Franco German inflation divergence: the dilemma and breakthrough of the European economy

Recently, there has been a significant divergence in inflation data between France and Germany: France's inflation rate has risen to 4.9%, and energy prices have increased by over 15% year-on-year; The inflation rate in Germany has dropped to 4.5%, the lowest level since the escalation of the Ukrainian crisis. Behind this divergence is a profound game between the energy structure, policy orientation, and geopolitical risks of the two countries, reflecting the difficult balance of the European economy between energy transition and fiscal discipline.

The accelerating upward trend of inflation in France lies in the vicious cycle of uncontrolled energy prices and expanding fiscal deficits. According to the French President's warning, energy prices in France are expected to rise by 15% in early 2026, which has already pushed up inflation expectations ahead of schedule. Energy prices account for over 10% of France's CPI basket weight, with natural gas and electricity prices increasing by 22% and 18% year-on-year respectively, directly driving overall inflation by 1.2 percentage points. The deeper contradiction lies in the constraints of political deadlock on fiscal reform. The French government debt is growing at a rate of 5000 euros per second, and the fiscal deficit in 2024 will account for 5.8% of GDP, far exceeding the EU's 3% red line. The current Prime Minister Beru's plan to cut 43.8 billion euros in spending has encountered a joint resistance from both the left and right, and the crisis of a confidence vote in the National Assembly has forced the government to postpone energy subsidy reforms, resulting in a passive increase in household energy spending. The bond market has issued a warning: the yield of French 10-year treasury bond is more than 80 basis points higher than that of Germany, a new high since 2009, and the rising financing costs further squeeze the fiscal space.

The fragility of the energy structure exacerbates policy dilemmas. Although the proportion of nuclear power in France has reached 70%, the maintenance costs of old units have surged, and nuclear power prices will increase by 9% year-on-year in 2025; The installation progress of renewable energy is lagging behind, with wind and photovoltaic power only meeting 12% of electricity demand, leading to a rebound in dependence on imported natural gas to 35%. Geopolitical risks further exacerbate energy security: the Ukrainian crisis has led to disruptions in natural gas supply to Russia, forcing France to purchase LNG at high prices from the spot market, resulting in a 45% year-on-year increase in LNG import costs from January to August 2025.

The cooling of inflation in Germany is essentially a resonance between the energy price base effect and weak domestic demand. In 2024, energy prices in Germany increased by 12.3% year-on-year, and in September 2025, the year-on-year increase narrowed to 1.0%, only driving overall inflation by 0.2 percentage points. This change is due to the decline in international energy prices and the phased achievements of Germany's energy transformation: by 2025, the proportion of renewable energy generation in Germany will exceed 50%, and the installed capacity of wind and photovoltaic power will increase by 65% compared to 2020, offsetting the upward pressure of some fossil energy prices. But weak domestic demand has become the main driving force behind the decline in inflation. Several research institutions in Germany have lowered their economic growth expectations for 2025 to 0.1% -0.2%. The manufacturing PMI has been below the boom bust line for 11 consecutive months, and exports from the automotive and chemical industries have decreased by 8.3% year-on-year. The recovery of personal consumption is slow, with retail sales increasing by only 0.7% year-on-year, far below the pre pandemic average of 2.5%. The service industry prices increased by 4.0% year-on-year, but the growth rate slowed down by 1.2 percentage points compared to 2024, reflecting a lack of domestic demand momentum.

The limitations of policy tools have exacerbated economic difficulties. The German government will launch a € 200 billion infrastructure fund by 2025, but the funds will mainly be used for power grid upgrades and hydrogen energy projects, with limited short-term consumption stimulation. The United States imposed a 10% tariff on German cars, resulting in an increase of 1.5 billion euros in export costs for car companies such as Volkswagen and BMW, further compressing their profit margins. The Harley Economics Institute warns that if exports continue their downward trend in the second quarter, the German economy may fall into a technical recession.

The inflation divergence between France and Germany is tearing apart the process of European economic integration. France advocates responding to the crisis by issuing Eurobonds and relaxing fiscal discipline, while Germany adheres to the 3% deficit red line of the Stability and Growth Pact. This policy divergence has led to inefficient use of the EU Recovery Fund: as of September 2025, France has only spent 42% of its planned amount, while Germany has only disbursed 38% due to strict project approvals. The divergence in energy policies is even more acute. France promotes the inclusion of nuclear energy as a "green energy" in the EU classification standards, while Germany insists on the "denuclearization" route and demands the closure of all nuclear power plants by 2030. This contradiction has led to the stagnation of the construction of the EU Energy Union, with cross-border power grid interconnection projects lagging behind plans by 30%, and the energy price difference among member states widening to 1:2.5.

Repairing the cracks requires compromise between France and Germany on three levels: firstly, establishing a "European Energy Security Fund" to reduce dependence on Russia through joint reserves and procurement; Secondly, reform fiscal rules to exclude green investment expenditures from deficit calculations, providing space for France's fiscal reform; Thirdly, accelerate the construction of a digital single market and compensate for manufacturing losses through data flow and digital services. The European Commission has proposed the "2030 Digital Compass Plan", which could create new growth points if France and Germany can reach an agreement on data sovereignty and tax allocation.

The inflation divergence between France and Germany is a concentrated manifestation of the pains of European economic transformation. France needs to find a balance between fiscal discipline and people's livelihood security, while Germany needs to resolve the contradiction between "denuclearization" and energy security. When the European Central Bank enters the cycle of interest rate cuts, whether France and Germany can surpass the old paradigm of "tightening vs stimulus" and build a new growth framework that is in line with the green economy and digital age will determine whether the eurozone can avoid the fate of "Japanization". The outcome of this inflation game may reshape the economic geography of 21st century Europe.