What drives Europe's economy?

View the Europe Economy timeline →

Europe Economy

Main drivers

What pushes Europe's economy up

  • Falling inflation — When prices stop rising so fast, households can afford to buy more, and the European Central Bank gets room to cut interest rates.
  • ECB interest rate cuts — Lower borrowing costs make it cheaper for families to take out mortgages and for businesses to invest, which lifts spending and output.
  • Expectations of future rate cuts — Even before the ECB acts, the belief that cuts are coming boosts business confidence and investor mood, encouraging hiring and investment.
  • Falling energy costs — Cheaper natural gas and oil reduce costs for factories and households, freeing up money for other spending and pulling inflation down.
  • German fiscal spending — When Germany loosens its strict borrowing rules and commits to large infrastructure or defense budgets, it injects demand into Europe's largest economy.

What pushes Europe's economy down

  • Rising inflation — Higher prices eat into household budgets, force the ECB to raise rates, and crush consumer confidence.
  • ECB interest rate increases — Expensive borrowing discourages spending and investment, slowing growth across the entire eurozone.
  • U.S. tariffs and trade conflict — Tariffs on European exports raise costs, squeeze corporate profits, and create uncertainty that freezes business decisions.
  • Rising energy costs — Surging natural gas or oil prices push up production costs and household bills, feeding inflation and weakening demand.
  • Persistent demand weakness — When new orders keep falling month after month, businesses cut jobs and output, creating a self-reinforcing downturn.

Historical examples

When Europe's economy improved

  • Falling inflation

    • Early 2026 disinflation — Euro area inflation eased to 1.7% in January 2026, the lowest since September 2024, while underlying inflation slipped to 2.2%, its lowest since October 2021. This gave the ECB significant space to support growth.
    • Mid-2023 inflation slowdown — Inflation fell for a third straight month to 5.3% in July 2023, driven by a 6.1% drop in energy prices and slowing food costs. This began restoring household purchasing power and contributed to 0.3% GDP growth in the second quarter.

  • ECB interest rate cuts

    • September 2024 rate cut — The ECB cut its deposit rate by 0.25 percentage points to 3.5%, reflecting an improved inflation outlook. This marked the start of an easing cycle that would reduce borrowing costs across the eurozone.
    • April 2025 rate cut — The ECB lowered its deposit rate to 2.25% and its main refinancing rate to 2.40%, responding to continued cooling in both headline and underlying inflation. Cheaper borrowing supported the stronger-than-expected first quarter GDP reading.

  • Expectations of future rate cuts

    • Germany's ZEW indicator, March 2024 — The ZEW investor sentiment index rose for an eighth straight month to +31.7, its highest since February 2022, driven by anticipation of ECB rate cuts in the following six months.
    • Germany's Ifo index, April 2024 — The Ifo Business Climate rose to 89.4, a third consecutive increase to its highest since May 2023, fueled by growing expectations of ECB rate cuts and easing inflation pressures.

  • Falling energy costs

    • 2023 natural gas collapse — European natural gas futures fell 58% during 2023 to €32 per megawatt-hour, thanks to persistently low demand that kept gas storage at 87% of capacity by late December. This removed a major source of inflationary pressure.

  • German fiscal spending

    • March 2025 debt rule overhaul — Incoming Chancellor Friedrich Merz reached agreement on borrowing reforms including a €500 billion infrastructure fund and exempting defense spending from debt limits. This contributed to eurozone GDP growing 0.4% in the first quarter of 2025, beating expectations of 0.2%.

When Europe's economy weakened

  • ECB interest rate increases

    • Late 2023 tightening peak — After ten consecutive rate increases over 15 months, the ECB pushed its main rate to a 22-year high of 4.5% and its deposit rate to a record 4%. Germany's economy contracted 0.1% in the third quarter as consumer spending buckled under higher rates and persistent inflation.
    • Early 2023 growth stall — The eurozone grew only 0.1% in the first quarter of 2023, missing expectations. Surging consumer prices combined with the fastest pace of ECB rate increases in over 20 years hammered demand and confidence.

  • U.S. tariffs and trade conflict

    • April 2025 tariff escalation — The U.S. imposed a 20% levy on EU imports alongside 104% duties on Chinese goods. The European Commission announced retaliatory tariffs on nearly €21 billion of U.S. products. Major European automakers saw profits fall, a large oil company suffered a 49% drop in first-quarter profit, and a sportswear maker warned tariffs could push prices higher.

  • Rising energy costs

    • February 2025 gas price spike — Natural gas prices surged 9% to €45 per megawatt-hour on fears that a U.S.-EU trade dispute could raise the cost of liquefied natural gas imports, since the U.S. is Europe's main supplier.
    • June 2025 gas price jump — Gas prices rose nearly 5% above €38 per megawatt-hour due to declining wind power generation, concerns about French nuclear output after stress corrosion was found in a reactor, and rising tensions in the Middle East.
    • Late 2023 German consumer confidence drop — Higher energy costs drove German inflation upward, causing the GfK Consumer Climate Indicator to fall unexpectedly to -29.7 heading into February 2024, its lowest in 11 months.

  • Persistent demand weakness

    • December 2023 PMI contraction — The eurozone composite business activity index fell to 47.0 (below the 50 mark that separates growth from contraction) for the seventh straight month. Employment fell for a second consecutive month as companies cut staff in response to shrinking order books.
    • November 2024 activity slump — The composite index dropped to 48.1 from 50, the sharpest contraction in private sector activity that year. Services activity shrank for the first time in 2024, and manufacturing weakness deepened.

Who benefits

When Europe's economy strengthens

  • European stock markets — Stronger growth lifts corporate earnings expectations, drawing investors into equities. In October 2023, stocks rebounded from 10-month lows just on data showing Germany contracted less than feared.
  • European retailers and consumer-facing businesses — Rising household purchasing power translates directly into higher sales volumes.
  • European workers — Growing demand means companies hire rather than cut jobs, reducing unemployment.
  • The euro currency — Stronger growth attracts foreign capital into European assets, pushing the euro higher.
  • European governments — Faster growth generates higher tax revenue, making it easier to manage public debt.

When Europe's economy weakens

  • Holders of safe government bonds — When growth falters, investors expect rate cuts, which pushes bond prices up and rewards those who already own them.
  • Energy exporters outside Europe — Weak European demand pushes down natural gas prices (gas fell 58% in 2023 due to low demand), benefiting buyers but hurting producers who depend on European markets.
  • U.S. and Asian exporters competing with European firms — A weaker euro makes European goods cheaper abroad but makes imports more expensive, shifting some demand away from foreign competitors. However, if European consumers pull back overall, everyone loses.
  • Discount retailers — When budgets tighten, consumers trade down to cheaper alternatives, boosting lower-cost sellers at the expense of premium brands.