The issue of European sovereignty has been on everyone's mind recently. Among its many dimensions, sovereignty in retail digital payments is often cited as an urgent gap to be filled. In fact, two-thirds of digital payments in the Eurozone rely on non-European providers, mainly American. However, this situation is not inevitable, and 2026 could well be the year when a European alternative takes off and reaches critical mass.
In the Eurozone, the improvement in the business climate points to stronger activity. Household confidence remains moderate but spending intentions are rebounding. The unemployment rate is close to its low point, and inflation remains under control.
Lending rates are relative stable since September. Bank financing flows to Eurozone corporations are expanding faster than market financing flows. In France, outstanding loans continue to recover overall.
The industrial recession ended in Q4 2025 in Germany. Production rebounded, driven by capital goods, as did demand (new industrial orders). However, the business climate remains mixed.
The business climate initially improved in industry (driven by the rebound in aeronautics production) and is now improving in services as well, particularly business services. Household confidence continues to improve, albeit moderately. The labour market remains resilient.
Despite the slowdown in December 2025, the business climate remains favourable. Household confidence remained stable over the last two months of the year. The unemployment rate reached a historic low. At the same time, the number of people in employment remains at its highest level.
The business climate is strengthening and high consumer confidence is supporting private consumption. The labour market remains dynamic. Wage growth (negotiated hourly) continues (+3.5% y/y in Q4; stable compared to Q3) and remains above inflation, leading to an increase in households’ purchasing power.
March 4 will mark the first anniversary of Germany's announcement of its plans for massive investments in defense and infrastructure. The increase in public spending in Germany has already contributed to end the two-year recession (2023-2024) by 2025 – mainly through defense investments, according to our estimates. Infrastructure investments, on the other hand, are currently below the planned amounts. 2026, however, is expected to see a clear acceleration of these programmes, which should bolster a strong pickup in growth and restore Germany’s role as a driving force in the euro area.
Today, we're looking at household consumption, which remains the main driver of growth in both the Eurozone and the United States. As we all know, household consumption suffered a major negative shock during the COVID-19 pandemic.
Since 1 January 2025, banks in the European Union have had to consider the loan-to-value (LTV) ratio of loans to households for house purchases when calculating their regulatory capital. This new prudential requirement is ill-suited to the French market. The criteria for granting home loans are based mainly on the debt service-to-income ratio, leading to historically low default rates. However, since mid-2025, the supervisor has been paying increasing attention to the LTV of home loans in France, which is fuelling concerns about higher borrowing costs and an increase in down payment rates.
In the energy sector, the European Union has two objectives: to continue the low-carbon transition in order to reduce greenhouse gas emissions; and to increase its energy sovereignty in a context of rising geopolitical tensions.
On 1st January 2026, Bulgaria became the 21st member of the Eurozone, nineteen years after joining the European Union. Since June 2025, Bulgaria has satisfied the EU's convergence criteria, which include price stability, sustainability of public debt, exchange rate stability and long-term interest rate stability. The European Parliament granted its approval in July 2025, and shortly thereafter, the rating agencies Fitch and S&P upgraded Bulgaria's sovereign rating from BBB to BBB+.
Growth in the Eurozone is expected to strengthen in 2026 (1.6%) primarily driven by investment and a resurgence in activity in Germany. Our forecasts indicate that inflation is likely to remain below the 2% target. However, the anticipated recovery in GDP growth may prompt the ECB to keep its rates unchanged until 2027 before raising them. The fiscal impulse is expected to remain largely neutral, as fiscal consolidation in France and Italy offsets the increase in the German deficit. Interest rates on new loans to households and businesses are projected to remain stable in 2026, with new loans continuing to decelerate for both households and businesses. However, sovereign rates are expected to rise moderately.
