Europe’s economy faces continued decline, economists say

Last year was a very turbulent year for the eurozone, which includes its two largest economies, Germany and France, with political and economic turmoil meaning neither has yet developed a budget for 2025. .

Economists say the path forward for both countries is worrying, warning that lack of growth, fiscal imbalances and political intransigence could lead to decline and loss of standing for Europe as a whole. .

Group chief economist Neil Shearing said: “Today’s situation is different from the earlier (sovereign debt) crisis in that Europe’s most serious problems are no longer concentrated in small economies like Greece. Rather, it is Europe’s two most important economies that are suffering. That’s what Capital Economics said in a December analysis.

Mr Shearing said: “Without core fundamental reforms, Europe faces continued decline,” adding that without this, “Europe’s future is one of very low growth and fiscal unsustainability.” “It is difficult to escape the conclusion that gender concerns will continue and the fiscal crisis will continue.” A sense of an increasingly diminished position in a world increasingly characterized by superpower rivalry between the United States and China. ”

As it stands, neither France nor Germany has drawn up a budget for 2025 amid the political infighting that ultimately brought down their governments.

New elections are scheduled in Germany in February, and analysts are betting on new parliamentary elections in France next summer. Both countries are currently operating on interim budgets with tax and spending provisions for 2024 carried over to this year, but it is unclear when either side will agree on a 2025 budget.

France and Germany are grappling with different economic challenges, reflecting the dangers of both overspending and underspending.

France’s budget deficit is estimated to reach 6.1%, and the debt mountain is expected to reach 112% in 2024, according to the IMF. The new government led by Prime Minister François Bayrou, like his predecessor Michel Barnier, is expected to struggle to bring together lawmakers from opposing parties to pass the 2025 budget.

Meanwhile, Germany is facing a snap election in February after the coalition government led by Chancellor Olaf Scholz collapsed in the fall due to disagreements over economic and budgetary policies. Germany’s problem is a lack of spending and investment that has led to slow economic growth.

“In stark contrast, Germany’s problem is excessive fiscal austerity,” said Capital Economics’ Shearing.

“Despite Germany’s low public debt burden, the so-called ‘debt brake’ significantly reduces the room for deficit spending.Amid economic stagnation, Germany would benefit from easing fiscal policy. “And this will almost certainly suck in imports from other countries,” he said, “which would support the growth (and thus the fiscal health) of France and Italy.”

Economists say a lack of budget planning means Europe’s major economies cannot focus enough on policies aimed at expanding their economies, continuing a worrying trend in recent years in poorer economies.

This is a combination of events such as the Ukraine war and rising energy prices, which are hurting Europe’s energy-intensive industries, but also exacerbated by weak demand on both the external and external fronts. The country also faces serious structural problems, including declining demand from countries such as China, sluggish consumer demand within Europe, and low productivity growth and a lack of competitiveness.

The European Central Bank is trying to stimulate economic activity in the euro zone by lowering interest rates, cutting interest rates by 25 basis points in December to bring the key policy rate to 3% (the fourth rate cut this year). The central bank forecast that the growth rate of the euro zone economy will reach 0.7% in 2024 and 1.1% in 2025. Inflation in the euro area is expected to be 2.4% in 2024 and 2.1% this year.

ECB President Christine Lagarde said at a press conference in December that risks to economic growth “remain tilted to the downside”, warning of the possibility of “intensification of frictions in global trade” and “deteriorating confidence.” “This could hinder a rapid recovery in consumption and investment.” As expected. ”

Some analysts, including Peel Hunt chief economist Callum Pickering, told CNBC that the ECB should be bolder and cut rates even further in 2025.

It also said that interest rate cuts would not solve structural problems such as low productivity growth or headwinds such as tariffs on U.S. imports of European goods that President-elect Donald Trump is likely to introduce. There is also a view.

“Our base case is that Europe faces a fairly difficult year in 2025,” Jari Steen, chief European economist at Goldman Sachs, told CNBC. He said he expected growth in the euro area to be 0.8% (compared to 2.5% in the euro area). United States, same period.

“There are a lot of issues…high energy prices, slowing China, political uncertainty, trade tensions are all negatives,” he told CNBC’s “Squawk Box Europe.” However, investors were still looking for potential bright spots in the region.

“People are asking whether they will receive more financial support when new elections are held in Germany. Perhaps there will be some, but ultimately it will be limited. ,” Stern said.

“People are also asking whether European consumers could end up seeing an unexpected turnaround. Savings rates are high and there’s actually quite a bit of money (to spend), but again some support is needed. “Maybe, but it’s unlikely.”It would be a big upside surprise. ”

Steen said lower interest rates “will go some way to boosting savings and consumer spending. That’s one of the reasons why I actually think Europe will grow next year despite these challenges.”

“But at the same time, I think we need to be realistic about a lot of the headwinds that we’ve been talking about, like energy prices, China, structural issues, etc. Cutting rates won’t solve them all,” he said. Ta.

“Ultimately, it’s going to be a tough environment.”