Europe’s economic Engine Stalls as Political Turmoil Grips France and Germany
Brussels – Even before teh political landscape of France and Germany fractured,the Eurozone economy faced a multitude of challenges. Sluggish growth and a growing gap in competitiveness compared to the U.S. and China threatened stability. An automotive industry struggling to adapt to electric vehicles and the pressing need to boost defence spending against Russia further compounded the difficulties. Now, the prospect of protectionist tariffs from incoming U.S. President Donald Trump looms large.
Finding solutions to these complex problems will be exceedingly arduous while the two nations, which represent almost half of the Eurozone’s economy, remain entangled in political deadlock. The once-reliable franco-German axis, a driving force behind European progress, has been replaced by a void.
Germany’s governing coalition, led by Social Democratic Chancellor Olaf Scholz and comprising the Greens and the pro-business Free Democrats, crumbled in November, triggering a snap election on February 23rd.The process of forming a new government could extend into April, further delaying critical decisions.
Germany’s likely next chancellor, conservative opposition leader Friedrich Merz, appears open to softening constitutional restrictions on borrowing, perhaps paving the way for pro-growth spending and investment initiatives.
However, France faces the grim prospect of “total paralysis” on economic matters, according to Mujtaba Rahman, managing director Europe at Eurasia Group.
“The likelihood of a political configuration capable of enacting a credible fiscal course correction is minimal,” Rahman cautions.
This paralysis has dire consequences for the entire continent.
“It means that the full potential of the European economy remains untapped because France and Germany aren’t operating at peak capacity,” Rahman adds.
Adding to the complexity, Europe’s business surroundings lags behind global competitors.
Mario Draghi, former head of the European central Bank, has proposed solutions such as common borrowing for public investments, an EU-wide industrial policy, and integrated financial markets to support startups. Yet,
“Progress on any of these fronts hinges on Franco-German alignment,” Rahman emphasizes.
Meanwhile, Europe’s automotive industry has requested a postponement of stringent EU emissions standards from 2026 to 2025, citing weak demand for electric vehicles and aiming to avoid hefty fines. they argue that funding should be redirected towards research and development of new electric vehicle technologies.
France’s political instability has raised concerns in financial markets, though they remain cautiously optimistic.
However, economic weakness in both France and Germany could have far-reaching implications for the broader European Union, observes Anne-Laure Delatte, a French economist and head of research at the National Center for Scientific research.
“This could either weaken Europe’s global position or shift influence towards other European countries like the Netherlands or Spain, which are currently performing well,”
France is projected to grow by 1.1% this year and 0.8% next year, while Germany’s economy is expected to contract by 0.1% this year, marking the second consecutive year of downturn, before rebounding modestly by 0.7% next year.
A shortage of skilled labour, bureaucratic hurdles, and elevated energy prices are hindering Germany’s growth. Efforts to address these challenges have been stalled by infighting within Scholz’s coalition.
Ursula von der leyen,President of the European Commission,the EU’s executive arm,wields critically important power,especially in the realm of trade. However, her ability to implement effective policies is fundamentally limited without strong political backing from the two largest member states whose national budgets dwarf the EU’s own.
One of the most pressing issues is navigating the potential trade conflict with the incoming U.S. administration. European officials are strategizing to defuse tensions arising from President-elect Trump’s threatened tariffs on European goods,which could severely impact the continent’s export-driven economy.
Europe could choose not to retaliate, thus avoiding a damaging tit-for-tat trade war. Alternatively, the bloc could commit to purchasing U.S. liquefied natural gas to appease Trump or bolster defense spending for Ukraine to address his concerns about NATO members not meeting their defense commitments.
Europe’s economic growth remains modest.
Inflation-weary consumers are tightening their belts,resulting in projected growth of 0.8% for this year and 1.3% for next year for the 20 EU members using the euro currency, according to the European Commission.
While the direct impact on growth is relatively small, the political deadlock represents a missed possibility for Europe to engage with the incoming Trump administration.
“Ideally,” says Holger Schmieding, chief economist at Berenberg Bank, “Europe, before Trump takes office, would prepare a comprehensive offer:
“We will significantly increase our defense spending if, in return, you ease your stance on trade and Ukraine.”
Unluckily, this is not happening.”
Schmieding warns that “Trump’s position on trade might potentially be tougher than it or else would be as Germany and France are absent from the negotiating table.”
Von der Leyen can offer increased natural gas purchases from the U.S. and remind Trump that the EU could retaliate. However, “the offer Europe can present to Trump is relatively small, lacking the significant financial backing from Germany and France,” Schmieding concludes.
