Macro overview – largest EU economies – Germany, France, Spain and Italy – divergence/disorder
The EU is currently undergoing a period of macroeconomic divergence. The analysis of the four largest EU members – Germany, France, Spain, and Italy reveal a profound shift in regional dynamics such as Germany’s collapse of the export-driven growth model that has underpinned the economy for decades; the emergence of Spain as a regional leader; and all this is contrasted with France’s current fiscal instability.
Macro overview – largest EU economies – Germany, France, Spain and Italy – divergence/disorder
The EU is currently undergoing a period of macroeconomic divergence. The analysis of the four largest EU members – Germany, France, Spain, and Italy reveal a profound shift in regional dynamics such as Germany’s collapse of the export-driven growth model that has underpinned the economy for decades; the emergence of Spain as a regional leader; and all this is contrasted with France’s current fiscal instability.
Macro shifts
Key takeaways:
Germany: Main challenges, which Germany faces now are not cyclical but structural due to China’s increased competition in automotives, mechanical engineering, chemicals, and renewable energy. China’s economic advancements are especially acute in autos, where it now exports 5 million vehicles, which meant that Germany’s car exports crashed by 70% from 2022 to 2024. The IMF projects negligible growth of 0.2% in 2025.
Spain: Has seen the strongest performance since the pandemic, where it recorded 15.9% in Q3 2020 and since then it has recorded on average 1% growth since Q1 2021, and is expected to continue growing in 2026 and 2027, 1.9% and 1.7% respectively. The latest IMF figures reinforce 2025 as a outlier, where the Spanish economy is forecasted to grow at 2.9%. The main drivers for this are the services and manufacturing sectors. Also, Spain unlike other EU countries, was relatively unscathed by US tariffs due to its’ heavy export reliance on other EU countries.
France and Italy: French economic growth has been more subdued compared to other EU countries. The ECB predicts only 0.6% Year-on-Year(YoY) economic growth with a slight improvement of 1.6% in 2026. The only bright spot for the French economy recently has been the construction sector in recent years.
Italy has also recorded strong initial growth following the pandemic and has maintained a resilient, and yet tepid growth in recent quarters. One of Italy’s woes is still lower women participation in the workforce. The IMF projects growth of only 0.5% for 2025.
Inflation
Inflation has proven extremely sticky since 2022 and has been a global challenge everywhere, not just in the EU. It took the Eurozone 18 months before inflation started to move closer to the 2% target, which core price pressures continue. Even now, inflation is slightly elevated in Spain with 3% recorded, and in Germany it is closer to 2.4%.
The primary risk to ECB’s efforts is services inflation. This figure has crept up and has reached 3.4%, which is a critical metric given that it is extremely sensitive to wage growth, and domestic demand strength, which could feed into the wider economy, and sustain higher pricing expectations.
In addition, this prolonged period of high inflation has ed directly to the ECB’s tightening cycle, which has caused an upward trend for 10-year government bond yields since 2022.
GDP growth: levels vs trend
All the European economies suffered greatly during the pandemic, but some bounced back more quickly than others.
Spain: The strongest performer since the pandemic (double digit growth in Q3 2020 of 15.9%) and since then it has become the fastest growing economy in the EU, which the last 2 years and has become the fastest growing economy in Europe with average growth rates of 1% since Q1 2021. And it is expected to continue the growth in 2026 and 2027, 1.9% and 1.7% respectively. Spain was able to rebound quite quickly following the Covid pandemic, where it was particularly hard hit as tourism represents a big chunk of the economy. The main drive has been the services sector and manufacturing. Also, a big chunk of the boost is driven by the influx of more people coming to the country, driven by the rapid growth. And furthermore, the country is less exposed to US tariffs compared to other EU countries.
Germany: Europe’s largest economy has been experiencing difficulties with respect to growth where in several quarters (in Q4 2022, Q2 2023, Q4 2023, Q2 2024, and Q4 2024) it recorded slightly negative growth. In addition, there have been other structural issues at play such as US tariffs, and extreme competition from China in export-oriented industries such as automotive, mechanical engineering, chemicals and renewable energy. Cars represent the main sticking point, where China now exports 5 million vehicles more than it imports. The shift was dramatic and rapid, where car exports to China declined by 70% from 2022 to 2024. This has had a cascading effect, where some of Germany’s largest manufacturers are now considering plant closures and mass layoffs.
France: Economic growth has been much more muted compared to other EU countries, where French businesses have singled bleak economic outlook in both the industrial and services sector. The only bright spot has been construction that last few quarters. The ECB is predicting only 0.6% YoY growth and 1.3% in 2026. In addition, there are debt considerations (to discuss below) that are having an impact on the wider economy.
Italy: Has also since some great growth following the pandemic but still suffers from historical problems such as lower workforce participation by women and continue with reforms to support growth as the IMF recommends. Still the economy has remained resilient and has delivered consistent growth the last few quarters even though it is much more muted compared to the figures from Spain.
