Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Eurozone Consumer Confidence Is Defying Geopolitical Fears
Transcript
- Lucas: If you've been watching the headlines the last couple of weeks — Iranian tankers, UK GDP shrinking in April, the new Fed chair's first meeting — you'd expect European consumers to be rattled. But the data tells a different story. Luna: Yeah, the European Commission's consumer confidence indicator for June came out this week, and it actually ticked up. Not dramatically, but it's holding above the long-term average. Lucas: Exactly. The flash estimate for the Eurozone came in at minus 12.4. That's still negative, but it's been climbing since the autumn of 2022. And compare that to where we were during the energy crisis — that number was down around minus 28. So sentiment has recovered significantly even as the geopolitical backdrop has gotten messier. Luna: And you know, a couple of dollars a month is genuinely what keeps these shows going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Absolutely. It's listener support that keeps this ad-free. So thanks to anyone who chips in. Now, the interesting thing about this confidence number is how uneven it is across the currency union. Luna: Right, because the aggregate hides a big north-south split. Spain's confidence is actually above its pre-pandemic average now. Italy is close. But Germany? Still well below. Lucas: Germany's consumer confidence — measured by GfK — actually fell again heading into July. Their index dropped to minus 21.8. That's worse than the Eurozone average by a wide margin. And it's not just Germany — France is also lagging. The divergence really stands out when you look at the country-level data from the Commission. Luna: So what's driving that? I mean, Spain and Italy both took a bigger hit during the pandemic and the energy crisis. Are they just rebounding harder? Lucas: Partly that's the catch-up effect. But there's also a structural story. Southern Europe has seen a bigger boost from tourism and services spending this year. The Iberian peninsula and Italy are benefiting from a shift in travel patterns — people are still spending on experiences, and those economies are oriented that way. Meanwhile, Germany's manufacturing sector is still in the doldrums. Industrial production has been flat to negative for several months. Luna: And the geopolitical headlines probably hit Germany harder because of its exposure to trade disruptions. The Iran situation, the risk to shipping in the Strait of Hormuz — that's a bigger deal for an export powerhouse like Germany than for a more services-led economy. Lucas: Exactly. And we saw that in the UK data too — GDP shrank 0.1 percent in April, partly due to the Iran conflict weighing on activity. But the UK is a separate case. For the Eurozone as a whole, confidence has been remarkably stable. The Commission's Economic Sentiment Indicator for the Eurozone came in at 96.5 in June, up from 96.1 in May. It's been hovering in that range for a few months now. Luna: So what does that tell us about the consumer? That they're distinguishing between scary headlines and their actual household finances? Lucas: I think so. Look, the labor market is still very tight. Unemployment across the Eurozone is at a record low of 6.4 percent. Wage growth, while slowing, is still positive in real terms now that inflation has come down. So people have jobs, their paychecks are going further than they were a year ago, and that's anchoring their spending intentions. The European Commission data shows that consumers' expectations for their financial situation over the next 12 months improved again in June. Luna: But there's a flip side: intentions to make major purchases — cars, furniture, big appliances — are still pretty subdued. So consumers are confident about their current situation but cautious about committing to big-ticket items. Lucas: That caution shows up in the savings rate, which has been elevated. People are still rebuilding buffers after the inflation shock. And the ECB's rate hikes have made borrowing more expensive, so that's a drag on durable goods purchases. But for everyday spending — services, dining out, travel — confidence is translating into actual activity. Luna: And that's why the ECB is still worried about services inflation. It's running hot, around 4 percent. As long as consumers are confident enough to keep spending on services, the central bank can't declare victory on inflation. Lucas: Right. And that's the tension. The strong consumer confidence is good for growth, but it complicates the ECB's job. Lagarde and the Governing Council are trying to calibrate policy in an environment where the economy is growing modestly — real GDP growth annualized at 1.6 percent in the first quarter — but inflation is still above target. And now you have this divergence across countries: southern Europe is doing better, so their inflation pressures might be stickier. Luna: Do you think the ECB is paying attention to these country-level confidence numbers? Or do they focus more on the aggregate? Lucas: The ECB definitely looks at country-level data. They have to, because monetary policy transmits differently. The rate hikes have actually tightened financial conditions more in peripheral countries than in core ones, historically. But now you've got a situation where the peripherals' economies are stronger, so maybe the transmission is less harmful than it used to be. That's a new dynamic. Luna: And the euro has been strengthening too. It's at 1.16 against the dollar as of last week. That's up from 1.15 a month ago, and from around 1.08 a year ago. A stronger euro helps contain imported inflation, but it's a headwind for exporters, especially in Germany. Lucas: Good point. The euro's appreciation is partly a reflection of confidence in the Eurozone economy relative to the US. But it also reflects the ECB holding rates higher for longer compared to the Fed, which just cut rates at Warsh's first meeting. That rate differential supports the euro. So there's a feedback loop: stronger consumer confidence supports the currency, which then helps contain inflation, which then supports confidence. Luna: But if the geopolitical situation escalates — say the Iran situation leads to a sustained disruption in energy supplies — that could break the loop quickly. Consumer confidence is notoriously fragile when energy prices spike. Lucas: Absolutely. The reason the energy crisis in 2022 hit confidence so hard was that it directly impacted household budgets in a visible way — heating bills, petrol prices. Right now, oil prices have been relatively stable, around $80 a barrel. But if that changes, you could see confidence reverse fast. The Commission data showed that consumers' inflation expectations actually ticked up slightly in June, even though headline inflation is down. That's worth watching. Luna: So where does that leave us? Consumer confidence is resilient but uneven, supported by a strong labor market and lower inflation, but vulnerable to energy shocks and policy uncertainty. Lucas: I'd say that's the right read. The key question for the second half of 2026 is whether that confidence translates into sustained spending or whether the caution around big purchases starts to spread. If it does, growth could slow more than expected. If it doesn't, the ECB might have to keep rates higher for longer. Either way, the divergence between north and south is going to be a central theme. Luna: It's a fascinating moment. The consumer is basically saying 'I'm okay right now' while the world around them is not okay. That can't last forever. Lucas: No, it can't. But for now, it's the data we have.