Europe Intelligence Brief for Friday, February 20, 2026

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What matters today

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\nCritical
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\nCritical
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\nTense
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\nWatching
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\nGermany faces five state elections in 2026, and the stakes for Chancellor Merz’s coalition could hardly be higher. The first test comes on March 8 in Baden-Württemberg, where the CDU leads polls at 29% against the Greens’ 20% and the AfD’s 21%. Rhineland-Palatinate follows on March 22, where the SPD risks losing its long-held governorship.
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\nThe real danger lies in September. In Saxony-Anhalt and Mecklenburg-Vorpommern, the AfD polls near 40% — making it increasingly difficult to form governing coalitions that exclude the far right. The CDU’s “firewall” against the AfD faces its greatest stress test yet: in some states, a governing majority without AfD involvement would require four-party alliances.
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\nNationally, the picture is equally stark. The latest polls show AfD at 25.2%, virtually level with CDU/CSU at 25.4%. The governing coalition parties together secure only 46% of seats — below the majority threshold. Trust in Merz has fallen to 32%, down six points since he took office. Defence Minister Pistorius remains the most popular coalition figure, but even his ratings are declining.
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\nToday’s PMI data offers Merz a rare piece of good economic news — German manufacturing expansion for the first time in three and a half years could help the narrative ahead of Baden-Württemberg. But the deeper challenge is political: the AfD’s rise reflects structural dissatisfaction with both the economy and immigration policy that a single good PMI reading cannot address.
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\nThe February flash manufacturing PMI of 50.8 is a milestone. For the first time since June 2022 — outside a brief August 2025 blip — eurozone manufacturing is in expansion territory. The composite index rose to 51.9, signalling the economy is on a stable footing even as the tariff overhang persisted.
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\nGermany is the engine of the recovery. Its manufacturing PMI hit 50.7, the first expansion reading in over three and a half years. New orders increased robustly, including from abroad, and order backlogs rose for the first time since mid-2022. HCOB chief economist Cyrus de la Rubia attributed the improvement to higher public spending on infrastructure and defence, plus stronger foreign demand after six months of decline. Survey data suggest Germany’s economy may have grown visibly in Q1.
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\nFrance is the laggard. The composite PMI came in at 49.9 — just below expansion — with manufacturing slipping back into contraction after briefly expanding in January. New orders declined again, with export orders particularly weak. The Franco-German divergence is widening, and it has implications for ECB policy: Germany’s expansion argues against further easing, while France’s stagnation argues for it. Input costs rose at their fastest pace since December 2022, though services inflation pressures eased slightly — a nuance the ECB will be monitoring closely ahead of next week’s meeting.
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\nLagarde’s WSJ interview on Thursday was carefully calibrated. She said completing her ECB mission would “take until the end of my term” — the strongest pushback yet against the FT’s report of an early exit. But parsing the language matters: “my baseline” is not “I will.” She declined to comment on the FT report. She described the WEF as “one of many options” for her post-ECB career. And the ECB’s official statement pointedly said she “has not taken any decision” about her term — without denying the possibility.
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\nThe political backdrop explains the hedging. National Rally polls 10 points ahead for France’s April 2027 presidential election. Bardella has called for the ECB to purchase French debt — a direct challenge to the bank’s independence mandate. Villeroy de Galhau is already departing the Bank of France in June, giving Macron one appointment. An early Lagarde exit would give Macron a second, ensuring the ECB presidency and France’s central bank are both in centrist hands regardless of the 2027 outcome.
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\nFor markets, the signal is clarity — for now. The succession drama is unlikely to produce a surprise candidate: Knot and Hernández de Cos remain frontrunners. The risk is not the outcome but the process: any perception that the ECB presidency is being traded as a political asset could undermine the very credibility the manoeuvre aims to protect.
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\nFriday delivered a trifecta of positive UK data that complicates the BOE’s March rate decision even as it reinforces the broader disinflation narrative.
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\nRetail sales surged 1.8% month-on-month in January, nine times the 0.2% consensus. It was the strongest monthly gain since May 2024. Year-on-year growth accelerated to 4.5% from a revised 1.9% in December. Core retail sales (ex-fuel) jumped 2.0%. Separately, the public sector recorded a £30.4 billion surplus in January — double last year’s figure and £6.3 billion above the OBR forecast. Year-to-date borrowing stands at £112.1 billion, 11.5% below the same period last year — giving Reeves fiscal breathing room ahead of the Spring Statement.
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\nThe composite PMI rose to 53.9, a 22-month high. Manufacturing hit 52.0, an 18-month peak. Services held at 53.9, above expectations. The picture is one of a consumer economy that is more resilient than feared, a fiscal position that is stronger than projected, and a private sector that is expanding at a healthy clip.
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\nYet the BOE March cut remains 84% priced. Why? Because CPI at 3.0% (from 3.4%), unemployment at a five-year high of 5.2%, and cooling wage growth still dominate the policy calculus. Today’s data reduces the urgency but doesn’t change the direction.
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\nMoncler was the standout European equity story on Friday, surging 13% — its biggest gain since September 2024. Full-year revenue of €3.13 billion (+3% at constant FX) beat estimates, driven by a strong Q4 acceleration: Moncler brand DTC up 7%, Stone Island DTC up 16%. Asia surged 11% in Q4, Americas +9%. EBIT margin held at 29.2%. CEO transition confirmed: Bartolomeo Rongone takes the Group CEO role from April, with Remo Ruffini remaining as Executive Chairman.
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\nAir Liquide led the CAC 40 with a 3%+ gain after raising its dividend by 12% following full-year results. The luxury complex rallied broadly: LVMH +3%, Hermès +2%, driven by Moncler’s Q4 beat and renewed confidence in Asian demand.
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\nAnglo American reported adjusted EBITDA of $6.4 billion but posted a $3.7 billion net loss, driven by a $2.3 billion impairment on its De Beers diamond business. CEO Wanblad confirmed the De Beers separation is progressing. Danone was flat despite beating 2025 sales and cash flow forecasts. The broader earnings season continues to deliver: 60% of European companies beating expectations, well above the 54% average. The Stoxx 600 is approaching new highs.
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\nThe FCAS crisis from yesterday remains unresolved. Merz publicly questioned the €100 billion joint fighter programme on Feb 19, confirming Germany is exploring 35+ additional F-35A purchases from Lockheed Martin. France has drawn a red line: if Berlin exits FCAS, Paris could withdraw from the MGCS tank programme. A decision deadline has been pushed to end-2026.
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\nIn the background, Europe’s rearmament continues at pace regardless of bilateral disputes. BAE’s £83.6 billion record backlog and KNDS’s planned €20 billion dual-listing in June/July demonstrate that defence investment is flowing even as the Franco-German axis strains. The Merz government has already approved measures allowing defence spending above 1% of GDP to bypass constitutional debt rules. The Bundestag’s €90 billion EU loan for Ukraine for 2026–27 was approved this week. The question is whether European rearmament can be coordinated — or whether it fragments into national procurement sprees that duplicate capabilities and dilute industrial scale.
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Assessment

