WanSquare - The year 2026 seen by... Michala Marcussen

Translation of an article published by WanSquare on 30 December 2025
By Michala MARCUSSEN, Societe Generale group Chief Economist

What is your growth scenario in Europe and France for 2026? What is the main hazard surrounding your forecasts? Will Germany's fiscal expansionism be a key variable?

2025 was characterised by the resilience of the global economy in the face of several headwinds, be it US tariffs, geoeconomic fragmentation, sticky inflation or numerous pockets of uncertainty, including the challenging political situation in France. This resilience, however, relies on a few concentrated tailwinds that are set to lose steam looking ahead.

On the domestic front, we see a slower impulse from disinflation to household income, and while past ECB rate cuts have yet to feed fully through, room for further cuts in 2026 seems narrow given still sticky service prices. Turning to fiscal policy, we observe notable differences across member states with France, for example, set to engage some tightening, while Germany is set to deliver stimulus. The impulse from Germany, while not unwelcome, will not suffice to substantially lift growth for the full euro area.

Turning to the external front, energy price declines delivered an important lift to consumers globally, and while prices are expected to remain low, new declines of a similar magnitude seem unlikely in 2026. Tariffs imposed in 2025, moreover, have yet to feed fully through while front-loading effects have now faded. 2025 saw an exceptional contribution from Ireland to euro area growth, as the country enjoyed real GDP growth of over 10% fuelled notably by pharma front-loading ahead of the US tariffs. Looking ahead to 2026, competition from China could well further intensify.

On a more positive note, the build out of AI related investment was a major driver for the global economy, and not least in the US. We estimate a contribution of around 1.0pp to US GDP growth in 2025, with an estimated 0.5pp stemming from the AI related investment channel, adjusted for import content, and a similar contribution through wealth gains, underpinning US household spending. Even if these dynamics remain firm, a further surge of similar magnitude in terms of the contribution to growth seems unlikely in 2026. Moreover, it is probably too soon for the productivity gains from these investments to fully materialise. This J-Curve effect of investment is well known from the literature, and we expect AI productivity gains to become material at the aggregate macroeconomic level only towards the end of this decade.

Further headwinds to growth in the US in 2026 stem from weaker demographics with the crackdown on immigration, and globally from ongoing geopolitical uncertainty and geoeconomic fragmentation. While euro area households could deliver an upside surprise with a significant drop in savings, this seems unlikely in the current climate.

For the first time since 2018, the Fed will have a new Chair. In view of the context of his appointment and the pressure exerted by Donald Trump on the FOMC, could we see a subordination of US monetary policy? If so, will there be any repercussion?

The latest projections from the FOMC members shows a split at both ends of the distribution with some member leaning towards more cuts while others prefer less. This diversity of view likely reflects different outlook on the underlying economy and different preference on where to place emphasis on the Fed’s dual mandate of price stability and full employment, with the doves preferring to take out insurance against downside risks to the employment outlook, while hawks are mindful of inflation still above target.

The change in Fed Chair due in May 2026 will mark an important event for the markets, but fears that the Fed could lose independence was eased in early December with the reappointment of 11 of the 12 regional bank presidents. While the next Fed Chair will have an important role in steering communication, the reappointment of the regional Fed president reduces the immediate risk of subordination.

Risks of fiscal dominance nonetheless remain, with still large budget deficits, burgeoning public debt and issuance increasingly concentrated in short maturities. The Fed’s new Reserve Management Purchases (RMP) tool does raise some questions. While the tool’s stated purpose is to ensure ample reserves in the banking system, the tool will also support the short end of the Treasury market in making purchases of maturities of up to 3 years. Persistent RMP, with significant and durable expansion, could tip the instrument from technical liquidity management into de facto support for government funding. As such, the size of RMP will be an important factor to watch in 2026.

For many quarters, China's manufacturing sector has been significantly increasing its global market share, to the detriment of European industry. If the Draghi, Letta and Noyer reports are medium-term responses to boost our competitiveness, are there turnkey measures that can be deployed to safeguard the productive fabric of the Old Continent?

While anti-dumping measures against external competitors can offer some short-term respite for European industry, this will not fix the problems of competitiveness where urgent action is needed to stem structural and increasingly irreversible decline. The Draghi report clearly defined this existential challenge, stating that if “Europe cannot become more productive, we will be forced to choose.” The Draghi report further observes that “Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines”. As such, the immediate policy focus has to be on securing a viable model internally, that can deliver prosperity and continued financing our social models, rather than simply defending a declining model from outside threats.

The EU has strengths to build on and fully delivering on the Single Market, and the Skills, Energy, Banking and Capital Markets Unions would bring substantial wins for Europe, while it is fair that delivery will take time, this cannot be an excuse for procrastination. It took Europe just seven years from the signature on the Maastricht Treaty in 1992 to delivery of the euro on 1 January 1999. The Single Market has yet to fully deliver and dates from 1986. The still incomplete Banking Union was agreed in 2012 while the first action plan for Capital Market Union (or Savings and Investment Union) dates from 2015 and shares its launch date with the Energy Union.

Europe is today not just a net exporter of goods, but also a net exporter of ideas and risk willing capital. Encouraging innovative business ideas and risk willing capital to stay at home is key to securing sustainable growth.

In view of the 2027 French presidential election, the candidates' draft programmes could be unveiled next year. In order of importance, what would be the three measures to be adopted to boost France's growth potential?

France would benefit tremendously from full delivery of the European reform agenda, but measures are also urgently required at the national level. France today pays an exceptionally high yield spreads over Germany, and while not at crisis levels this is exerting an ongoing drag on the economy. Failure to reverse this situation could see France suffer new sovereign downgrades with the risk of tipping into outright crisis.

The solution to public finances is a complex equation. While there is a consensus in France on the need to reduce the budget deficit, disagreement arises on which concrete measures to take. This debate will no doubt be an important topic in 2026, as the countdown continues to the Presidential election in spring 2027.

The debate on equity and equality should not focus on income distribution alone but should also consider social mobility. While France in terms of income redistribution compares favourably to the Nordic welfare models, it lags in terms of efficiency of outcomes and not least in terms of upward social mobility. Education, be it schooling or life-long learning needs substantial reform, with many potential wins in France stemming from more efficient allocation of resources. Simplification of the functioning of labour markets and reduced rigidity mark further avenues for reform.

A further difference resides with a supply of risk willing capital. This is an issue to be addressed at the European level with the Savings and Investment Union, but the national level also matters. Drawing a comparison again to the Nordics, it is worth note that funded pensions savings not only help support a sustainable pension model, but also help channel long-term savings to innovative business ideas, fostering economic growth.

France enjoys a well-diversified economy with strong institutions. Taking inspiration from European neighbours with shared social values offers a strong opportunity to deliver sustainability to both public finances and growth in France.