Désenchantée

France’s deteriorating fiscal position should push its sovereign spread wider and weigh on the euro, but strong euro support and the ECB’s backstop make a full Italian-style crisis unlikely.

• The French 10-year yield premium over Germany has risen by more than 100 bps since late February to 175 bps, near the 2011 record of about 190 bps.
• France’s projected 2026 budget deficit is 5.4% of GDP, versus Italy’s 2.2% in 2018; France is also expected to run a primary deficit near 3% of GDP, while Italy then recorded a 1.3% primary surplus.
• A rise in the spread toward 250 bps, comparable to the Italian episode, could drag EUR/USD down to 1.1000; political gridlock and the April-May 2027 presidential election limit near-term fiscal repair.
• Italy’s 2018 spread widened by roughly 200 bps to 340 bps, but euro-breakup fears are now much lower: the Sentix index was 2.4% in September versus about 13% during that crisis.
• Euro support is stronger in France, with 79% of respondents backing the currency in the Spring 2026 Eurobarometer, while the ECB’s TPI can contain unjustified contagion but cannot remove France’s legitimate fiscal risk premium.

Takeaway: French spreads remain vulnerable and EUR/USD should stay under pressure until the 2027 election produces a government capable of credible deficit reduction, although euro support and the ECB’s TPI reduce the risk of a broader crisis.