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\nFebruary 20 may be remembered as the day European manufacturing turned the corner. The flash PMI of 50.8 — a 44-month high — is not just a number: it represents the first sustained expansion reading since June 2022, driven by a German industrial sector that has been contracting for three and a half years. Defence spending, infrastructure investment, and recovering foreign demand are doing what monetary policy alone could not. HCOB’s Cyrus de la Rubia was cautious but clear: this could be the turning point.
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\nThe ECB succession story evolved but did not resolve. Lagarde’s WSJ interview was a masterclass in strategic ambiguity. Her “baseline” is to stay through October 2027, but she wouldn’t deny the FT’s early-exit report and is already eyeing the WEF. The real story is not whether she leaves but what her departure would mean: Macron racing to install a centrist successor before National Rally can influence the appointment. With Villeroy already departing the Bank of France and Le Pen polling 10 points ahead, the institutional Le Pen-proofing project is accelerating.
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\nThe UK delivered the day’s most surprising data: retail sales nine times expectations, a record January fiscal surplus, and a composite PMI at a 22-month high. Yet the BOE March cut remains firmly priced. The message is that the British consumer is more resilient than feared, the fiscal position is stronger than projected, and disinflation is on track — a combination that gives the BOE room to cut without urgency.
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\nMoncler’s 13% surge led a broader luxury and earnings rally that pushed the CAC 40 up 1.2% and the Stoxx 600 back toward records. Sixty percent of European companies are beating estimates. Defence, banking, and luxury remain the structural pillars of European equity outperformance.
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\nBut the political undercurrents are less reassuring. Germany faces five state elections in 2026, with the AfD polling virtually level with the CDU/CSU nationally and approaching 40% in eastern states. Baden-Württemberg on March 8 will be the first test. If the firewall against far-right participation in government breaks in September’s eastern state elections, the implications for German and European politics would be profound. Today’s good economic data helps — but it may not be enough.
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