Europe is currently facing significant economic hurdles, exacerbated by political chaos enveloping two of its largest economies, France and Germany. Even before the recent disarray, the continent was grappling with sluggish growth and increasing competition from both the U.S. and China, not to mention internal challenges like the faltering auto industry and the pressing need for increased defense spending amid tensions with Russia. The situation appears more dire as political paralysis has set deep roots, potentially stalling initiatives needed to address these economic woes.
Recent events have only compounded these difficulties. Following the resignation of French Prime Minister Michel Barnier after losing a confidence vote, the French government stands at the precipice of instability. President Emmanuel Macron is now faced with appointing a successor without the benefit of having a solid parliamentary majority, and elections won't occur until at least June. This political deadlock is worrisome, particularly since France is traditionally seen as the backbone of European leadership alongside Germany.
Meanwhile, Germany is also wrestling with its political challenges, having seen its coalition government fracture last November. Chancellor Olaf Scholz's administration, which includes the Greens and the pro-business Free Democrats, is now preparing for early elections scheduled for February 23, with negotiations aimed at forming a new government likely extending well beyond April.
Analysts like Mujtaba Rahman, managing director at Eurasia Group, express cautious optimism about the potential new leadership from Germany's conservative opposition leader Friedrich Merz. Merz has indicated openness to loosening borrowing restrictions to allow for increased investment and spending aimed at fostering economic growth. This shift might provide Germany with the fiscal space needed to address some of its underlying economic issues.
Contrastingly, the outlook for France seems bleak. Rahman described the French political climate as one of “complete paralysis on the economic question,” expressing doubt about the establishment of any credible economic course corrections. Without political stability, France is unlikely to fully participate constructively on the European stage, which can significantly hamper overall European ambitions.
Draghi, the former chief of the European Central Bank, has dissected the current economic malaise, recommending action steps such as collective borrowing to spur public investment and the implementation of joint industrial policies. His insights suggest changes aimed at integrating financial markets to help startups access necessary funding. Yet, as Rahman succinctly summarizes, “nothing can move in Europe without Franco-German alignment,” indicating how deeply intertwined the fates of these two nations are with the health of the European economy.
The auto industry, facing particularly tough times, has been vocal about the need to reconsider stringent EU emissions standards. Automakers have argued passionately for review timelines to be extended, stating the demand for electric vehicles has been less than anticipated, leading them to fear heavy fines. Instead, they posited the argument for channeling resources toward developing new electric vehicles rather than trying to comply with impractical regulations.
On the broader economic scale, France's growth is expected to hover around 1.1% for the current year, with projections dropping to 0.8% in the following year. Similarly, Germany’s economy is anticipated to contract by 0.1% this year, marking the second consecutive year of negative growth before witnessing modest recovery with 0.7% growth slated for next year. These figures paint a grim picture, particularly as they reflect the tough battles both economies are facing to recover from external shocks and internal disruptions.
The head of the European Commission, Ursula von der Leyen, holds significant powers on trade matters, but there is only so much she can do without the backing of France and Germany. Drafting policy changes and implementing ideas for public investment is often stymied by the political impasses these major player nations are currently experiencing.
The impending trade standoff with the new U.S. administration under President-elect Donald Trump also looms large. Initial discussions among European officials suggest efforts to mitigate potential tariffs or import taxes on European goods, as such moves would likely harm the Eurozone's export-driven economy significantly.
Possibilities on the table include Europe’s collective decision to refrain from retaliatory economic actions, which could lead to tit-for-tat tariffs. Some propose Europe should become more strategic, perhaps by purchasing more U.S. liquified natural gas or increasing military spending to ease Trump’s concerns over NATO contributions.
Currently, European growth remains tepid as inflation has left consumers cautious about spending. The aggregate projected growth for the eurozone stands at a dismal 0.8% for the rest of the year, with 1.3% growth anticipated the following year. Political stagnation means these growth figures might not inspire confidence, leaving Europe vulnerable to declining positions on the global stage.
Chief Economist at Berenberg Bank, Holger Schmieding, argued the political standoff is depriving Europe of strategies to engage proactively with Trump. He has critiqued the absence of decisive actions, lamenting, "It would be ideal if Europe ... would prepare a big offer for Trump, such as: We spend significantly more on defense if trade and on Ukraine you don’t disappoint us. This is unfortunately not happening.”
With this backdrop of uncertainty, European Union officials face the challenge of galvanizing unity without the backing of its strongest economies. There’s great concern among experts like Rahman, who notes the political turmoil could potentially reduce Europe’s global influence and empower well-performing nations such as Netherlands or Spain - nations not presently hampered by similar political struggles.
Lastly, as pressures mount on the continent, the long-term need to address security matters remains at the forefront. The EU Commission estimates upwards of 500 billion euros, approximated at 528 billion dollars, would be needed over the next decade to address the bloc’s security needs. Discussions surrounding the implementation of common defense bonds suggest potential paths forward; still, moving forward without Germany, seen as the EU's heavyweight, casts doubt on any meaningful progression.
These pressing issues highlight the need for substantial collaboration to bolster economic performance within Europe. Without the coherence typically driven by Franco-German cooperation, the viability of Europe’s strong economic and political standing remains tenuous. The fragility of this alliance is an unfortunate thread running through the continent, affecting everything from investment strategies to future growth prospects, beggining with the hare to step up politically.