Analysts at Bank of America have taken another close look at the eurozone, and, true to form, they are worried. According to their latest report, the region’s economy is not in crisis, but it’s clearly far from healthy.
A key concern is that financial conditions have tightened, even without an official interest rate hike. Due to shifts in currency values and real interest rates, Bank of America estimates that financial conditions have tightened significantly. The current environment, they say, reflects the equivalent impact of one to two additional rate hikes. This change has occurred since the European Central Bank's June meeting, during which the ECB had confidently declared that the eurozone was in a strong position. That position, it seems, has since weakened.
The analysts admit that the eurozone economy is stalling. Activity remains sluggish, the data uninspiring, and the effects of previous policy decisions are only now starting to surface.
“Activity is weak, soft data is moving sideways, and the payback from 1H25 frontloading is still awaited,” the report reads.
Inflation surprised slightly to the upside in September, but BofA views this as more of a final flare before a decline. Monetary policy remains restrictive, and analysts say the question is not if the ECB will cut rates, but when.
Regulatory rhetoric has become less one-sided, but the central bank is still far from signaling that it is ready to loosen policy. Even so, a degree of hope remains, carefully managed and aligned with the eurozone’s institutional approach.
The report also references recent BofA analyst meetings in Rome, where the economic context was described as a period of internal calm. It is a phrase that, outside of economic jargon, means the situation appears stable, though unease persists.
There is, at least, one bright spot: the 2025 budget deficit came in better than expected, creating a chance for the EU to exit the excessive deficit procedure by spring 2026. Defense spending is rising, though very gradually.
In the end, the outlook for the eurozone remains characteristically European. The economy is not in a state of collapse, but it is not demonstrating clear growth either. Interest rates are being held steady—they are neither being reduced nor increased. A sense of peace prevails, although it is more accurately described as cautious internal stability.
