s 2027 presidential election could offer a similar turning point, but only if it produces a government able to deliver credible deficit reduction. Until then, French spreads remain vulnerable to further widening, keeping EUR/USD under pressure.
