Not so long ago, money market interest rates were negative in Europe, and the French government could borrow almost for free, even for long maturities...
The quantitative theory of money — the idea that inflation in an economy depends on the quantity of means of payment in circulation — is a very old one. It is generally attributed to the French philosopher and jurist Jean Bodin, who, around the middle of the 16th century, was the first to have the intuition that the causes of the "rise in the price of all things" in Europe were to be found in the influx of precious metals from the New World.
Stabilisation in manufacturing, deterioration in services. The manufacturing PMI continues to improve in May, rising above the services index for the first time since March 2022. The composite indicator fell back below 50. The European Commission's economic sentiment index climbed in May (+1 pt to 94.8) but remains well below its long-term average (100).
Business climate: better prospects. According to the Ifo survey, the business climate continued to improve in May (+0.6 points m/m to 87.5), driven by the improvement in the economic outlook (+1.5 points). The services index declined for the second consecutive month, while the manufacturing sector continued to show signs of improvement. Nevertheless, the index remains below its long-term average (95.6), signaling a fragile recovery amid high uncertainty.
Business climate slightly down. The deterioration was slight in May (from 97 to 96). The more pronounced decline in industry and services was offset by a slight improvement in construction and retail trade. The composite index remained in a corridor between 95 and 98 over the last three quarters, consistent with a weak, but positive growth.
A slow improvement. The business climate indices improved slightly in May for all sectors (industry, services, retail, construction). The economic sentiment index is close to its long-term average (+2.8 points to 98.6). Industrial production recorded a modest rise in Q1 (+0.5% q/q), putting an end to five consecutive quarters of contraction.
Spanish outperformance. Business sentiment contracted by 0.4 points in May, but remains above its long-term average and Eeurozone’s (94.8). The industrial indicator dropped by 0.8 points, after 3 months of improvement, but also remained above the European average (at -10.3). While the export orders index improved, those for production and employment weakened slightly.
The dollar is involved in nine out of ten foreign exchange transactions and still accounts for 58% of total foreign exchange reserves. Commodities, interest rates, derivatives: it is the dominant currency in almost all markets, with one exception: green bonds, which are mainly denominated in euros and whose take-off is mainly driven by companies and public actors based in Europe. In 2025, the green bond market is expected to see another record volume of issuance. It remains to be seen whether the US counteroffensive on social and environmental responsibility will be a threat or an opportunity for sustainable finance. There are many arguments in favor of the latter hypothesis.
European energy policy is focused on two objectives: firstly, to progress in the low-carbon transition to reduce greenhouse gas emissions, and achieve carbon neutrality by 2050, and secondly, to increase energy sovereignty by diversifying sources of supply and reducing external dependencies.
The gradual recovery in demand, which has been noticeable for almost six months, seems to be continuing in the Eurozone. It remains to be confirmed given the uncertainties surrounding US trade policy. Nevertheless, the trend towards improvement has not been called into question by the decisions taken so far. In the medium term, the implementation of the European rearmament plan and the German investment plans should strengthen this dynamic.
The EU-UK summit on 19 May marks a new phase in economic rapprochement, more than five years after the Brexit, which has undeniably weakened the UK economy. The structural challenges facing the UK – high inflation, sluggish business investment, low productivity – partly result from this event.
The investment required to meet the challenges of competitiveness and energy and technology transition in the European Union is huge, and the need for it is imminent (2025-2030). To this must now be added expenditure to strengthen the European Union's military capabilities. To finance this, the EU must of course speed up its roadmap towards a Savings and Investment Union. But given the urgency, it must also take account of its financial ecosystem and rely on its banks. The postponement of the FRTB (Fundamental Review of Trading Book) until 2027 and the European Commission's legislative proposal on securitisation, expected in June, are steps in this direction.
France's fiscal deficit worsened in 2023 and 2024. Spending growth was maintained, despite the slowdown in public revenues growth. The 2025 budget should enable consolidation to begin thanks to a rebound in revenues. However, spending as a share of GDP is expected to remain relatively stable. The challenge of continuing fiscal consolidation in 2026 therefore remains intact. This exercise will be constrained by the expected increase in interest payments and military spending.
The recovery in loans for house purchase spread to all eurozone countries in March 2025, but the picture is still mixed. New loans to households for house purchase, excluding renegotiations, saw a year-on-year increase in all eurozone countries in March 2025, which is unprecedented since April 2022. However, it was a very mixed picture in terms of year-on-year increases, ranging from 4.3% in Croatia to 48.6% in Lithuania, with a volume-weighted average of 24.3% across the eurozone. As a result, new loans in the eurozone (EUR 60.3 billion) has returned in March 2025 to its August 2022 level, after hitting a low in January 2024 (EUR 37.0 billion).
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.
Central European economies have defied pessimist predictions in recent years on their ability to cope with shocks. The region posted a less pronounced GDP contraction in 2020 compared to advanced EU countries. In 2022, at the onset of the Russia-Ukraine war, the region was viewed as the most exposed within Europe due its high energy dependence on Russia. However, the widely expected recession did not occur as these economies implemented generous fiscal stimulus. Central European countries are now facing the tariff shock imposed by the US administration. Will this time be different?
The business climate is holding up. The composite PMI decreased (50.1) but remains in expansion area. The manufacturing index persists in negative territory but is getting better for the fourth month in a row. Expectations of activity in services fell sharply (53.1, the lowest level in five years).
The business climate remains fragile. The IFO index has been rising since the beginning of 2025, including in April (86.9, +0.2 pp m/m, historical average of 95.7). However, the economic outlook has darkened as a result of the trade tensions triggered by the protectionist shift in the United States. These tensions have now spread to the services sector (flash PMI down to 48.8 in April). Industry is showing signs of stabilisation, but the situation remains fragile.
Mixed business climate. A slight deterioration was noticeable in April (from 97 to 96), due to a decline in retail sales and a deterioration in construction activity to a new low. The manufacturing index benefited from a rebound in production, particularly in the aeronautics industry. Despite a slight improvement, the services index remains below its long-term average.
Business sentiment deteriorated sharply in April. Confidence in the services sector is at its lowest since October 2022, causing the economic sentiment index to plunge. Confidence in industry continues to deteriorate (-0.6pt m/m), also due to a decline in order-book levels.
Business sentiment remains buoyant. The European Commission's economic sentiment index has been rising for three months (103.8; +0.4 points m/m), driven by an improvement in industry (-4.2; +1.3 pt). Indices of production expectations for the months ahead and of stocks of finished products are improving.
• 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.
