Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
German Chancellor Olaf Scholz greets French President Emmanuel Macron before a private dinner at the Kochzimmer restaurant in Potsdam near Berlin, Germany, June 6, 2023.
Michael Kappeler | Pool | via Reuters
Last year was tough for the eurozone with its biggest economies, Germany and France, seeing political and economic turmoil, meaning neither has a 2025 budget.
Economists say the trajectory for both countries is worrying, warning that lack of growth, fiscal imbalances and political intransigence could lead to decline and loss of position for Europe as a whole.
“The situation today is different from the previous (sovereign debt) crisis in that Europe’s most acute problems are no longer concentrated in smaller economies like Greece. Instead, Europe’s two most important economies are struggling,” Neil Shearing, group chief economist at Capital Economics said in a December analysis.
“Europe faces continued decline without fundamental reform at its core,” Shearing said, noting that if this is not done, “it is hard to avoid the conclusion that Europe’s future is one of very low growth, continuing concerns on fiscal sustainability and a declining sense of position in a world increasingly characterized by superpower rivalry between the US and China.”
Currently, neither France nor Germany have a budget for 2025. amid political struggles which eventually overthrew their governments.
New elections are coming up in Germany in February, and analysts are betting on new parliamentary elections in France next summer. Countries are now working on interim budgets after passing their tax and spending provisions to 2024. this year and it is not certain when they will agree on a budget for 2025.
France and Germany are grappling with different economic challenges, reflecting both the dangers of overspending and underspending.
According to the IMF, France’s budget deficit is expected to reach 6.1% and debt to reach 112% in 2024. Prime Minister Francois Bairro’s new government is expected to struggle to get warring lawmakers from all parties to pass a 2025 budget. as did his predecessor Michel Barnier.
Meanwhile, Germany faces a snap federal election in February after Chancellor Olaf Scholz’s governing coalition collapsed in the autumn due to division on economic and budgetary policies. Germany’s problem is underspending and underinvestment, which has led to declining economic growth.
“In stark contrast, Germany’s problem is overly tight fiscal policy,” notes Shearing of Capital Economics.
“The so-called ‘debt brake’ significantly reduces the scope of deficit spending, even though Germany’s public debt burden is low. With a stagnant economy, Germany would benefit from looser fiscal policy – and as this would almost certainly suck up imports from other countries, it would help support growth (and thus fiscal consolidation) in France and Italy,” he noted .
You need to focus on growth
Economists say the lack of budget plans means Europe’s major economies will not be able to focus fully on policies aimed at economic expansion, continuing a worrying trend in recent years of anemic growth.
This was caused by a combination of events such as the war in Ukraine and rising energy prices, a factor that affected Europe’s energy-intensive industries but was also exacerbated by weaker demand — both in terms of external demand from China and more weak consumer demand in Europe, as well as deeper structural problems such as low productivity growth and a lack of competitiveness.
The European Central Bank seeks to stimulate economic activity in the Eurozone by cutting interest rates, applying a 25 basis point cut in December — the fourth cut this year — to raise its key interest rate to 3%. The central bank said it expects the eurozone economy to grow by 0.7% in 2024. and 1.1% in 2025. Inflation in the bloc is expected to be 2.4% in 2024. and 2.1% this year.
Risks to economic growth “remain on the downside”, ECB President Christine Lagarde told a news conference in December, warning of the potential for “greater frictions in global trade” and that “lower confidence could prevent consumption and investment from recovering as fast as expected.”
Some analysts, such as Calum Pickering, chief economist at Peel Hunt, told CNBC that the ECB should be bolder and go for bigger rate cuts in 2025.
Others say that cutting rates cannot help with structural problems such as low productivity growthand headwinds as a potential tariffs on European imports into the US for the US., which are likely to be presented by US President-elect Donald Trump.
“Our base case is that Europe is going to face a pretty tough year in 2025,” Jari Sten, chief economist for Europe at Goldman Sachs told CNBC, with the investment bank forecasting 0.8% growth for the eurozone in 2025. – compared to 2.5% for the US over the same period.
“There are a lot of issues … high energy prices, China’s slowdown, political uncertainty, trade tensions are all negative things,” he told CNBC’s “Squawk Box Europe.” However, investors are still looking for potential bright spots in the region.
“People are asking whether in Germany, when there are new elections, we could get a little bit more fiscal support – maybe we think there will be some, but we think it will be limited in the end,” Sten said.
“People are also asking whether the European consumer can finally surprise on the upside, the level of savings is high, there is actually quite a lot of money (to be spent), but again we think there will be some support, but it is unlikely to there will be a big surprise.”
Sten noted that lower interest rates “will help savings and consumer spending somewhat, and that’s one of the reasons why we really think Europe will grow next year, despite these challenges.”
“But at the same time, I think we have to be realistic that a lot of the headwinds that we talked about (like) energy prices, China, structural stuff. Cutting rates won’t fix all of these things,” he said.
“Ultimately, it’s going to be a challenging environment.”
