France's debt pushes the euro to 17-month low

The euro hit a 17-month low against the dollar on Monday, largely on concerns over the growing debt crisis in France.

France is running a major deficit. Its borrowing costs are rising, and pretty soon it’s going to have to refinance a lot of debt that it borrowed back when interest rates were much lower — that’s not a great combination.

For more than a decade from the Great Recession through the pandemic, interest rates were historically low.

“Leading economists, people on Wall Street, at central banks, all thought interest rates would stay low forever,” said Kenneth Rogoff, a professor of economics at Harvard University and former chief economist at the International Monetary Fund.

He said that governments thought so too, so they borrowed a lot.

“They said, ‘Oh, and don't bother borrowing long-term,’” Rogoff said. “In other words, taking out a 30-year mortgage instead of a flexible-rate mortgage. ‘The flexible rate borrowing is cheaper. Do short-term borrowing.’”

Some countries did that more than others, he said — and France was one of them.

Paul Christopher, head of global investment strategy for Wells Fargo Investment Institute, said that now, it’s coming time for France to refinance a lot of that debt, and interest rates are much higher.

“Imagine yourself in a mortgage situation,” Christopher said. “You borrowed at 2.5%, but now you want to move, and now the mortgage rate is 7%. Well, that's going to make a huge difference in your monthly payment. That's exactly what's happening in France and in other countries.”

And in France, it’s happening at a time of political instability.

Veronique de Rugy, George Gibbs Chair in Political Economy at the Mercatus Center at George Mason University, said that ahead of presidential elections next year, candidates are offering different solutions.

“One guy is talking about erasing the debt and basically defaulting,” she said. “The other one wants to reverse the retirement age reform to basically allow French people to retire at 60, which was a source of the financial problem of the country.”

All of this chaos is making investors nervous, she said, and less inclined to buy French bonds.

“It's not just that people aren't buying — they're selling off French government bonds,” she said.

And they’re selling euros, too, spooked by the turmoil.