Europe’s economy was already struggling before the fall of the administrations of France and Germany. Slow development and poor competitiveness in comparison to China and the United States.
An automobile industry that is having trouble. Where can I locate billions of dollars to defend against Russia? Donald Trump is now threatening tariffs.
As long as the two nations that account for nearly half of the Eurozone economy continue to be mired in political impasse far beyond 2025, finding solutions will be more difficult.
The so-called French-German axis that once propelled Europe forward is now absent.
After losing a vote of confidence, French Prime Minister Michel Barnier resigned on Thursday.
President Emmanuel Macron will name a replacement, but the future leader of the country will not have a majority. According to the constitution, elections cannot take place until at least June.
In November, Germany’s coalition with the Greens and pro-business Free Democrats, led by Social Democratic Chancellor Olaf Scholz, broke up, leading to an early election on February 23. The formation of a new government may continue into April.
According to Mujtaba Rahman, managing director of Europe at Eurasia Group, Friedrich Merz, the conservative opposition leader and Germany’s most likely candidate for chancellor, at least seems willing to relax constitutional borrowing constraints to allow for pro-growth investment and spending.
Rahman stated, however, that France might be experiencing “total paralysis on the economic question.”
“They’re not likely to achieve a political balance that requires them to carry out a credible fiscal course correction.”
The fact that France and Germany aren’t operating at full capacity implies that the European economy’s enormous potential isn’t being realized, which is a concern for Europe, he said.
Then there’s Europe’s underperforming business climate, which was analyzed by Mario Draghi, the former head of the European Central Bank, in a report that includes suggestions like EU-wide industrial policy, integrating financial markets to assist startups in raising capital, and common borrowing to encourage public investment.
According to Rahman, however, “nothing can move in Europe without Franco-German alignment.”
The European auto sector, however, has requested a reassessment of the strict EU emissions regulations in 2025 rather than 2026, arguing that the funds would be better utilized to create new electric vehicles and that the declining demand for electric cars will make it impossible for them to avoid steep fines.
Financial markets are still cautious but not particularly concerned by France’s political unrest, according to French economist Anne-Laure Delatte, head of research at the National Center for Scientific Research.
However, the European Union may be affected more broadly if France and Germany continue to experience economic downturns.
“This could either erode Europe’s standing in the world or transfer power or influence to other European nations like Spain or the Netherlands, which are doing well right now,” she said.
While Germany’s GDP is predicted to drop by 0.1% this year for the second year in a row and then recover somewhat with 0.7% next year, France is predicted to increase by 1.1% this year and 0.8% next year.
Laptops 1000Squabbling within Scholz’s coalition has halted efforts to address Germany’s problems, which include a lack of skilled labor, bloated bureaucracy, and rising energy prices.
As the leader of the EU’s executive branch, European Commission President Ursula von der Leyen has significant responsibility, particularly in the area of commerce, which is a crucial EU power that member nations have given to Brussels.
However, without the political support of the two largest members, whose national budgets exceed the EU’s, von der Leyen can only go so far.
How to react to Donald Trump, the U.S. president-elect, who takes office on January 20, maybe the most pressing issue.
The continent’s export-oriented economy would be severely harmed by new U.S. tariffs or import fees on European goods, which European leaders are attempting to diffuse.
By choosing not to respond to any U.S. tariffs, Europe may prevent a vicious circle of reciprocal harm.
To appease Trump, the bloc might potentially agree to purchase U.S. liquefied natural gas or give Ukraine billions more in defense funding in response to his criticism that European nations fail to fulfill their NATO defense budget obligations.
Due to consumers’ reluctance to spend after being battered by inflation, Europe is only experiencing modest growth.
The European Commission projects that the economies of the 20 EU member states that use the euro will grow by 0.8% this year and 1.3% next year.
According to Holger Schmieding, chief economist at Berenberg, Europe is losing a significant chance to interact with Trump because of the political impasse, even though the direct impact on growth is minimal.
“At this time, when Trump is not yet in office, it would be great if Europe prepared a big offer for Trump, as we spend much more on defense if you don’t disappoint us on trade and Ukraine.” Unfortunately, this isn’t taking place.
“The danger is that Trump’s trade policies may be harsher on us than they otherwise would be because Germany and France aren’t doing anything,” he stated.
In addition to reminding Trump that the EU can respond, von der Leyen can offer to persuade nations to buy more natural gas from the United States, but “the offer that Europe can make to Trump is small, rather than a big offer where there would be German and French money behind it.”
According to the EU Commission, up to 500 billion euros ($528 billion) will be required over the next ten years to help meet the bloc’s security needs.
Common defense bonds might raise that huge amount, according to Defense Commissioner Andrius Kubilius.
However, envisioning progress without Germany, the bloc’s largest member, is difficult.
“The question is whether Germany and France are in a position to enable that at the European level,” Rahman said, adding that major concerns like defense and competitiveness “require the fiscal and parliamentary resources of the biggest member states.”
“I believe the answer is probably yes, but I’m not quite as sure as I would have been if Germany and France hadn’t gone through this extremely trying political period.”
