Eurozone inflation jumps to 3.8% as energy costs surge, deepening Europe’s fiscal strain

Europe is facing economic headwinds as the global energy crunch adds further pressure on squeezed national budgets.(CN) — European governments, already weighed down by hefty public debt and turbulence in bond markets, came under more economic stress Friday as inflation rose unexpectedly to 3.8% in September in the eurozone, driven by soaring fuel costs.On Friday, French President Emmanuel Macron called an emergency meeting of the Group of Seven nations, where they agreed to release 100 million barrels of diesel and other fuels from their strategic reserves over the next four months. Fuel prices are at record highs across Europe, prompting farmers, truckers and fishermen to hold protests and strikes.U.S. President Donald Trump has been pressuring European countries to tap their oil reserves or face a ban on U.S. diesel exports as fuel prices soar in America, too. Europe gets about half of its diesel from the United States.Friday’s inflation data, showing an increase from 3.2% in August to 3.8% in September, came as a shock and marked the highest level in three years. The cost of energy rose 18.8% from a year earlier, according to Eurostat data.Inflation jumped in several key economies, too, last month. It rose to 5.0% in Spain, 4.1% in Italy, 3.4% in France and 3.3% in Germany.Europe was already struggling with low growth, and many EU governments are wrestling with budget problems as they increase defense spending and seek to ramp up public spending in a bid to make up for years of lackluster investment, which many economists say has hurt Europe’s competitiveness.Meanwhile, France’s fiscal troubles are being watched closely. France, the eurozone’s second-largest economy, faces rising debt, surging borrowing costs and political gridlock ahead of presidential elections next year, making it very difficult to approve billions of dollars in proposed budget cuts.The country’s public deficit is projected to reach 5.4% of gross domestic product in 2026, up from 5.1% in 2025, while public debt is expected to climb to 119.3% of GDP this year and jump to 121.7% in 2027.Speculation has increased that the European Central Bank could even be forced to step in to help Paris stave off wider eurozone problems, though that remains unlikely at this point.Bond markets have been particularly turbulent, with September described as one of the most difficult months for global sovereign debt in years. The bond sell-off has increased borrowing costs for governments.French 10-year OAT treasury bond yields rose 61 basis points in September alone, reaching around 4.78%, near 18-year highs. German 10-year Bund yields closed the month around 3.58%, touching highs not seen since 2008, while Italian 10-year BTP yields closed around 4.6%, the highest since October 2023.The surge in yields is driven by a combination of sticky inflation, rising energy prices and the growing need to finance public deficits.In response to persistent inflation, the European Central Bank raised its three key interest rates by 25 basis points in September — a decision framed as necessary, with inflation expected to remain well above target levels for an extended period.The higher borrowing costs translate directly into pressure on national finances. The European Fiscal Board has flagged that high debt levels and rising spending pressures — particularly from defense needs— require rigorous enforcement of EU fiscal rules to safeguard sustainability. The public debt of 10 of the EU’s 27 member states has exceeded the EU’s debt-ceiling rules, forcing them into painful cost-cutting procedures. Those countries include France, Italy, Poland, Belgium and Hungary.Tightening national budgets have also strained discussions over the EU’s pending 2028-2034 budget, with Germany and other so-called “frugal” nations that contribute the most to the EU budget demanding billions of dollars in cuts. The European Commission has proposed a budget of nearly 2 trillion euros ($2.25 trillion).“Investors are starting to talk about a financial crisis in Europe,” said Eurointelligence, a political analysis firm, in a briefing note. “As long as the crisis in the strait of Hormuz shows no signs of easing, the pressures continue right into the heating season.”Courthouse News reporter Cain Burdeau is based in the European Union.Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads