The race was originally scheduled as the Portuguese Grand Prix at Estoril but was moved to Jerez after Estoril's management encountered financial difficulties. Engine suppliers Renault did not want their final Formula One race to be in Japan, which led to the race being added to the schedule as the season finale.
Entering the race, Michael Schumacher led the Drivers’ Championship with 78 points, followed by Jacques Villeneuve with 77 points. Despite driving a Ferrari considered inferior, Schumacher held a one-point advantage. Villeneuve had won two more races than Schumacher during the season, meaning that in the event of a tie on points, the rules stated Villeneuve would be world champion.
During Friday's practice sessions, Olivier Panis set the fastest time for Prost, while David Coulthard led the Saturday morning sessions for McLaren. Qualifying produced an unprecedented result in the history of the World Championship: the three fastest drivers—Villeneuve, Schumacher, and Heinz-Harald Frentzen—all set identical lap times of 1:21.072. Grid positions were determined by the order in which the times were established. Villeneuve, having set the time first, was awarded pole position, with Schumacher second and Frentzen third. Damon Hill qualified fourth, having been forced to slow for yellow flags caused by Ukyo Katayama’s Minardi while on a fast lap.
The race began in dry, sunny conditions. Schumacher made a superior start, overtaking Villeneuve to lead into the first corner. Frentzen also passed Villeneuve for second but was ordered by the Williams team to let his teammate through on lap eight. Schumacher maintained the lead through the first 40 of 47 laps, including the first round of pit stops.
On lap 48, Villeneuve trailed Schumacher by less than a second and attempted an overtake at the Dry Sac corner. Villeneuve held the inside line and was ahead when Schumacher turned into him, causing a collision between Schumacher’s front-right wheel and Villeneuve’s left-hand sidepod. The impact forced Schumacher into the gravel and immediate retirement. Villeneuve’s car suffered damage to its battery mounts, causing him to lose pace for the remainder of the race.
Villeneuve described the incident after the race: "The car felt very strange. The hit was very hard. It was not a small thing." He also stated, "I did not fight then. It was better to let them through and win the World Championship. It is a good exchange."
In the closing laps, Villeneuve was caught by the McLaren duo of Mika Häkkinen and David Coulthard. Coulthard allowed Häkkinen to pass, and Häkkinen won the race, followed by Coulthard and Villeneuve. Gerhard Berger, in his final Grand Prix, finished fourth, just 0.116 seconds behind Villeneuve.
Following the race, the FIA summoned Michael Schumacher to a disciplinary hearing. While race stewards at Jerez initially deemed the contact a "racing incident," the FIA governing body later determined Schumacher’s actions were deliberate. On 11 November 1997, Schumacher was disqualified from the 1997 World Championship, losing his second-place standing to Heinz-Harald Frentzen. He was permitted to retain his individual race victories and was ordered to participate in a road-safety campaign during 1998.
The incident drew heavy criticism from international media. German publication Bild stated Schumacher “wanted to take out Villeneuve,” while the Italian newspaper l'Unità suggested he brought shame to Italian sport. In England, the BBC and The Times compared the move to Schumacher's collision with Damon Hill at the 1994 Australian Grand Prix. Schumacher later admitted to the mistake, describing it as a misjudgment rather than a premeditated act.
Häkkinen's victory was the first for a Finnish driver in 12 years, since Keke Rosberg won the 1985 Australian Grand Prix. The 1997 European Grand Prix marked several statistical milestones: McLaren achieved its first one-two finish since the 1991 Japanese Grand Prix. It was the final race for veterans Gerhard Berger and Ukyo Katayama. Villeneuve became the first Canadian World Champion.
The race resulted in a ban on the Jerez circuit hosting future Formula One events after the Mayor of Jerez, Pedro Pacheco, disrupted the podium ceremony. The FIA President Max Mosley cited the embarrassment caused to trophy presenters as the reason for the sanction. Although the ruling was later rescinded when Pacheco appeared before the World Motorsport Council, the 1997 event remains the last World Championship Grand Prix held at the circuit.
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