• The euro area government deficit decreased in 2024 to -3.1% of GDP.• Italy and Greece posted primary surpluses even though their interest costs remain high• The fiscal adjustment that still needs to be provided by the countries whose deficits increased in 2024 (France, Austria, Belgium, Finland) will nevertheless act as a brake on growth in the zone.
The economic scenario for the Eurozone remains dependent on the evolution of the trade conflict and implementation of possible US reciprocal tariffs of 20%. The increase in defence spending will nevertheless support GDP.
Against a backdrop of heightened international competition and trade tensions linked to the United States' new tariff policy, the German economy is seeing its traditional growth drivers challenged. In the short term, the increase in customs duties imposed by the Trump administration will weigh on exports and heighten economic uncertainty.
French growth is set to bottom out in 2025, due to political and trade uncertainties. It should pick up again in 2026, buoyed by a rise in public consumption driven in particular by defence spending and the expected acceleration in German growth.
The mild rebound recorded in Q4 2024 enabled Italy’s real GDP to grow by 0.5% over the year. In 2025, real GDP is expected to grow by 0.8%, while in 2026, it should reach 1.3%. GDP growth is expected to remain subdued in the first part of 2025. It should gain momentum later in the year, mainly driven by consumption, which is projected to benefit from increased disposable income.
Over the next two years, Spanish growth should be stronger than anticipated in our last issue of EcoPerspectives. Continued disinflation and the good performance of the labour market should continue to drive domestic demand, at the expense of foreign trade.
A new government has emerged, with the coalition agreement under immediate pressure from protesting unions and criticism on its underlying assumptions. Growth remains positive, albeit below trend as capex spending could take a hit while net exports still weigh on GDP.
On Wednesday 5 March, the 10-year Bund yield increased 30bp, the biggest rise since the fall of the Berlin Wall. It continued to move higher the following days, reaching a peak on 11 March. The trigger was the announcement by Friedrich Merz (CDU) and the heads of the CSU and SPD during an evening press conference on Tuesday 4 March 2025 that they agreed to reform the debt brake, that defence spending above 1 percent of GDP would be exempt from this debt brake and that a EUR 500bn fund for infrastructure investments would be created. The developments in the German bond market had sizeable spillover effects across markets in the Eurozone. This didn’t come as a surprise.
Faced with US disengagement, the European Union has decided to close ranks and reinvest massively in its defence. On 6 March, the European Council therefore approved a plan that would theoretically raise EUR800 billion. This plan is split into two parts. The first will allow each Member State to deviate from its spending trajectory by 1.5% of GDP on average over a four-year period, without being subject to an excessive deficit procedure. In theory, this mechanism would provide an additional EUR650 billion of budgetary leeway. For the time being, several national governments have announced that they will not make use of the escape clause (France) or are not favourable to it (Italy, Spain).
As a result of the post-Covid debts surge and rising interest rates, the financial burden on governments is increasing. In the OECD, it has reached 3.3% of GDP, its highest level since 2010. For the European Union, the end of the period of cheap money coincides with a substantial increase in its borrowing requirements, partly linked to the need of rearmament. Public finances, already confronted with climate change and ageing populations, are under pressure and will not be able to meet all the challenges alone.
Key figures for the French economy compared with those of the main European countries, analysis of data on the population and the French labour market, activity by sector, publication administration figures, inflation, credit and interest rates, corporate and household accounts.
The tug of war between the United States and the European Union has begun. On March 12, the US administration raised tariffs on imports of aluminum and steel by 25%. In response, the EU has announced that it will reinstate, in mid-April, tariffs introduced during Donald Trump's first term, suspended since 2020
They say the Davos consensus is always wrong, but it usually takes longer than a couple of months to be apparent. Not so in 2025.
The unemployment rate held steady at 6.2% in January, an all-time low. Declines are most marked in southern Europe and Ireland, while the unemployment rate is relatively stable in France and Germany. Negotiated wages rose by 4.1% y/y in Q4 2024, less than in Q3 (5.4% y/y) but still well ahead of inflation.
