BRUSSELS — The challenges facing Europe’s economy have intensified, particularly following the political upheaval in the crucial economies of France and Germany. Key issues include modest growth rates, an auto industry struggling to adapt, and the pressing question of where funding will come from for defense against looming threats like Russia. Adding to the tension, Donald Trump has hinted at the possibility of imposing tariffs.
The situation is compounded by the political stalemate in both nations, which collectively represent nearly half of the eurozone’s economy. The traditional collaboration between France and Germany, once a driving force for European progress, is currently absent. French Prime Minister Michel Barnier recently resigned after facing a vote of confidence, leaving President Emmanuel Macron to appoint his successor, who will likely govern without a legislative majority since elections cannot be held until at least June.
In Germany, Chancellor Olaf Scholz’s coalition, which includes the Greens and pro-business Free Democrats, broke down last November, leading to a snap election scheduled for February 23. The negotiations for forming a new government could drag on into April. Despite this uncertainty, conservative opposition leader Friedrich Merz, who is expected to become the new chancellor, has expressed some willingness to modify constitutional borrowing limits to boost growth and investments.
However, the outlook for France appears particularly grim regarding economic governance, with experts predicting a political vacuum that could hinder any attempt to establish a coherent fiscal policy. Rahman from Eurasia Group highlighted that without France and Germany working effectively together, Europe will miss out on significant economic potential.
In the auto sector, companies are urging a reassessment of stringent EU emissions regulations for 2025, arguing that slumping demand for electric vehicles might lead to hefty penalties. Economists like Anne-Laure Delatte note that while financial markets are somewhat on edge due to the political instability in France, they are not panicking. However, weaknesses in France and Germany could weaken the EU’s global standing or shift influence to other better-performing European countries.
Current forecasts indicate that France’s economy will grow by 1.1% this year and 0.8% next year, while Germany’s economy is poised to contract by 0.1% for the second consecutive year, with a modest recovery projected at 0.7% next year. Germany struggles with insufficient skilled labor, cumbersome bureaucracy, and rising energy costs, all exacerbated by internal disputes in Scholz’s coalition regarding solutions.
European Commission President Ursula von der Leyen possesses significant powers on trade matters, but her efforts may be constrained without the backing of France and Germany, whose national budgets dwarf that of the EU. As the EU braces for the impending term of U.S. President-elect Donald Trump, finding a diplomatic approach to address potential trade conflicts over tariffs has become an urgent priority.
One potential strategy for the EU could involve refraining from retaliatory tariffs, allowing for a smoother course of action. They could also consider committing to purchasing U.S. liquefied natural gas or increasing defense spending in support of Ukraine to meet NATO commitments that have drawn criticism from Trump.
As inflation causes consumers to be more cautious, the European economy is expected to grow modestly, with a projected 0.8% increase this year and 1.3% next year. Despite the limited immediate growth impact, the ongoing political impasse in Europe could deprive the region of vital opportunities to engage effectively with the incoming administration in the U.S.
Some experts believe that Europe should present a more substantial offer to Trump before he takes office, arguing that enhanced defense spending and trade initiatives could lay the groundwork for better relations. However, the current situation reveals a disparity in Europe’s ability to present unified and robust proposals without the leadership of its two largest economies.
The EU needs an estimated 500 billion euros ($528 billion) over the next decade to meet its security requirements, with potential for common defense bonds to help raise funds. Yet, it’s challenging to envision a cohesive path forward without contributions from Germany, the bloc’s largest member.
Overall, the key challenges surrounding defense and economic competitiveness highlight the necessity of robust fiscal and parliamentary support from both Germany and France, especially during this tumultuous political period. Despite the uncertainty, some analysts remain cautiously optimistic about the eventual capabilities of these leading nations to engage proactively at the European level.
