The two main heads of the European Union, France and Germany, are mired in a deep polarization that further alters plans to recover their weakened economies, something that generates many concerns within the EU.
Both countries not only have in common the weakness of their respective GDPs. They are also mired in a very similar political instability, impossible to solve in the short term due to the application of the same strategy, that which establishes a cordon sanitaire around the extreme right, to avoid any agreement with this type of formations.
In the case of Germany, the dead end into which German politicians have found themselves is especially evident. Despite the failure of the Scholz Government, the truth is that its rivals, the Christian Democrats of the CDU, have very few options to govern alone, and would need the support, in addition to the Liberal Party, of the Alternative for Germany (AfD). But it is an impossible pact, given that the CDU supports the cordon sanitaire that isolates the AfD.
Faced with this situation, the only escape route is the formation in Berlin of an Executive even more polarized towards the left, which would bring together the social democrats of the still Chancellor Scholz, the post-communists of Die Linke and the Greens.
In France, Emmanuel Macron’s party cannot aspire to any type of support from Marine Le Pen’s far-right either. It is thus very possible that the new Government will also have to lean to the left, the option that the head of state has been avoiding for months even though it was that ideological option that won the legislative elections last July.
This horizon is even more compromising in the case of Paris than in Berlin itself. It is not in vain that France faces debt and public deficit problems that are much more serious than those of Germany.
Such large imbalances can only be corrected by cutting public spending, given that the low growth of the French GDP is incapable of offering any help. Now, a left-wing government will reject on principle any adjustments in the public sector, and will lead to a greater imbalance in France’s public finances.
Macron has this enormous problem with his accounts that, added to pyrrhic growth, even suggests the possibility of the Gauls entering a financial crisis. It is impossible for both countries to be able to approve the 2025 accounts, which leads Berlin and Paris to economic and institutional paralysis, well into next year. In the German case, the elections are called for February 23 and it seems that no one will get majorities to name a Government.
For its part, in France the most ephemeral government in its history has just fallen. The former Prime Minister, Michel Barnier, lasted only half a year in office and last Thursday he resigned after being censured by the National Assembly for his budget project.
Everything thus leads to a horizon marked by moderate growth and fiscal uncertainty. This is how you can summarize France’s year in macroeconomic terms. In the recently published World Economic Observatory of the Organization for Economic Cooperation and Development (OECD), they predict that the neighboring country will grow by a timid 1.1% in 2024, before decreasing to 0.9% in 2025 and remaining at 1% next year. “The temporary boost to private consumption in the third quarter of 2024 due to the Olympic Games is expected to recover from 2025, gaining momentum as disinflation and purchasing power increases,” experts say.
On the other hand, as the previous Executive led by Michel Barnier – the brief one – warned that the deficit is expected to increase to 6.1% of GDP this year and the projections for the coming years assume a “lesser consolidation effort , with a structural impact that adjusts the primary balance of 1% of GDP by 2025 and 0.5% of GDP in 2026,” say the experts of the multilateral organization.
Likewise, they project that the debt will remain high, specifically up to 120% of GDP in 2026. That is, France’s overdraft will be very far from complying with European mandates that say that the deficit must be placed below 3%, especially now. that the country lacks budgets and that the President of the Republic, Emmanuel Macron, is going to promulgate a Special Law that extends the 2024 budgets to be able to minimally operate the country while waiting to appoint to a new prime minister who proposes a new public accounts project.
The OECD recommendations have been prepared without taking into account the current situation in the neighboring country.
Bloomberg experts emphasize that the economic implications of not having approved budgets and practically a year of paralysis are diverse. On the one hand, if the Government makes concessions of approximately 10 billion euros in 2025 (excluding delays in the indexation of pensions and increases in taxes on electricity and employers) to ensure support from the opposition and gradually return the deficit to the pre-crisis point in 2029 “the debt will trend upwards.”
At the same time, if the country continues without budgets for a long time, they predict that this will mean a decrease in its growth of 0.5% for next year.
In the German case, the lack of budgets and the constitutional mechanism of debt control in Berlin is making its industry increasingly less competitive which, added to high energy prices and Chinese competition, completely hampers the economy. of Europe’s locomotive, even reaching negative territory in 2023.
Although everything indicated that this year would end again in recession, the OECD speaks of “stagnation” in 2024 for the German economy, with practically zero growth (0%) and a meager recovery of 0.7%. in 2025. By 2026 the data would improve timidly, with GDP growth of 1.2% at the end of the year.
