German Chancellor Olaf Scholz welcomes French President Emmanuel Macron before a private dinner at the Kochsheimer restaurant in Potsdam outside Berlin, Germany, June 6, 2023.
Michael Kapler | pool | Via Reuters
The past year has been a topsy-turvy one for the Eurozone with its largest economies, Germany and France, experiencing political and economic turmoil meaning there is no budget for 2025.
Economists say the trajectory for both countries is worrying, warning that a lack of growth, fiscal imbalances and political sclerosis could lead to decline and loss of standing for Europe as a whole.
“The situation today is different from the previous (sovereign debt) crisis in that the most severe problems in Europe are no longer concentrated in smaller economies such as Greece. Instead, it is Europe's two most important economies that are suffering,” said Neil Shearing, the group's chief economist. In Capital Economics in an analysis in December.
“Europe faces continued decline without fundamental reform at its core,” Shearing said, noting that if this is not implemented, “it is difficult to escape the conclusion that Europe’s future is one of very low growth, and persistent concerns about fiscal sustainability and fiscal reform.” A diminished sense of status in a world increasingly characterized by great power rivalry between the United States and China.
Currently, neither France nor Germany has a budget for 2025 amid internal political strife Ultimately, their governments were overthrown.
New elections are scheduled to be held in Germany next February. Analysts are betting on holding new parliamentary elections in France next summer. States are now operating with interim budgets, after the 2024 tax and spending provisions were extended to this year, and it is uncertain when either will approve a 2025 budget.
France and Germany face different economic challenges, reflecting the risks of overspending and underspending.
France's budget deficit is expected to reach 6.1%, and debt accumulation is expected to reach 112% in 2024, according to the International Monetary Fund. The new government led by Prime Minister François Bayrou is expected to face difficulties in convincing warring MPs from all parties to pass the 2025 budget. Just as his predecessor, Michel Barnier, did.
Meanwhile, Germany faces snap federal elections in February, after the ruling coalition led by Chancellor Olaf Scholz collapsed in the fall. Because of divisions over economic and budget policies. Germany's problem is a lack of spending and a lack of investment, which has led to diminished economic growth.
“In contrast, Germany's problem is too tight fiscal policy,” Capital Economics' Schering noted.
The so-called “debt brake” significantly reduces the scope for leveraged spending even though Germany's public debt burden is low. In a stagnant economy, Germany would benefit from more flexible fiscal policy – since this would almost certainly absorb imports from other countries. He noted that this would help support growth (and thus fiscal consolidation) in France and Italy.
Need to focus on growth
Economists say the lack of budget plans means that Europe's major economies will not be able to fully focus on policies aimed at economic expansion, which means a continuation of the worrying trend in recent years of anemic growth.
This has been caused by a combination of events, such as the war in Ukraine and rising energy prices, a factor that has hit energy-intensive industries in Europe, but has also been exacerbated by weak demand – both in terms of external demand from the likes of China, and weak consumer demand within Europe – as well as about deeper structural problems, such as low productivity growth and lack of competitiveness.
The European Central Bank seeks to boost economic activity in the euro zone By lowering interest rates, implementing a 25 basis point cut in December – The fourth reduction this year – bringing the key interest rate to 3%. The central bank said it expects the euro zone economy to grow by 0.7% in 2024 and 1.1% in 2025. Inflation in the bloc is expected to reach 2.4% in 2024 and 2.1% this year.
European Central Bank President Christine Lagarde said in a press conference last December that risks to economic growth “remain tilted towards the downside,” warning of the possibility of “greater friction in global trade” and that “a decline in confidence could prevent… Consumption and investment recover at the same speed. “As expected.”
Some analysts, such as Calum Pickering, chief economist at Peel Hunt, told CNBC The ECB should be bolder and move toward deeper interest rate cuts in 2025.
Others say that lowering interest rates cannot help solve structural problems, e.g Low productivity growthand headwinds such as potential Tariffs on European imports destined for the United StatesWhich is likely to be presented by US President-elect Donald Trump.
“Our base case is that Europe is going to have a very difficult year in 2025,” Goldman Sachs chief European economist Gary Stein told CNBC, with the investment bank forecasting 0.8% growth for the eurozone in 2025 — compared to 2.5% for the eurozone. United States during the same period.
“There are a lot of issues… rising energy prices, China's slowdown, political uncertainty, trade tensions, they're all negative,” he told CNBC's “Squawk Box Europe.” However, investors are still looking for potential bright spots in the region.
“People are asking whether we in Germany, when there are new elections, can get more financial support – maybe we think there will be some support, but we think it will be limited in the end,” Stehn said.
“People are also wondering whether the European consumer might finally surprise to the upside, the savings rate is high and there is already a significant amount of money (to spend), but again we think there will be some support but it is unlikely that there will be an upside surprise.” “Big.”
Stehn noted that lower interest rates “will help to some extent with savings and boost consumer spending, and this is one of the reasons why we believe that Europe will grow next year, despite these challenges.”
“But at the same time, I think we also have to be realistic in the face of a lot of the headwinds that we talked about (like) energy prices, China, structural things. Cutting interest rates is not going to fix all of those things,” he said.
“Ultimately, it will be a challenging environment.”
