Europe’s economy faces growing challenges amid political instability in France and Germany
The collapse of the French and German governments has further exacerbated Europe’s economy, which was already grappling with significant challenges, including sluggish growth and declining competitiveness compared to the U.S. and China.
Solutions will be harder to come by as the two countries that account for nearly half of the eurozone’s economy remain mired in political paralysis, likely extending well into 2025.
Macron, who is facing the worst political crisis of his two terms as president, will appoint a new prime minister, following the resignation of Michel Barnier on Thursday after losing a vote of confidence. However, elections are not constitutionally permitted until June.
Germany’s coalition led by Social Democratic Chancellor Olaf Scholz with the Greens and pro-business Free Democrats fractured in November, triggering an early election on Feb. 23. Talks to form a new government could last into April.
Still, Germany’s likely new chancellor, conservative opposition leader Friedrich Merz, appears open to loosening constitutional restrictions on borrowing to enable pro-growth spending and investment, said Mujtaba Rahman, managing director Europe at Eurasia Group.
France, however, could be facing “complete paralysis on the economic question,” Rahman said. “It’s highly unlikely they’re going to get a political equilibrium that has a mandate to implement a credible fiscal course correction.”
“And that’s obviously a problem for Europe because it means the great potential of the European economy is not what it otherwise should be,” he said.
If the French parliament fails to pass a budget by December 20, the government can introduce emergency legislation to extend the 2024 spending limits and tax provisions until a new government is formed and a 2025 budget is approved.
“France probably won’t have a 2025 budget,” said ING Economics in a note, predicting that the country “is entering a new era of political instability.”
