A European financial counter-shock whose scale is still underestimated - January 12, 2026
At first glance, Europe appears to be the big loser in the geo-economic upheavals currently underway. Paradoxically, however, its financial sector is looking very healthy. Explanations.
Constantly provoked by Donald Trump, attacked by Putin and crushed by Chinese competition, Europe seems to be surrounded on all sides. Despite this, investors' economic and, above all, stock market scenarios are rather constructive with regard to Europe. Should we call this complacency?
On the economic front, positive expectations are based primarily on the potential created by fiscal stimulus in Germany and the Nordic countries (the Netherlands, Sweden and Denmark). Rising purchasing power – wages are rising slightly faster than prices – and abundant household savings should also support consumption. Finally, falling energy prices (oil, natural gas) are good for the Old Continent's economy.
But there is another dynamic at play, one that remains underestimated by many observers: a powerful financial cycle. After more than a decade of banking and sovereign crises, we are now witnessing a veritable counter-shock.
Let's start with the banks. The bitter medicine of post-2008 regulation, the euro crisis (2011-2012) and then negative interest rates (2014-2020) has finally been swallowed. In line with the principle that what doesn't kill you makes you stronger, the sector's profitability is skyrocketing, this time with record solvency ratios (Chart 1). Europe therefore benefits from an extremely solid financial sector.
A similarly significant counter-shock is taking place in the sovereign debt bond market. Despite bond sales by the ECB – which is currently continuing to reduce its balance sheet – and the political and fiscal situation in France, the average yield spread between long-term rates and Germany has reached its lowest level since 2008 (Chart 2). It is quite remarkable that this momentum is continuing without the support of the ECB, which has not lowered its rates for six months.
The return to favour of southern European countries is the main driver of this convergence in long-term rates. Having emerged from severe fiscal consolidation programmes and boosted by the European recovery plan devised during Covid, these countries are seeing their credit ratings improve significantly.
Despite its still glaring limitations – including the lack of a common budget and the strength of internal political divisions – the eurozone is therefore presenting the most harmonious face possible, with northern countries spending more and southern countries emerging from the rut. This relative harmony is reflected in a resurgence of cross-border financial flows among banks, insurers and investment funds, proof that these players no longer fear the fragmentation of the eurozone. At their highest level since 2007, the ECB's financial integration indicators reflect the establishment of strong confidence in the integrity of the eurozone (Chart 3).
Financial confidence in Europe has finally been bolstered by Donald Trump's policy, which is weakening the status of the dollar. In search of alternatives to a dollar that is both expensive and under scrutiny, some global investors and issuers have made extensive use of the euro to diversify. In 2025, net international bond issuance in euros reached nearly €500 billion, compared with around €200 billion in previous years (Chart 4).
These unprecedented banking and bond market dynamics explain why European finance is doing much better than its economy. But financial confidence also has economic consequences. One of these, the 13% rise in the euro against the dollar over the past year, is negative for European exports, especially as it comes on top of US customs duties. However, a stronger euro is helping to drive down the price of imported energy – a barrel of oil costs €50 – and is improving purchasing power in general. In addition, bank lending is continuing to recover (+2.4% year-on-year in November 2025) and property prices are rising (Chart 5).
The result of the counter-shock of the banking and sovereign crises of 2008-2012 and the weakening of the dollar's status, Europe's financial prosperity is a major asset in these particularly complicated economic and geopolitical times. The main risks likely to undermine this prosperity seem to be primarily political – the rise of the AfD in Germany, the political and budgetary situation in France, etc. – even though anti-euro sentiment has declined significantly in recent years. For the time being, however, strong external pressures have at least the advantage of neutralising these risks of division.