Filenews 9 December 2024
Even before the collapse of the French and German governments, Europe's economy had several difficulties. Lukewarm growth and a lag in competitiveness vis-à-vis the US and China, an auto industry that is struggling and now Donald Trump threatening tariffs.
And solutions to these impasse will be harder to find as the two countries that make up nearly half of the eurozone economy remain stuck in political paralysis until 2025. Where once there was the so-called Franco-German axis to push Europe forward, now there is a vacuum. French Prime Minister Michel Barnier resigned on Thursday after losing a confidence vote, and while President Emmanuel Macron will name a successor, the new head of government will not have a majority. Elections are constitutionally not allowed until at least June. Germany's coalition led by Social Democrat Chancellor Olaf Scholz with the Greens and Free Democrats dissolved in November, triggering snap elections on Feb. 23. Talks to form a new government could last until April.
At least Germany's potential new chancellor, conservative opposition leader Friedrich Merz, seems open to easing constitutional restrictions on borrowing to allow for pro-growth spending and investment, said Mujtaba Rahman, managing director of Europe at Eurasia Group. France, however, could face "complete paralysis on the economic issue," Rahman said. "They are very unlikely to achieve a political balance that has a mandate to implement a credible fiscal correction." Then there is Europe's lagging business environment, analysed by former European Central Bank chief Mario Draghi in a report containing recommendations such as joint borrowing to support public investment, industrial policy at EU level; and integrating financial markets to help start-ups raise capital. However, "nothing can move in Europe without Franco-German alignment," Rahman said.
European car industry
Meanwhile, the European automaker called for a revision of the EU's strict emissions standards in 2025 instead of 2026, saying easing demand for electric cars meant they would not be able to avoid heavy fines and that the money would be better used to develop new electric vehicles.
Anne-Laure Delatte, a French economist and head of research at the National Centre for Scientific Research, said financial markets remained cautious but not overly concerned by France's political instability. But economic weakness in France and Germany could have wider implications for the European Union. "This could either weaken Europe's position globally or shift power and influence to other European countries such as the Netherlands or Spain, which are performing well at the moment," he said. France is expected to see growth of 1.1% this year and 0.8% next year, while Germany's economy is expected to contract by 0.1% this year, the second year in a row, and recover moderately to 0.7% next year. Germany faces headwinds from a shortage of skilled labour, excessive bureaucracy and higher energy prices, and efforts to address these issues have stalled because of the dispute in Scholz's coalition.
Commission concerns amid calls
European Commission President Ursula von der Leyen, head of the EU's executive arm, has serious powers, especially on trade, a key EU principle delegated to Brussels by member states. But there is not much von der Leyen can do without political support from the two largest member states, whose national budgets are larger than those of the EU.
The most urgent question may be how Europe responds to U.S. President-elect Donald Trump, who takes office on January 20. European officials are trying to defuse a potential trade conflict involving new U.S. tariffs or import taxes on European goods that would severely hurt the continent's export-focused economy. Europe could decide not to respond to any U.S. tariffs, thus avoiding a mutually destructive cycle of punishment. The bloc could also commit to buying liquefied natural gas from the U.S. to mitigate Trump.
Europe sees only modest growth as inflation-hit consumers remain cautious about spending. The economy is expected to grow by 0.8% this year and 1.3% next year for the 20 EU member states that use the euro currency, according to the European Commission.
