The Eurozone’s economy has suffered major setbacks over the last quarter of 2024, with inflation moving back above 2% while the ECB is cutting rates, weak economic data, an ongoing political crisis in Germany and France, and the ongoing war between Russia and Ukraine.
The Euro itself has performed well this year up until October when these issues started to unfold for the Eurozone.
Economic Data
Through 2023 and 2024, the Eurozone had mixed economic results from GDP fluctuations, mixed results in services and manufacturing, volatile inflation and a strong labor market.
Eurozone GDP
The Eurozone’s GDP grew by 0.4% in the third quarter of 2024, its strongest growth in two years, exceeding forecasts of 0.2%. This follows a 0.2% increase in the previous quarter, with notable contributions from Germany’s modest 0.2% expansion, France’s Olympic-driven 0.4% growth, and Spain’s robust 0.8% rise.
However, Italy’s economy showed no growth, highlighting mixed performances across member states. On an annual basis, GDP rose by 0.9%, the best performance since early 2023.
Source: Tradingeconomics.com | EUROSTAT
The chart above shows Eurozone annual GDP growth from Q4 2022 till Q3 2024, displaying an expansion in each quarter despite high interest rates.
Labor Market
The Eurozone’s labor market remained steady, with unemployment holding at 6.3% in October, down from 6.6% a year earlier. Employment grew by 0.2% quarter-on-quarter, doubling expectations and pushing annual growth to 1.0%.
These figures reflect resilience in the labor market despite broader economic challenges, including rising inflation and slowing economic momentum.
Source: Tradingeconomics.com | EUROSTAT
The chart above shows that the unemployment rate has been in a downtrend since October 2023.
Inflation
Inflation climbed to 2.3% year-on-year in November, slightly above the ECB’s target but showing signs of easing in monthly trends. Consumer prices fell by 0.3% from October to November, the steepest monthly decline since January 2024.
The November inflation data is unlikely to alter the ECB’s current policy trajectory. The decline in monthly core inflation and services prices supports the argument that disinflationary forces remain intact.
This trend might provide the ECB with further justification to lower interest rates at its December meeting, especially as economic activity weakens across the Eurozone.
Source: Tradingeconomics.com | EUROSTAT
The chart shows inflation trending downwards, reaching a low of 1.7% but rebounded in October.
PMI (Purchasing Managers’ Index)
Economic momentum deteriorated in November, as reflected in the latest PMI data. The Composite PMI fell to 48.1, indicating the sharpest contraction since January, with both manufacturing and services sectors declining. For the first time in 10 months, the services sector joined manufacturing in contraction territory, signaling deeper challenges for the Eurozone’s private sector.
Source: Tradingeconomics.com | EUROSTAT
Manufacturing PMI has been contracting since 2023. The sector rebounded in May 2024 but is still trending downwards.
Source: Tradingeconomics.com | EUROSTAT
Services rebounded in January 2024 and throughout the year but contracted in November.
Government Instability & Geopolitical Tensions
Europe is currently navigating a complex landscape of geopolitical tensions and internal political instability, with several key developments impacting the region’s stability.
Geopolitical Tensions
The European Union faces instability in its neighborhood with Russia’s ongoing offensive in Ukraine, leading to high energy prices in Europe.
President Trump’s re-election has raised concerns in Europe about potential U.S. tariffs, with a 10% tariff on imports possibly reducing the Eurozone’s GDP by 1%. In response, EU leaders are pushing for a “Europe First” policy to protect the bloc’s strategic interests.
While the tariffs pose economic risks, some analysts believe Trump’s policies could encourage vital reforms in Europe, such as easing fiscal rules in Germany and boosting defense spending, ultimately fostering growth and strengthening Europe’s industrial base.
Government Instability
In France, Rassemblement National leader Jordan Bardella has threatened to remove Prime Minister Michel Barnier’s government over a critical budget proposal aimed at addressing a significant deficit.
The impasse risks a no-confidence vote, which could lead to the government’s collapse, marking a rare event in the Fifth Republic’s history. During this event, fear entered into French financial markets causing French stocks to fall with government yields also declining and adding pressure on the Euro.
Germany is experiencing political turbulence, with instability impacting the European Union at a time when cohesion is crucial. EU leaders have expressed concerns that Germany’s internal political challenges are undermining the bloc’s strength and ability to respond effectively to various crises.
German Chancellor Olaf Scholz fired Finance Minister Christian Lindner, bringing an end to Germany’s ruling coalition after months of political wrangling where a vote of confidence was scheduled on December 16 and raising the possibility of snap elections in March, a move which will create market uncertainty.
EUR/USD
The Euro continues to depreciate against the USD. The currency pair reached 1.12 in September as the U.S. Dollar declined after the Federal Reserve cut rates by 50 bps.
The U.S. economy is showing strength with strong labor market and growth despite high interest rates. The USD outperformed most currencies after the U.S. elections and is still dominating markets. EUR/USD reached its December 2022 low at 1.03, caused by a strong dollar and geopolitical tensions in Europe.
Conclusion
In conclusion, the Eurozone faces a period of economic and political challenges, with mixed growth in GDP, inflation pressures, and deteriorating private sector activity.
Despite strong labor market resilience, inflation has rebounded, and economic momentum has weakened, leading to concerns about future stability.
Geopolitical tensions, combined with political instability in Germany and France, further strain the region’s ability to respond effectively.
The Euro has struggled against the dollar, reflecting broader economic uncertainties and the potential impact of external factors like U.S. tariffs. The coming months will be crucial for the Eurozone as it navigates these internal and external pressures.
