The French Malady Returns to Haunt the Eurozone

The persistent myth of a broad European economic renaissance has once again disintegrated upon contact with reality. After a fleeting single month of growth, the French economy has slipped back into contraction. In October, France’s composite purchasing managers' index plummeted to 48.4, dragging the entire eurozone’s growth to a four-month low of 51.9.

This is not merely a statistical hiccup; it is the predictable result of structural paralysis. In Paris, corporate confidence has collapsed to levels not seen since the lockdown paralysis of April 2020. French enterprises are quietly suffocating under political uncertainty and worsening public finances. New orders are drying up at the fastest pace since May, export business has contracted for eleven consecutive months, and payrolls are being trimmed for the sixth straight month as vacancies remain unfilled and temporary contracts expire.

The bond markets have delivered a sharp verdict on Paris. Yields on ten-year French government bonds recently touched 5.14 percent, reaching levels not recorded since 2002. In a striking reflection of financial reality, France now pays around 45 basis points more than Italy to borrow over ten years, while its spread against German Bunds expanded to 170 basis points. The stock market mirrored this anxiety, with the CAC 40 dropping 0.7 percent on Friday to sit more than 11 percent below its August peak.

Across the Rhine, Germany’s modest expansion offers very little comfort. Although its composite PMI registered at 52.8, supported by factory orders and government spending on defence and infrastructure, the nation’s industrial core remains remarkably fragile. German manufacturers are once again confronting the painful consequences of surging input costs, driven by Brent crude trading near 114 dollars a barrel. High prices for raw materials, fuel, and electronic components continue to erode business expectations across the sector.

For the European Central Bank, this renewed divergence creates a familiar dilemma. With input price pressures escalating across the continent and a weaker euro pushing up the cost of imported energy, central bankers face persistent inflation while private enterprise stalls. Higher borrowing costs threaten to further depress corporate investment at the exact moment demand is wavering. The central banking apparatus appears trapped by its own rigidities, asking European businesses to pay the bill for structural failure.

Written by Freya Stensrud freya.stensrud@alpineweekly.com