Fiscal responses
The structural changes faced by Germany’s export sector are also compounding other issues such as a significant period of stagnation following the Covid-19 pandemic combined with chronic underinvestment, aging power grids, and soaring energy costs following the 2022 energy crisis.
To address these issues and domestic underinvestment in infrastructure Germany has embarked on a rapid re-armament worth €80 billion and a massive infrastructural program worth €500 billion. This has contributed to the rise in the Debt-to-GDP ratio (from 58.7% to 62.4%) and provided upward pressure on the Bund yields. The other aim is for the fiscal stimulus to offset the negative impact on the drop in exports and prevent an even deeper economic decline.
Compared to Germany, Italy has historically had higher Debt-to-GDP ratio, which peaked at 157.7% in 2021. However, decisive action has managed to decrease the figure to 138.3% by 2025.
Spain was equally able to reduce debt levels to 124.2% from 103.4%, and latest projections are the reduction trend will continue.
France is an outlier as it has significant systematic fiscal challenges. Debt-to-GDP ratio has risen from 99.5% to 115.8%. Critically, France also recorded a deficit of 5.8% last year, which has led to political instability and the push to continue reforms that aimed to improve the country’s budget situation have stalled indefinitely. 10-year government bond yield has crept up to 3.42% slightly higher than Italy’s at 3.38%. This convergence signals a repricing of sovereign risk within the Eurozone. There is no indication that this is a temporary blip and signals that investors are now much more concerned with fiscal responsibility and responses rather than historical debt ratios.
Also, this is in contrast with the new fiscal rules, which were reformed April 2024, which require that member states aim to keep their deficits within 3% and Debt-to-GDP ratios at 60%.
|
Economy |
Debt-to-GDP (Pre-Pandemic) |
Debt-to-GDP (Peak) |
DEBt-To-GDP(Latest) |
|
Germany |
58.7% |
68.8% |
62.4% |
|
France |
98.2% |
117.7% |
115.8% |
|
Spain |
97.7% |
124.2% |
103.4% |
|
Italy |
133.9% |
157.7% |
138.3% |
Foreign exchange
The EUR/JPY has shown tremendous strength, where the Euro has been appreciated by 46% (from 120 to 176). This dramatic increase has been supported by MUFG forecast that the EUR/JPY could reach 182.4 by the end of the year and even 184.5 in Q1 2026, thus signaling sustained weakness in the yen. Against the US dollar the narrow range has been put at 1.14-1.16. This narrow guidance points to the structural weakness in some of the largest EU members and constrained growth.
Forecast rates against the US dollar - End-Q4 2025 to End-Q3 2026(MUFG Bank forecast)
|
|
Spot close 31.10.25 |
Q4 2025 |
Q1 2026 |
Q2 2026 |
Q3 2026 |
|
JPY |
154.06 |
152.00 |
150.00 |
148.00 |
146.00 |
|
EUR |
1.1537 |
1.2000 |
1.2300 |
1.2500 |
1.2600 |
|
GBP |
1.3135 |
1.3640 |
1.3820 |
1.3890 |
1.4000 |
|
CNY |
7.1176 |
7.1000 |
7.0500 |
7.0000 |
6.9500 |
|
CAD |
1.4012 |
1.3700 |
1.3600 |
1.3400 |
1.3300 |
|
NOK |
10.1208 |
9.7500 |
9.5120 |
9.2800 |
9.2060 |
|
SEK |
9.4937 |
9.0830 |
8.7800 |
8.6000 |
8.4920 |
|
CHF |
0.8031 |
0.7670 |
0.7640 |
0.7600 |
0.7540 |
Sources used:
https://www.dw.com/en/china-puts-pressure-on-german-car-chemicals-engineering-industry/a-71919309
https://cepr.org/voxeu/columns/china-shock-hits-germany
https://think.ing.com/snaps/french-business-sentiment-signals-a-bleak-economic-outlook/
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Government_finance_statistics
https://www.politico.eu/article/eurozone-inflation-cools-despite-rising-cost-of-services/
https://cambridgecurrencies.com/euro-forecast-2025/[1] https://www.reuters.com/markets/rates-bonds/german-spending-boost-leave-lasting-impact-world-bond-markets-2025-03-10/
https://www.chathamhouse.org/2025/08/will-germany-rearm-quickly-enough
https://www.politico.eu/article/germanys-defense-donald-trump-air-defense-washington-us-weapons/
https://www.mufgresearch.com/fx/monthly-foreign-exchange-outlook-november-2025/
https://global.morningstar.com/en-nd/bonds/europes-bond-market-selloff-whats-happening
https://iep.unibocconi.eu/italian-and-french-debt-costs-converge-very-different-reasons
https://www.imf.org/external/datamapper/NGDPD@WEO/FRA
https://wiiw.ac.at/the-new-eu-fiscal-framework-implications-for-public-spending-on-the-green-and-digital-transition-dlp-7281.pdf
https://unsplash.com/photos/20-euro-bill-on-white-printer-paper-kkACMU0GYko?utm_source=unsplash&utm_medium=referral&utm_content=creditShareLink-Photo by Ibrahim Boran on Unsplash