The IFO business climate index remained stable in February compared with January, at 85.2, and remains close to the low recorded in November (84.7). It is the situation of industry that is having the greatest impact. Industrial output, including construction, contracted again, by 0.7% q/q in Q4 (the 6th fall in 7 quarters). However, January's figures show a slight rebound (+0.6% month-on-month on the 3-month moving average).
Household confidence rebounded from 89 in December to 93 in February (95 in September, 100 on long-term average). The balance of opinion on past price trends, at -5 in February, reached its lowest level since July 2021. On the other hand, the balance of opinion on fears of unemployment rose again in February (+55, compared with +29 in September), fuelling the opportunity to save.
Intentions to make major purchases in the coming year are at their highest level since July 2021. This should enable private consumption to further buoy Italian growth. For the time being, hard data remains disappointing: new vehicle registrations are slowing (-3.3% 3m/3m in February), as are retail sales volumes (-0.4% 3m/3m in January).
The composite PMI (55.1 in February compared with 54 in January) was buoyed by the services component (PMI at 56.2; +1.3 pt). Nevertheless, industrial activity is deteriorating sharply, with industrial output down by 1% y/y in January (-22.8% y/y for vehicles) and the manufacturing PMI falling below 50 for the first time in over a year in February (49.7; -1.3 pt).
We are almost a week away from a vote that could change the face of Germany. On 18 March, the Bundestag will decide on the adoption of two structural defence and infrastructure projects. A massive budget plan that could exceed EUR 1,000 billion over the next ten years and revive German growth, which has been absent for almost 3 years.
Inflation is no longer the No. 1 economic problem that it has been for the past three years, but it remains a major challenge. While it has not reached its 2% target yet, and the last pockets are slowly deflating, new inflationary pressures are mounting. At this stage, those pressures are limited but not negligible and new inflationary risks, linked to the economic and geopolitical context, are taking shape. The Fed's task is becoming more complicated by the risk of a US stagflation, and the ECB's one happens to be slightly trickier when balancing between downside and upside risks on growth.
Against a backdrop of falling interest rates, new banking loans (excluding renegotiations) to households and to non-financial corporations (NFCs) in the Eurozone continued to accelerate in January 2025. Cumulated over one year, new loans to the non-financial private sector (NFPS) increased by 8.6% year-on-year, after 7.4% in December 2024, to EUR 3,437 bn.
Inflation has probably eased in February, particularly in France due to the marked cut in the regulated electricity price. However, this overall movement masks divergent trends. Although disinflation is becoming more widespread (two-thirds of the components in Insee’s index show inflation below 2% y/y in January in France), prices continue to rise rapidly in services, in France as well as elsewhere in the Eurozone. In the short term, a return of energy price inflation is possible in the Eurozone, but this is likely to be short-lived. The ECB is likely to continue to cut rates at its 6 March meeting, but the persistence of core inflation (below but close to 3% y/y) could change the pace of cuts thereafter.
The result of the German election reveals a clear winner: the CDU/CSU. Only five parties were able to enter parliament, thereby reducing the fragmentation of the Bundestag. A grand coalition with the SPD is possible. Negotiations should begin soon to establish a common roadmap. When they come to an end, changes are to be expected: a German government that takes more initiative in European affairs, more public investment, increased defence spending and, as a result, a German budget deficit and public debt that could increase.
Peace talks have started. We do not know how soon or exactly where they will land. But things are moving fast. While much of the focus is, rightly, on the unexpectedly daunting geostrategic challenges, it’s not too soon to start mapping out the key economic implications for Europe.
The German elections of 23 February have high stakes. German GDP has been stagnating for three years and production capacity in the manufacturing sector has suffered its first decline since reunification. The question of the relevance of the German territory as a production site (standort deutschland) was again raised. In this context, will these elections open a new era (zeitenwende) in German economic policy, as was the case with the Hartz laws twenty years ago? Two main issues will need to be monitored: the reform of the debt brake and the decrease of energy costs.
