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The eurozone ended 2025 with a respectable headline performance, but beneath the surface the latest data point to an economy once again flirting with stagnation rather than building anything resembling a durable recovery.

December saw growth slow across the single-currency bloc, completing what was technically the strongest quarter since mid-2023, yet the figures read less like a turning point and more like a brief pause before old weaknesses reassert themselves.

The closely watched composite Purchasing Managers’ Index (PMI) slipped in December, signalling that economic activity is still expanding, but only just and with diminishing vigour. Growth remains heavily dependent on services, while manufacturing — long the backbone of Europe’s prosperity — continues to contract. This imbalance is becoming chronic, and it is increasingly difficult to argue that services alone can carry the eurozone forward.

Twelve consecutive months of expansion might sound reassuring. In reality, it speaks more to how anaemic growth has become. An economy can flatline above the 50 PMI threshold for a long time without meaningfully improving living standards, investment or productivity. Europe’s problem is not collapse, but inertia — and inertia is proving stubborn.

Somewhat predictably, the services sector once again did the heavy lifting in December, supported by resilient consumer spending and steady demand in areas such as hospitality and business services. Yet even here, momentum cooled after November’s surge. The sector’s expansion is increasingly driven by price rises rather than volume growth, a worrying sign for households already grappling with the lingering cost-of-living squeeze.

Manufacturing, by contrast, remains firmly in the doldrums. Factory output declined again at year-end as weak global demand, high energy costs and tightening credit conditions weighed on producers. Germany’s industrial sector — traditionally Europe’s economic engine — continues to struggle, undermined by falling export orders and a loss of competitiveness that can no longer be dismissed as temporary. Italy and France show little sign of picking up the slack.

This widening gulf between services and industry exposes a deeper structural malaise. Europe’s growth model has become unbalanced, overly reliant on domestic consumption while its industrial base steadily erodes. In a world of intensifying global competition, that is not a sustainable position for a bloc that prides itself on high-value manufacturing and exports.

Regional disparities only add to the unease. Spain remains a relative bright spot, benefiting from a strong labour market and tourism-driven demand. Elsewhere, the picture is far less encouraging. France’s economy is flirting with stagnation amid political uncertainty and weak investment, while Germany’s slowdown increasingly looks entrenched rather than cyclical. The eurozone may share a currency, but it is drifting further apart economically.

Perhaps most troubling for policymakers is the renewed rise in cost pressures. Input price inflation ticked up again in December, particularly in services, where labour shortages and wage demands are feeding through into higher prices. This is precisely the kind of inflation that central banks fear most: persistent, domestically generated, and difficult to extinguish without choking off growth altogether.

For the European Central Bank, the dilemma is becoming sharper. Cutting interest rates too soon risks reigniting inflation just as it shows signs of settling into a stubborn pattern. Holding rates higher for longer, however, threatens to push already-weak manufacturing further into decline and discourage the investment Europe desperately needs. Either path carries political and economic risks.

Employment trends offer little comfort. While services firms continue to hire cautiously, manufacturers are shedding jobs, and business confidence remains fragile. Companies appear reluctant to commit to expansion or long-term investment, reflecting uncertainty over energy prices, regulation, and the wider geopolitical environment. This hesitancy is a drag on productivity and future growth — problems Europe has failed to solve for over a decade.

Looking ahead to 2026, optimism should be tempered. The fourth quarter may have been the best since 2023, but that says more about how poor the intervening period has been than about any genuine revival. External risks, from global trade tensions to persistent conflict on Europe’s borders, remain acute. At home, ageing populations, high debt levels and sluggish reform continue to sap momentum.

Europe has avoided recession — for now. But the latest figures suggest an economy stuck in a low-growth rut, vulnerable to shocks and increasingly dependent on sectors ill-suited to drive long-term prosperity. Unless policymakers confront the bloc’s structural weaknesses head-on, December’s slowdown may prove less a blip than a warning.