Britain and the wider European economy are facing a period of considerable uncertainty, but reports of an imminent debt catastrophe may be overstated. While headlines have stoked fears of a dramatic crisis, the reality on the ground is more nuanced, with both challenges and signs of resilience shaping the outlook as of September 19, 2025.
According to The Economist, Britain is not yet experiencing as severe a debt crisis as some have claimed. Though concerns about public debt and fiscal stability persist, the situation remains manageable for now. This measured assessment stands in contrast to more alarmist narratives that have circulated in recent weeks, suggesting that while trouble is brewing, the worst has not yet materialized.
Zooming out to the European continent, the economic picture is similarly mixed. As reported by The Kiplinger Letter, Europe’s economy has struggled for years, battered by a succession of crises—from the Greek fiscal meltdown a decade ago, to the COVID-19 pandemic, to the ongoing war in Ukraine and persistent inflation. These shocks have left deep scars, and recovery has been sluggish across much of the region.
France, in particular, finds itself in the throes of a budget crisis. Political instability has further complicated matters, with French President Emmanuel Macron having appointed his fifth prime minister in less than two years. This revolving door at the top has rattled investors and raised questions about the government’s ability to rein in its ballooning budget deficit. As The Kiplinger Letter notes, drafting and passing a 2026 budget will be a formidable challenge for the French administration, potentially delaying much-needed fiscal consolidation and worsening the country’s debt trajectory.
Yet, despite these headwinds, the eurozone—the 20-nation bloc that uses the euro—has managed to stay afloat. Economic growth in the second quarter of 2025 was a modest 0.1%, according to the latest data. While hardly a robust expansion, it nonetheless marks an avoidance of outright contraction, even in the face of new external pressures.
One such pressure is the imposition of a 15% across-the-board tariff by the United States, which is expected to dampen growth in the third quarter as European exporters adjust. Part of the recent weakness in the eurozone’s numbers reflects a rush by exporters to get ahead of these tariffs, leading to a temporary spike in production that is now unwinding. Still, underlying growth, fueled by private consumption and investment, remains sluggish.
There are, however, glimmers of hope. The Purchasing Managers’ Index—a key barometer of business activity—along with other economic indicators, show steady improvement this year. Forward-looking components of recent surveys suggest that a further pickup in growth could be on the horizon. According to The Kiplinger Letter, “growth is likely to pick up in coming quarters,” buoyed by a healthier private sector and improving conditions in the banking industry.
Indeed, after years of painful adjustment following the 2008 global financial crisis and the subsequent euro area crisis, the European private sector is in better shape than it has been in years. Outside of France, private sector debt has fallen from a peak of 110% of GDP to 95%—the lowest level in 17 years. Households and corporations are now sitting on healthier balance sheets, with debt servicing ratios described as “healthy across Europe, except in France.”
The European banking sector, once plagued by non-performing loans and profitability woes, has also staged a comeback. Non-performing loans are no longer a significant threat, and both capital and liquidity ratios are robust. Bank profitability has improved, an especially important development given that European banks account for about 70% of corporate borrowing—far higher than the 25% seen in the United States. A stronger banking sector is expected to support renewed capital spending and bolster the broader recovery.
Germany, the continent’s economic powerhouse, is leading the way on fiscal policy. In a significant shift, German Chancellor Friedrich Merz has lifted the country’s constitutional debt brake and launched a $1.2 trillion spending spree focused on defense and infrastructure. This move is expected to inject much-needed stimulus into the German and wider EU economies, signaling a departure from the austerity that defined much of the past decade.
However, this new wave of spending is not without its risks. Yields on long-dated German, French, and Italian government bonds have climbed to their highest levels since the euro area crisis, reflecting investor concerns about rising debt levels and political instability—particularly in France. The cost of borrowing has increased, raising questions about the sustainability of higher public debt at a time when economic growth remains tepid.
Despite these challenges, the European Union remains firmly committed to deepening integration and addressing the fragmentation that has long hampered its economic ambitions. Sentiment toward the common currency and the EU itself is at an all-time high among Europeans, buoyed by the bloc’s successful navigation of the pandemic and the energy crisis. Efforts to create a capital market union are ongoing, with the aim of making European capital markets deeper and more liquid—key steps for supporting investment and growth in the years ahead.
Still, risks abound. The political crisis in France could inject further uncertainty into an already fragile economic landscape, particularly if it escalates or spreads. The rise of populist parties, fueled by public frustration over sluggish growth and high immigration, poses another threat to the EU’s plans for greater integration. As The Kiplinger Letter cautions, “the rise of populist parties… threatens to slow down, or potentially even derail, the EU’s plans for further integration.”
Meanwhile, the specter of contagion from France’s government bond market to the rest of the euro area looms, though most analysts expect any spillover to be “muted and short-lived unless the crisis in France becomes much bigger.” For now, the private sector’s improved health and the banking sector’s resilience provide important buffers against the worst-case scenarios.
Looking ahead, the path for Britain and Europe is fraught with uncertainty, but not without hope. Policymakers face tough choices as they balance the need for fiscal support with the imperative of debt sustainability. The coming quarters will be crucial in determining whether the region can build on recent improvements or whether political and economic headwinds will prove too strong to overcome. For now, though, the sky is not yet falling—despite what the most dramatic headlines might suggest.
