The two economic engines of the Eurozone, Germany and France, are seized and the weakness that has been affecting their activity since the end of the pandemic is now added. a political crisis whose scope is unpredictable. It could not have come at a worse time, with the region pending the arrival of Donald Trump to the White House and his more than foreseeable tightening of trade policy, and with a competitiveness gap with respect to the United States itself and China, which it only grows. The EU’s pending challenges in areas such as defense investment do not help either.
The President of France, Emmanuel Macron, accepted the resignation of Prime Minister Michel Barnier on Thursday, after the left and the extreme right supported a motion of censure in the National Assembly that led to the fall of the Government. Macron himself has asked Barnier to continue as acting prime minister until a new executive is formed. The immediate priority of this will be to achieve a minimum political consensus to move forward with the Budgets and avoid the extension of those for 2024. This could further aggravate the deficit that the country already incursto which Brussels has opened an excessive deficit procedure this year – from which Spain has been saved.
The French Government had initially planned to end the year with a gap between public income and expenditure that would be around 4.4% of GDP. That estimate was later revised upward to 5.6% and Now it is expected to even exceed 6%. Given that official estimates pointed to growth above 1% in 2025, any risk of missing this target “could increase the deficit, resulting in a further deterioration of the debt-to-GDP ratio, exceeding the initial target of 114.9 %”, warn from Allianz Global Investors.
As political instability in France may continue, French companies will face more difficulties in making your investment decisionswhich could hamper the economy. The industry has been in crisis for almost two years, and the services sector also shows signs of slowing down and macro indicators do not allow us to glimpse a change in the short term. “In France, economic recovery seems unlikely, since the activity of new companies and active companies decreases at an accelerated rate compared to October,” says François Rimeu, senior strategist at the manager Crédit Mutuel AM, according to reading PMI or purchasing managers indices.
The situation in Germany is also far from calm. On February 23, the country will hold early elections, and it is on the table the possibility of modifying the “debt brake” rule, which limits the federal deficit to 0.35%. This change requires, however, a two-thirds parliamentary majority, a difficult objective given the current fragility of the traditional parties CDU and CSU (Christian Democratic Union) and the possibility that the extremists AfD and BSW will block any change in this regard if they achieve sufficient support at the polls.
Germany and its change of model
The positive part is that the European ‘locomotive’ It has ample room for maneuver, with a debt-to-GDP ratio of 59% and without a primary deficit, which could favor this shift in the traditional German budget orthodoxy and support greater growth in its economy. This would be a “breath of fresh air”, since Berlin would be shelving an economic model that has been in decline for almost a decade.
The country will have to deal next year with the threat of a trade war induced by the United States, which would hit its foreign sector (Almost 10% of German exports will go to the US in 2023, the highest share in more than 20 years), and with the ongoing restructuring of the manufacturing sector. Given that the new government will not take office, in principle, until April or May, everything seems to indicate that fiscal policy will continue to be restrictive in 2025, which will once again limit the growth of its GDP.
It is a new headwind for growth in the euro zone and will probably contribute to making the European Central Bank (ECB) more pessimistic. “The economy of the euro zone recovers very slowly, due to low productivity which limits its potential growth and the problems of specific countries such as France and Germany,” adds Rosa Duce, Investment Director of Deutsche Bank in Spain. The strength of the labor market, the rate cuts by the ECB and the increase in real wages They should allow an improvement in economic activity next year. On the contrary, tariffs or the intensification of the trade conflict between Beijing and Washington could dampen that recovery.
S&P Global Ratings already warned a few days ago that after 2024 in which half of the world’s population has gone to the polls, Next year will be marked by political uncertainty. In its annual outlook report ‘Global Credit Outlook 2025’, it maintains that the main risks for the coming months are, precisely, the possibility that geopolitical tensions disrupt supply chains, trade and market confidence; protectionism on the rise; that the rate cut will be slower than expected; that the slowdown in the global economy intensifies or that the tension in the real estate market increases.
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