Europe is facing growing political and economic uncertainty as its two largest economies, Germany and France, struggle with internal woes that threaten the stability of the entire eurozone. With both countries seeing sharp declines in business activity and ongoing political challenges, the outlook for recovery looks increasingly bleak.
The latest data on business activity, released in September, paints a grim picture for the European economy. In Germany, the HCOB flash composite purchasing manager’s index (PMI), a key indicator of business activity in manufacturing and services, fell to 47.2, its lowest level in seven months. France fared no better, with its composite PMI dropping to an eight-month low of 47.4. Any figure below 50 indicates contraction, signaling that both economies are shrinking.
This slowdown is part of a broader trend across the eurozone, where business activity decreased for the first time in seven months, dropping from 51 in August to 48.9 in September. The PMI figures, widely regarded as a gauge of economic health, suggest that Europe’s traditional economic engines—Germany and France—are struggling to recover from the shocks of the past few years.
Germany’s Ongoing Economic Struggles
Germany, once the powerhouse of Europe, has been hit particularly hard. After years of robust growth driven by its export-oriented economy, the country now faces deepening economic challenges that many analysts believe are structural rather than cyclical. “The German economy continues to struggle for momentum, fueling concern that the headwinds are structural rather than just cyclical,” said Greg Fuzesi, euro area economist at J.P. Morgan, in a recent report titled “Checking in on the German Patient.”
Germany’s woes have been attributed to several factors, including higher energy prices, the economic transformation required for the green transition, and increased competition from China, particularly in the automotive sector. The aging population and underinvestment in public infrastructure have also been cited as long-term issues that are weighing on the country’s economic prospects.
According to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB), Germany is on the brink of a “technical recession,” with GDP expected to fall by 0.2% in the third quarter. “In the second quarter, GDP already shrank at a rate of 0.1%. There is still some hope that the fourth quarter will be better as higher wages combined with lower inflation should boost not only real income but also consumption, supporting domestic demand,” de la Rubia said. However, the outlook remains uncertain, with many economists predicting that Germany’s challenges will persist well into 2024.
Once hailed as Europe’s economic poster child, Germany is now often referred to as the "sick man" of Europe, a title that reflects the growing concerns over its long-term growth potential. With weak demand for its exports, particularly in key markets like China, and domestic consumption struggling to pick up the slack, the country’s prospects for recovery seem limited.
France Faces Political Instability Amid Economic Challenges
France, the eurozone’s second-largest economy, is grappling with its own set of challenges. Following an inconclusive snap election earlier this year, a new government has only just been formed under Prime Minister Michel Barnier. Barnier, a veteran Conservative and former Brexit negotiator, now faces the daunting task of addressing the country’s mounting fiscal problems.
Barnier’s first major challenge is to draft a budget for 2025, which must be submitted to France’s National Assembly in early October. At the same time, the French government must present a plan to reduce its deficit to the European Commission, or risk facing disciplinary action from the EU for breaching budgetary rules. France’s budget deficit has been deemed "excessive" by the EU, and the country has already asked for an extension on its deadline to submit debt reduction proposals.
Compounding these economic issues is the ongoing threat posed by the far-right National Rally (RN) party, led by Jordan Bardella and Marine Le Pen. The far-right opposition has gained significant ground in recent elections and could threaten the stability of Barnier’s government. Analysts believe that Barnier’s coalition, which has faced resistance from both the far-right and far-left, is unlikely to last beyond a year. This political instability could delay much-needed economic and budgetary reforms, further exacerbating France’s fiscal problems.
“This will cause France’s fiscal deficit and debts to worsen,” said David Roche, president of Quantum Strategy. “France will defy the EU on the Excessive Deficit Procedure. Political paralysis now has both France and Germany by the throat.” Roche predicts that the far-right will likely wait until the one-year anniversary of the legislative elections to bring down the Barnier government, pushing the country into further political and economic uncertainty.
