• Raiffeisen Research (RBI.VI) warns that France's worsening fiscal outlook could push EUR/USD below $1.10.
  • The euro trades near $1.1218, after hitting a 17-month low of $1.1112 last week.
  • The key takeaway: France's fiscal troubles are becoming a growing risk for the euro.

A Fragile Calm

The euro clawed back some ground on Tuesday, trading at about $1.1231, up 0.2% from the previous session as overnight unrest in France eased. But the currency remains dangerously close to last week's 17-month low of $1.1113, and analysts are warning that the reprieve may be temporary. The immediate focus is today's parliamentary vote on the revenue section of France's 2027 budget—a test that could make or break market confidence in the government's fiscal credibility.

The stakes are high. France's borrowing costs remain elevated, with the 10-year government-bond yield at 4.94% and the premium over German bunds sitting at a hefty 148 basis points. That spread—the OAT–Bund spread—measures the extra compensation investors demand to hold French rather than German debt, and it has been widening steadily as political dysfunction and fiscal slippage erode trust.

The Budget Hurdle

The government's proposal aims to reduce the deficit from 5.4% of GDP in 2026 to 5.0% in 2027, with a target of 3% by 2029. That's a tall order. The consolidation package totals €54 billion, including €43 billion in new measures split roughly 60% spending restraint and 40% revenue hikes. But these are proposals, not law. Prime Minister Sébastien Lecornu's minority government must navigate a fragmented parliament ahead of the 2027 presidential election, and the path to passage is anything but clear.

MUFG (MUFG) expects a modified budget to eventually pass, potentially through the use of Article 49.3—the constitutional mechanism allowing passage without a normal parliamentary vote, subject to a possible no-confidence challenge. That's an analyst expectation, not a settled outcome. The risk is that delays or dilution of the fiscal plan further undermine investor confidence, pushing French yields even higher and dragging the euro down with them.

The Cost of Inaction

France faces a potentially self-reinforcing problem: persistent deficits and weak growth undermine confidence, investors demand higher yields, and higher interest costs make deficit reduction harder. The government estimates that a sustained one-percentage-point increase in interest rates would add roughly €3 billion to debt-service costs in the first year and €12 billion after two years. That's a heavy burden for a country whose debt stands at about 119% of GDP, up from roughly 89% in 2011.

The political context only complicates matters. Proposed reductions in pension uprating and a public-sector wage freeze would constrain income growth for pensioners and public employees, while an extended corporate levy would increase the contribution of large companies. Protesters have already taken to the streets over living costs, political paralysis, and conditions in schools and healthcare, illustrating the resistance to further fiscal restraint. Balancing the books while keeping the peace is a delicate act.

Market Ripple Effects

The stress is not confined to the bond market. French equities came under pressure on Monday, with the CAC 40 falling about 1.7% in afternoon trading and banks taking a particularly hard hit. The 10-year government yield rose more than 10 basis points that day, reflecting broader selling of French assets. Meanwhile, French yields now exceed those of Italy or Greece—a striking reversal in relative borrowing costs, though not proof that all aspects of French creditworthiness are worse.

Internationally, the question is whether French stress remains a national fiscal problem or begins disrupting euro-area financial conditions. MUFG sees a high threshold for European Central Bank intervention because current spreads reflect identifiable fiscal and political risks rather than clear market dysfunction. ECB support should not be assumed to be an automatic backstop for the budget.

The Road to $1.10

Raiffeisen Research's warning that EUR/USD could break below $1.10 is a downside scenario, not a verified consensus forecast. In the short term, budget votes, government stability, and social unrest are the clearest catalysts. Handelsbanken (SHB-A.ST) strategist Tommy von Brömsen told Reuters (TRI) that French concerns would persist and that further euro weakness remained to be priced in. Nevertheless, Tuesday's rebound shows the currency can recover when immediate tensions ease.

Over the longer term, analysts disagree on how achievable the adjustment is. MUFG is skeptical of the government's growth assumptions and planned pace of deficit reduction. Its adverse scenario—not its baseline forecast—suggests that a persistent two-percentage-point increase in real borrowing costs could push debt above 130% of GDP by 2030. Banque de France Governor Emmanuel Moulin has said a return to a 3% deficit by 2029 remains possible, although rising debt-service costs make the task harder. IMF Managing Director Kristalina Georgieva warned on October 14 that restoring full investor confidence would take time, even with a budget aimed at putting debt and deficits on a downward path.

The most informative signals are whether France passes a credible budget, whether its yield premium over Germany narrows, and whether growth supports the promised fiscal improvement. Dollar and energy-market developments will also help determine whether French stress translates into a sustained EUR/USD decline. For now, the euro's fate hangs on whether Paris can convince investors that it has a credible plan—and the political will to see it through.

Update: This article has been updated to reflect the latest market prices and the scheduled parliamentary vote on the revenue section of France's 2027 budget.