The organization points out that low inflation and increased wages will be a support for consumption, which will be what will save Europe’s locomotive from falling into the terrain of negative growth this year.
In the medium term, “uncertainty remains high” after the failure of the 2025 budget negotiations and the fall of the traffic light coalition. In the long term, they recommend that Berlin boost investment for the country’s green and digital transformation and divert “the tax burden from labor towards capital income and wealth.”
The south supports Europe
The Franco-German axis has always been the main support of the Eurozone, while the south of the bloc, made up of Spain, Italy, Greece and Portugal, were the most lagging economies of the Old Continent. In fact, during the 2010 debt crisis, this group of countries was called the PIGS (Portugal, Ireland, Greece and Spain -Spain in English-), an acronym that in Shakespeare’s language means “pigs.” At that time it was “the Europe of two speeds.”
The tables have now turned a bit. While in 2010 the profitability of the ten-year Greek bond compared to the German one was practically considered a “junk bond”, that is, it was not profitable. Now the French 10-year bond has reached the same profitability and even lower than the Greek one.
At the end of November, the political uncertainty that devastated – and continues to plague – France, caused the yield of the ten-year French bond to fluctuate between 2.964% and 3.025%, while that of the Greek country moved between 2.973% and 3.008%.
Former French economy minister Antonie Armand said in a television interview that “France is not Greece.” Ensuring that France has a much greater economy, employment situation, activity, attractiveness, economic and demographic power.
But the truth is that France is not Greece in the sense of public accounts. While the Gauls are adrift in debt and deficit, the forecasts for Athens are completely the opposite.
Since 2020, they have reduced liabilities by 40 points and the budget presents a deficit of 1.5%. Likewise, the IMF Fiscal Monitor, published in October of this year, predicts that Greece will manage to reduce its deficit to 0.9% next year and will remain stuck at 1.5% until 2029. For its part, the debt will will be stuck at 145%.
For its part, Spain now stands as the developed economy that will grow the most this year. In the OECD they have revised upwards the growth of our country for this year to 3% and places that of 2025 at 2.3%.
In fiscal terms, the organization accepts the Government’s expectations as good. They predict that the deficit will end the year at 3% of GDP and that it will be corrected to 2.5% in 2025 and continue to fall to 2.1% in 2026. Instead, they argue that an “effective application” is “crucial” “of the fiscal consolidation plan, sent by the Government on October 15 and endorsed by the European Commission, “to comply with community rules, put the debt on a downward trajectory (currently it is around 102% of GDP) and free up resources for future priority expenditures, especially given the aging of the population.
Portugal, for its part, the conservative government of Luís Montenegro, has just approved a budget project with the largest tax reduction in history.
The key to all these tax bonuses comes from a budget surplus of 0.4% of GDP for this year and 0.3% in 2025. Added to a good performance of the economy, which will grow 1.8% in 2024 and 2.1% in the next financial year, according to Government forecasts. The growth forecasts of the Portuguese for this year and next by the OECD are quite aligned with those of the Government, they foresee a slowdown of 1.7% in 2024 and a stagnation of 2% in 2025.
For its part, Ireland can be called the great winner of the PIGS. After years of cuts and adjustments, the country was able to stand on its own without the need for external aid.
Although this year the OECD predicts that it will enter a recession (-0.5%), they foresee a strong rise in GDP next year, up to 3.7%, sustained during 2026, which will close with an expansion of 3 .5%.
Italy, the reflection of Germany
The case of Italy is more complex, since the transalpine country has a strong dependence on the German economy. Trade between both countries is very powerful and the automotive sector is one of the most exposed to these economic fluctuations. Specifically, manufacturers of mechanical components and industrial machinery. Experts estimate that 20% of a German car is made up of components made in Italy.
Likewise, the transalpine country is going through a significant financial problem due to the Superbonus implemented by the Georgia Meloni government.
Italian growth will be very low, the OECD predicts that it will remain at 0.5% at the end of 2024 and by 2025 they speak of “a modest rebound” to 0.9%. Regarding public accounts, the debt will remain stagnant at around 146% of GDP between now and 2026. On the other hand, the deficit will be corrected below the 3% threshold in 2026.
The Eurozone is in low times and from Brussels they are doing everything possible to increase competitiveness in the face of a year that is expected to be turbulent geopolitically.
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