The EU Commission estimates that up to €500 billion ($528 billion) will be needed over the next decade to bolster EU security. Defense Commissioner Andrius Kubilius has suggested issuing common defense bonds to raise this substantial sum.
But moving forward without Germany, the bloc’s largest member, seems unlikely.
Rahman summarizes the situation.
“Major issues like defense and competitiveness necessitate the fiscal and parliamentary resources of the bigger member states. The crucial question is whether Germany and France are in a position to facilitate this at the European level. While I believe the answer is likely yes, I’m less certain than I would have been had Germany and France not faced these political challenges.”
What are the key economic challenges currently facing the Eurozone?
Interviewer: welcome, everyone, to another segment of Time.news interviews. Today, we’re diving into the heart of Europe’s economic challenges amidst the political turmoil gripping France and Germany. I’m joined by Mujtaba Rahman, the managing director for Europe at Eurasia Group. Mujtaba, thank you for being here.
Mujtaba Rahman: Thank you for having me! It’s a critical time for Europe, and I’m glad to discuss it.
Interviewer: To start, can you give us a snapshot of what the current economic landscape looks like for the Eurozone, particularly with the ongoing political uncertainty in two of its leading economies?
Mujtaba Rahman: Absolutely. The Eurozone is facing a slew of challenges even before the political unrest escalated. There’s sluggish growth, a widening competitiveness gap compared to the U.S. and China, and major industries, like automotive, are struggling to transition to electric vehicles. On top of that, the need for increased defense spending due to the geopolitical climate adds another layer of complexity.
Interviewer: You mentioned the automotive industry. How critical is its adaptation to electric vehicles, especially in light of looming U.S. protectionist tariffs?
Mujtaba rahman: It’s extremely critical. The automotive sector not only drives the economy in Germany but also influences broader Eurozone growth. As the demand for electric vehicles grows globally, Europe’s manufacturers are at a crossroads. They are requesting deadlines for strict emissions standards to be pushed back, indicating their struggle to meet these standards amidst weak demand. This shows a pressing need for strategic investment in research and progress.
interviewer: Speaking of investment, we see Germany’s coalition government has recently crumbled, paving the way for a possible new government under Friedrich Merz. How do you foresee this impacting fiscal policy and economic initiatives moving forward?
Mujtaba Rahman: That’s a crucial development. If Friedrich Merz, who shows an inclination to consider loosening borrowing restrictions, becomes Chancellor, we might see a shift toward pro-growth policies. However, the negotiations to form a stable government could extend further into the year, which means critical decisions are likely delayed. This instability hampers any potential fiscal corrections needed for both Germany and the eurozone as a whole.
Interviewer: And what about France? You mentioned that there’s a risk of “total paralysis” in economic matters. Can you elaborate on that?
Mujtaba Rahman: Certainly. France’s political landscape is fraught with challenges, making it nearly impractical for any administration to enact a cohesive and credible economic strategy. This paralysis can stifle necessary reforms and investments at a time when the economy is struggling. The longer this continues, the more Europe’s overall economic potential remains untapped, given that both France and Germany represent such a meaningful part of the Eurozone.
Interviewer: Interesting. And there’s also the concept of Franco-German alignment being pivotal for any progress. How essential is this cooperation for the future of Europe’s economy?
Mujtaba Rahman: It’s fundamental. there have been proposals from figures like Mario Draghi advocating for common borrowing and industrial policy to stimulate investment. Though, these initiatives require a united front from France and Germany to move forward. Without that political alignment,the chances of enacting bold economic policies diminish greatly,making it difficult to enhance Europe’s competitiveness on the global stage.
Interviewer: Lastly, as we look at the uncertain future, what are the potential implications if both France and Germany continue on this path of economic weakness?
mujtaba Rahman: If this weakness persists, we could see Europe’s global influence wane. There’s a possibility it could create a power vacuum, allowing other economies to step in and assert their dominance. The implications are profound, not just for these countries but for the entire European Union, which may find it challenging to present a united front on international issues.
Interviewer: Thank you, Mujtaba, for sharing your insights. It’s clear that the political dynamics in France and Germany will play a significant role in shaping the future of Europe’s economy.
Mujtaba Rahman: Thank you for having me, and let’s hope for constructive solutions that can bolster Europe in these challenging times.
Interviewer: Thank you to our viewers for tuning in today. Stay informed and engaged as we continue to cover the evolving landscape of Europe and beyond.