Far-Right Gains in Germany and France
The rise of far-right parties is not limited to France. In Germany, the far-right Alternative for Germany (AfD) party has seen increasing support, particularly in recent state elections. Public dissatisfaction with immigration policies, economic stagnation, and the government’s handling of the Ukraine crisis has fueled the AfD’s popularity. Chancellor Olaf Scholz’s center-left Social Democratic Party (SPD) narrowly held onto power in Brandenburg in the latest regional election, just barely managing to keep the AfD at bay.
However, the AfD’s rise has significant implications for Germany’s political landscape. The party won its first state election in Thuringia earlier this month and came a close second in Saxony. The increasing support for the AfD reflects a broader trend of growing populist and anti-establishment sentiment across Europe’s largest economies.
Ian Bremmer, founder and president of the Eurasia Group, noted that the political center in both France and Germany is “imploding,” leaving room for the extremes to gain ground. “In France, the far left and far right outperformed in the snap parliamentary election called by President Emmanuel Macron,” Bremmer said, adding that the exclusion of these groups from government is only fueling their constituencies’ anger.
Bremmer also pointed out that similar trends are emerging in Germany, where the AfD’s platform of anti-immigration, economic populism, and opposition to support for Ukraine is gaining traction among disillusioned voters. He warned that these developments could pose a significant risk to the stability of the European Union, particularly as domestic policies in both France and Germany increasingly diverge from the EU’s broader goals.
Broader Implications for Europe
The economic and political instability in Germany and France has far-reaching implications for the rest of Europe. As the two largest economies in the eurozone, their struggles are likely to have a ripple effect across the continent. Analysts are increasingly concerned that the economic downturn in these countries could push the eurozone as a whole into recession, particularly as political uncertainty continues to undermine investor confidence.
Andrew Kenningham, chief Europe economist at Capital Economics, highlighted the broader risks to Europe’s economy. “The big decline in the euro-zone Composite PMI suggests that the economy is slowing sharply, that Germany is in recession, and that France’s Olympics boost was just a blip,” he said.
With both countries grappling with deep-seated economic and political challenges, the road to recovery looks uncertain. For Europe to regain its economic footing, both Germany and France will need to address their internal issues, while also finding a way to navigate the broader geopolitical and economic pressures facing the continent. The rise of populism and political fragmentation only adds to the complexity of the challenges ahead.
(Source:www.cnbc.com)
The latest data on business activity, released in September, paints a grim picture for the European economy. In Germany, the HCOB flash composite purchasing manager’s index (PMI), a key indicator of business activity in manufacturing and services, fell to 47.2, its lowest level in seven months. France fared no better, with its composite PMI dropping to an eight-month low of 47.4. Any figure below 50 indicates contraction, signaling that both economies are shrinking.
This slowdown is part of a broader trend across the eurozone, where business activity decreased for the first time in seven months, dropping from 51 in August to 48.9 in September. The PMI figures, widely regarded as a gauge of economic health, suggest that Europe’s traditional economic engines—Germany and France—are struggling to recover from the shocks of the past few years.
Germany’s Ongoing Economic Struggles
Germany, once the powerhouse of Europe, has been hit particularly hard. After years of robust growth driven by its export-oriented economy, the country now faces deepening economic challenges that many analysts believe are structural rather than cyclical. “The German economy continues to struggle for momentum, fueling concern that the headwinds are structural rather than just cyclical,” said Greg Fuzesi, euro area economist at J.P. Morgan, in a recent report titled “Checking in on the German Patient.”
Germany’s woes have been attributed to several factors, including higher energy prices, the economic transformation required for the green transition, and increased competition from China, particularly in the automotive sector. The aging population and underinvestment in public infrastructure have also been cited as long-term issues that are weighing on the country’s economic prospects.
According to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB), Germany is on the brink of a “technical recession,” with GDP expected to fall by 0.2% in the third quarter. “In the second quarter, GDP already shrank at a rate of 0.1%. There is still some hope that the fourth quarter will be better as higher wages combined with lower inflation should boost not only real income but also consumption, supporting domestic demand,” de la Rubia said. However, the outlook remains uncertain, with many economists predicting that Germany’s challenges will persist well into 2024.