The German economy is undergoing a strategic transformation, with increased public spending poised to significantly change its economic model. This transformation has the potential to boost business investment and household spending, while also reducing the country's reliance on exports. The stability of GDP in Q3 2025 underscores this duality: the rise in public spending and private investment is offsetting the ongoing decline in exports. Following a growth rate of 0.3% in 2025, Germany's economic expansion is projected to gain considerable momentum in 2026 (1.4%) and 2027 (1.5%), with this growth gradually extending to the private sector. The rise in public debt is expected to remain manageable and temporary
French growth has been rebounding since Q2 2025, driven primarily by aeronautics production, but also by business investment in a context of decreasing interest rates. These two factors are coming along with two structural drivers: growth in services and public consumption. In 2026, these momentums are expected to continue. Additionally, exports should benefit from the rebound in German growth. Inflation is expected to remain low and household consumption to strengthen moderately, against a backdrop of continued high political uncertainty. French GDP growth is expected to return to its 2024 level (1.1%) in 2026, after a soft patch in 2025 (0.8%).
The Italian economy is showing some resilience: GDP experienced a modest rebound in Q3 2025, and moderate inflation is helping to maintain household purchasing power. We forecast growth to be around 1% over the next two years (1% in 2026 and 0.9% in 2027). Market confidence has been bolstered, as evidenced by improved ratings, due to political stability, fiscal consolidation, and a growing share of public debt held abroad. Exports are benefiting from a robust pharmaceutical sector and intra-EU sales, while trade with the United States remains positive. Despite an historically strong labour market, productivity remains low due to weak intangible investment, limited digitalisation and significant fragmentation within the business sector.
Spanish growth should continue to outpace Eurozone growth. It is underpinned by a dynamic labour market, which is generating gains in purchasing power and bolstering consumption. Investment, meanwhile, is benefiting from lower interest rates and European funding. This strong GDP growth will enable the country to generate primary surpluses and continue to reduce its public debt ratio. However, Spanish activity should come up against the constraint of full employment at the end of the decade, in the absence of significant productivity gains.
With the energy transition in full swing, the European electric vehicle market is at a turning point. After a promising start, it is time to shift into high gear to meet the European Union's climate ambitions. But this acceleration will not be without challenges.
Countries will not be able to limit global warming to +1.5°C compared to pre-industrial levels, as was the ambition of the Paris Agreement ten years ago. However, it would be wrong to conclude that it was a failure. Paris was the catalyst in accelerating for the race to decarbonisation, not only in the European Union, but also in China, which is now on track to reduce its greenhouse gas emissions. Despite the climate scepticism of its president, Donald Trump, the United States continues to green its electricity production. The scientific consensus is that we must now expand and intensify our efforts, which will come at a cost, but much lower than the cost of the status quo.
2025 saw a renewed appetite among European consumers for electric cars. This enthusiasm comes after a lacklustre 2024, when registrations stagnated following the late 2023 announcement regarding the reduction of budgetary support in France and the complete withdrawal of such support in Germany. Yet, numerous studies, including the joint report by Pisani-Ferry and Mahfouz, had deemed these subsidies crucial.
Since 2020, households’ real estate purchasing capacity has improved significantly in the tightest housing markets. Our metric, which monitors changes in the amount of space a typical household can purchase, has increased by almost 20% in areas where demand for housing significantly outstrips supply. In contrast, in less constrained or even unconstrained areas, purchasing capacity decreased during the same period.
Since the pandemic, household consumption has evolved very differently between the Eurozone and the United States. In Europe, weak growth in real gross disposable income, moderating wealth effects, and rising real interest rates have dampened demand. In the United States, however, consumption has exceeded what fundamentals would suggest, buoyed by the housing wealth effect and fiscal stimulus. This divergence is likely to narrow, however, with the Eurozone gradually correcting its underperformance, albeit unevenly across countries, while the United States is expected to see an end to its outperformance, without falling into underperformance.
GDP growth reached 0.5% q/q in the third quarter, well above the figures recorded for nearly three years. This outperformance came despite the period of political uncertainty that began in June 2024 and sluggish household consumption.
Germany's primary deficit is expected to widen over the next two years as a result of the new fiscal strategy, before gradually narrowing between now and 2030.
Despite consolidation, which is set to continue from 2026 until the end of the decade, the primary deficit will remain worse than the stabilising balance. Public debt will therefore increase.
