European stock markets have delivered mixed performance with divergence between some of the major stock indices. The EuroStoxx 50 and 600 have posted gains of between 7% and 9% with the top European markets in Germany and Italy gaining up to 20%. The heavy weighting of technology, financial and industrial sectors has boosted performance. SAP, one of the Dax’s biggest constituents and Germany’s leading tech giants, performed strongly up over 70% on the year and this pushed the index to fresh record highs.
On the flip side, France was the only market to lose money over the year, falling over 2%. It especially struggled during the second half of the year due to major political uncertainty and concerns over its high debt levels. The election of Donald Trump in early November also played a part in worsening sentiment more broadly as tariffs on eurozone goods and China’s too could further weigh on the region’s economy.
EUR
The euro performed relatively quite well considering the headwinds hitting the region’s economy. The single currency was the second best performing major versus the dollar, but still finished the year down by around 5%. EUR/USD couldn’t get beyond the top made in September above 1.12 and has since collapsed to a low of 1.0331 in mid-November.
Similar to its peers, the euro has sold off sharply since November and the hawkish December Fed meeting has pushed the world’s most popular currency pair down through long-term support at 1.0448. The anticipation of Trump’s policy agenda is keeping dollar rate spreads wide, plus US exceptionalism in general and its impact on the FOMC, is seeing the currencies of trading partners remain under pressure.
The Economy and the European Central Bank (ECB)
The uptick in the region’s economy seen up to the midpoint of 2024 faded after France and German elections, and the ensuing grim political backdrop. The lack of functioning governments in the two pillars of the zone has essentially ruled out major fiscal support for the region in the near term. The flip side to these two mainstays has been some countries, like Spain, which stand out with growth on a par with a resilient US economy.
That means the ECB has been forced into doing the heavy lifting of supporting the economy, after a protracted battle between the hawks and doves on the Governing Council. Sticky core and services inflation, plus higher than expected wage growth amid low unemployment, saw a muted start to rate cuts and a gradual easing path. But the many headwinds have caused stagnation and policymakers appear more determined to get ahead of the curve and return interest rates to neutral as quickly as possible.
2025 Outlook
Downside risks emerging in the economy are plentiful and include domestic politics frustrating the recovery and geopolitics putting pressure on an economy very open to the world. Even if inflationary pressures do not disappear entirely, it will likely mean the ECB cutting rates more than expected and below neutral.
That said, a combination of low inflation, lower rates and a low base could drive a decent improvement in GDP growth, though absolute expansion is likely to remain subdued. Any European rebound will also be beholden to the bloc’s outsized exposure to China. Again, Donald Trump holds the keys to many of these worries, with European government ministers perhaps hoping Chinese stimulus plans offset new Trump tariffs. Conflict in Ukraine and the Middle East, and any possible positive signs too of a reduced risk premium, will also be worth watching.