The euro dropped to its weakest level in 17 months against the US dollar on Monday, as the combined shock of France's fiscal troubles and Spain's sudden political shift drove investors to speed up their retreat from eurozone assets, adding further pressure on the European sovereign bond market.

Spanish Prime Minister Sanchez announced a snap election on Monday, with nationwide protests over the housing crisis serving as the trigger, abruptly injecting political uncertainty into an economy that had been one of the eurozone's relatively bright performers in recent years.

At the same time, France's draft budget failed to convince the market, with economists at Barclays and ING both arguing that the plan is not enough to fundamentally resolve France's structural fiscal problems.

The euro was last down 0.6% against the US dollar on Monday, with data showing it touched its lowest level since May 19, 2025.

Against a backdrop of elevated inflation, rising interest rates and climbing borrowing costs, the eurozone must also bear the additional burden of weak growth, a fragmented bond market and political turmoil, leaving it in a more fragile position than the United States, which faces similar macroeconomic headwinds.

Spain: From Star Performer to Source of Political Risk

Spain had previously been seen as one of the bright spots in the eurozone's post-pandemic economic recovery, but Sanchez's announcement of an early election in November has suddenly changed its political outlook. The immediate trigger for the vote was a wave of nationwide protests over the housing crisis, underscoring the obstacles the government faces in advancing its reform agenda.

Rufaro Chiriseri, head of fixed income at RBC Wealth Management, said in a CNBC interview on Monday that Spanish assets had been a favored investment this year, thanks to the country's growth trajectory and relatively solid fiscal position.

Chiriseri said:

Commitment to fiscal rules matters greatly, and even though we saw a bond market selloff last week, Spanish and Portuguese bonds fell noticeably less than French and Italian debt. In that sense, investors still view this as an attractive allocation within the market.

France: A Microcosm of Europe's Sovereign Debt Problem

France has now become the "textbook example" of the troubles in Europe's sovereign bond market, with a steadily rising debt stock pushing up the cost of servicing it.

The French government submitted its 2027 budget draft last Friday, aiming to cut the public deficit from 5.4% of GDP to 5% next year. However, Barclays economists believe that even if the budget plan is passed, France will struggle to meet its fiscal targets.

Barclays economists said:

France's fiscal and political situation casts a shadow over the eurozone outlook, fiscal fundamentals remain weak, and no turning point is expected before next year's presidential election.

ING strategists went further, noting that even if the budget plan were passed in full, it "would not solve France's structural fiscal problems." ING strategists said:

The deficit level will remain too high to stabilize the debt ratio, while spending linked to population aging and interest payments will keep rising, meaning the next government will have to face more difficult choices,

ING strategists added:

So far, none of the main presidential candidates has put forward a sufficiently detailed plan explaining which spending will be cut, which taxes will be adjusted, or how the debt ratio will ultimately be stabilized.

The Eurozone Outlook Under Twin Pressures

The challenges now facing the eurozone go beyond the purely macroeconomic level.

Inflation, high interest rates and rising borrowing costs are broadly similar to the pressures experienced by the United States; but the eurozone's unique combination of weak growth, a fragmented bond market and political turmoil has clearly intensified investor unease.

France and Spain are both core eurozone economies, and their simultaneous entanglement in political and fiscal difficulties has already transmitted spillover effects directly to the euro exchange rate and European bond markets.

The market is now waiting to see whether the two countries can deliver credible policy signals in the near term, and given the current situation, that prospect remains unclear.