EU Economy: Weekly Commentary – February 23, 2026

European Market Review

Eurozone bond yields fell, with spreads narrowing. European equities rose, the euro weakened. Brent crude surged on U.S.-Iran tensions, lower Saudi exports, and tighter U.S. inventories, signalling strong demand.

Eurozone bond yields declined last week. The 10-year French-German spread stands at 56.4 basis points, while the German-Italian 10-year spread remains near 60 basis points. German Finance Minister Lars Klingbeil’s rejection of Eurobonds reinforces Germany’s stability focus, despite more flexible signals from the Bundesbank and Deutsche Bank, while Eurozone yields converged amid joint debt speculation. European equities rose, with Spain and France leading the gains at 2.91% and 2.45%, respectively. The euro weakened 0.64% against the dollar. Brent crude rose 5.18%, reaching a six-month high amid rising U.S.-Iran tensions and concerns over potential supply disruptions near the strategically critical Strait of Hormuz, which channels roughly 20% of global oil flows. Simultaneously, Saudi exports declined and U.S. crude inventories unexpectedly fell, signalling tighter supply alongside strong demand.

Europe View Synopsis

Eurozone industrial production dropped 1.4% MoM in December but rose 1.2% YoY. German manufacturing recovery, stimulus, and normalizing inventories suggest continued Eurozone growth despite structural challenges.

Eurozone industrial production fell 1.4% MoM in December but rose 1.2% YoY, reflecting a continuing cyclical recovery despite structural headwinds. The monthly decline followed weaker national data from Germany and France, yet domestic momentum appears to be strengthening. German fiscal stimulus is gaining traction, with industrial orders up nearly 20% over the final four months of 2025, while inventory corrections that had constrained production are largely complete. Forward-looking indicators, including European Commission surveys, suggest firmer domestic demand, even as high natural gas prices, Chinese competition, and US import tariffs remain challenges. Complementing this, February Eurozone PMIs rose to 51.9, led by German manufacturing, while France remained stagnant. Services activity also improved, and inflationary pressures grew. Germany is increasingly emerging as a growth driver, supported by infrastructure and defence investment plans, which could sustain momentum. Overall, the data point to a eurozone economy that is recovering, with near-term industrial production and business activity likely to rebound.

Industrial Production

Eurozone industrial production fell 1.4% MoM in December. It rose 1.2% YoY. Domestic demand, German stimulus, and completed inventory corrections support the ongoing cyclical recovery despite structural headwinds.

Eurozone industrial production fell by 1.4% MoM in December, a decline that was broadly anticipated following weaker national data from Germany and France. Despite the monthly contraction, output remained 1.2% higher on a YoY basis, underscoring that the broader cyclical recovery in manufacturing remains in place. Structural headwinds continue to pose challenges, with European natural gas prices still running at more than three times US levels, competitive pressure from Chinese exports intensifying, and higher US import tariffs weighing on European producers. However, forward-looking indicators point to improving domestic momentum. The January business sentiment survey from the European Commission showed export order assessments still subdued, but overall order books improved, signalling firmer demand within the euro area. German fiscal stimulus appears to be gaining traction, reflected in a nearly 20% increase in German industrial orders over the final four months of 2025. In addition, survey data suggest that the inventory correction that has constrained production in recent quarters is largely complete, with stock levels returning close to their historical average. Together, these factors suggest that, notwithstanding ongoing structural pressures, the Eurozone industrial upturn is likely to continue in the near term.

We expect industrial production to rebound in the near term, supported by strengthening domestic demand, ongoing German stimulus measures, and the normalisation of inventory levels, despite persistent structural headwinds.

Business Activity

February Eurozone PMIs rose to 51.9, led by German manufacturing expansion. France stagnated. Inflation pressures grew. Germany emerges as growth driver. Optimism returns amid ECB speculation and geopolitical tensions.

February’s PMI data point to a clear strengthening of growth momentum across the Eurozone, led by a notable rebound in German manufacturing that has finally returned to expansion territory after a prolonged slump. The Eurozone composite PMI rose to 51.9 in February from 51.3 in January, marking its highest level since November, with the manufacturing PMI climbing to 50.8 from 49.5 and the services PMI edging up to 51.8 from 51.6. In Germany, the manufacturing sector expanded for the first time since 2022, while the services PMI reached a four-month high of 53.4, underscoring a broad-based improvement in domestic business activity. By contrast, France’s growth remained largely stagnant, implying a potential role reversal between the Eurozone’s two largest economies: Germany emerging as a key growth driver, while France temporarily drags on overall expansion. The surveys also highlight a resurgence of inflationary pressures, with input costs and selling prices rising in February, particularly in manufacturing, reflecting increased pricing power alongside the rebound. Coming on the heels of last week’s informal European summit and amid speculation over Christine Lagarde’s potential early exit from the ECB, the PMI readings inject a sense of economic normality and optimism into the region, with Germany finally providing tangible momentum for the Eurozone economy.

We expect this could be a positive moment for Germany, especially as it has ongoing investment plans in infrastructure and defence, which could further sustain the economic momentum. Overall, the Eurozone appears to be recovering.