Once hailed as Europe’s economic poster child, Germany is now often referred to as the "sick man" of Europe, a title that reflects the growing concerns over its long-term growth potential. With weak demand for its exports, particularly in key markets like China, and domestic consumption struggling to pick up the slack, the country’s prospects for recovery seem limited.
France Faces Political Instability Amid Economic Challenges
France, the eurozone’s second-largest economy, is grappling with its own set of challenges. Following an inconclusive snap election earlier this year, a new government has only just been formed under Prime Minister Michel Barnier. Barnier, a veteran Conservative and former Brexit negotiator, now faces the daunting task of addressing the country’s mounting fiscal problems.
Barnier’s first major challenge is to draft a budget for 2025, which must be submitted to France’s National Assembly in early October. At the same time, the French government must present a plan to reduce its deficit to the European Commission, or risk facing disciplinary action from the EU for breaching budgetary rules. France’s budget deficit has been deemed "excessive" by the EU, and the country has already asked for an extension on its deadline to submit debt reduction proposals.
Compounding these economic issues is the ongoing threat posed by the far-right National Rally (RN) party, led by Jordan Bardella and Marine Le Pen. The far-right opposition has gained significant ground in recent elections and could threaten the stability of Barnier’s government. Analysts believe that Barnier’s coalition, which has faced resistance from both the far-right and far-left, is unlikely to last beyond a year. This political instability could delay much-needed economic and budgetary reforms, further exacerbating France’s fiscal problems.
“This will cause France’s fiscal deficit and debts to worsen,” said David Roche, president of Quantum Strategy. “France will defy the EU on the Excessive Deficit Procedure. Political paralysis now has both France and Germany by the throat.” Roche predicts that the far-right will likely wait until the one-year anniversary of the legislative elections to bring down the Barnier government, pushing the country into further political and economic uncertainty.
Far-Right Gains in Germany and France
The rise of far-right parties is not limited to France. In Germany, the far-right Alternative for Germany (AfD) party has seen increasing support, particularly in recent state elections. Public dissatisfaction with immigration policies, economic stagnation, and the government’s handling of the Ukraine crisis has fueled the AfD’s popularity. Chancellor Olaf Scholz’s center-left Social Democratic Party (SPD) narrowly held onto power in Brandenburg in the latest regional election, just barely managing to keep the AfD at bay.
However, the AfD’s rise has significant implications for Germany’s political landscape. The party won its first state election in Thuringia earlier this month and came a close second in Saxony. The increasing support for the AfD reflects a broader trend of growing populist and anti-establishment sentiment across Europe’s largest economies.
Ian Bremmer, founder and president of the Eurasia Group, noted that the political center in both France and Germany is “imploding,” leaving room for the extremes to gain ground. “In France, the far left and far right outperformed in the snap parliamentary election called by President Emmanuel Macron,” Bremmer said, adding that the exclusion of these groups from government is only fueling their constituencies’ anger.
Bremmer also pointed out that similar trends are emerging in Germany, where the AfD’s platform of anti-immigration, economic populism, and opposition to support for Ukraine is gaining traction among disillusioned voters. He warned that these developments could pose a significant risk to the stability of the European Union, particularly as domestic policies in both France and Germany increasingly diverge from the EU’s broader goals.
Broader Implications for Europe
The economic and political instability in Germany and France has far-reaching implications for the rest of Europe. As the two largest economies in the eurozone, their struggles are likely to have a ripple effect across the continent. Analysts are increasingly concerned that the economic downturn in these countries could push the eurozone as a whole into recession, particularly as political uncertainty continues to undermine investor confidence.
Andrew Kenningham, chief Europe economist at Capital Economics, highlighted the broader risks to Europe’s economy. “The big decline in the euro-zone Composite PMI suggests that the economy is slowing sharply, that Germany is in recession, and that France’s Olympics boost was just a blip,” he said.
With both countries grappling with deep-seated economic and political challenges, the road to recovery looks uncertain. For Europe to regain its economic footing, both Germany and France will need to address their internal issues, while also finding a way to navigate the broader geopolitical and economic pressures facing the continent. The rise of populism and political fragmentation only adds to the complexity of the challenges ahead.
(Source:www.cnbc.com)
