The EU’s engine, Germany and France, are without a stable government when Donald Trump takes office as president. There are also massive problems in economic and financial policy.
Long before his election as president, Donald Trump threatened the Europeans: He would impose high tariffs on their products, reduce support for Ukraine, and renegotiate the funding of the NATO military alliance. In a few days, on January 20, 2025, he will take office. Given the political turmoil ahead, it would be important for the 27 countries of the European Union (EU) to demonstrate unity and speak with one voice. But when Trump becomes president, Germany and France will not even have a stable government. The two countries are often referred to as the “engine of the EU,” having the largest populations and highest economic output in the union.
GOVERNMENTS WITHOUT MAJORITY IN BOTH COUNTRIES
In Germany, Chancellor Olaf Scholz’s government, made up of the Social Democrats and the Greens, no longer has a majority in parliament. Only new elections on February 23, 2025, can ensure stable conditions again. According to polls, no party will achieve an absolute majority, and coalition negotiations are considered certain to take place after the elections. It will probably take at least two months after Trump takes office for Germany to have a government capable of functioning.
In France, the phase of instability will last longer: according to the constitution, new elections will not be allowed until July 2025. Until then, the uncertainties of the majorities resulting from the last elections in July 2024 are in force. “The situation is very unstable. There is no majority in parliament. And the three blocs do not want to work together,” Claire Demesmay told DW. The political scientist is a professor at the Institut d’études politiques de Paris (Science Po) and a researcher at the Marc Bloch Center, the German-French center for social sciences in Berlin.
MONEY FIGHTS IN BOTH COUNTRIES
It was conservative Prime Minister Michel Barnier who failed in December in his attempt to get a draft budget through parliament. The government fell on December 4 when MPs withdrew their confidence in it. On December 13, President Macron appointed centrist Francois Bayrou as prime minister and tasked him with forming a new government. In Germany, the government also fell due to a budget dispute. Both France and Germany entered the new year without adopting budgets. “What makes the situation even worse is that when it comes to public finances, the two largest economies in the EU are going in completely opposite directions,” says Carsten Brzeski, chief economist for the eurozone at ING Bank, in an interview with DW. France has a lot of debt and will have to save money, while Germany will have to spend more money and invest in its dilapidated infrastructure. “France should become a little more German and Germany a little more French,” according to Brzeski.
DEBT AND DEBT RESTRAINT
After Greece and Italy, France now has the third-highest national debt in the eurozone, while Germany is just above the EU ceiling. When it comes to budgets, the differences could not be greater. In Germany, the deficit is below the EU limit of three percent of economic output. This is also due to the so-called debt brake. This rule in Germany’s basic law sets strict limits on new debt. The limits are too tight, say opponents of the debt brake and call for these limits to be relaxed. But this requires a two-thirds majority in the next Bundestag.
In France, the new Prime Minister Bayrou is struggling with the same problems as his predecessor Barnier. He wanted to save around 60 billion euros with a mixed strategy – of spending cuts and tax increases, because the gap in the French budget is huge.
Bayrou’s dilemma: To comply with EU rules for eurozone countries, he needs to save money. But to pass a budget with savings in parliament, he needs a government with a solid majority. But that won’t be possible until at least the summer of 2025. “It’s like squaring the circle,” says Claire Demesmay. The next blow came in mid-December: ratings agency Moody’s downgraded its rating of France’s creditworthiness, making it more expensive to take on new debt. According to Moody’s, France’s “political fragmentation” is weakening its fiscal position and preventing comprehensive measures to reduce its huge deficit.
The French economy is not doing any better either. The central bank still expects growth of 1.1 percent for the current year. However, for 2025, it lowered its forecast to 0.9 percent, citing “increasing uncertainty” both inside and outside France.
Germany would be happy with such figures. The Bundesbank expects economic output to contract by 0.2 percent in 2024. It would be the second consecutive year of recession. Things will look a little better in 2025. The Bundesbank sees a slight increase of 0.2 percent. In other words: the German economy is stagnating. The biggest factor of uncertainty is “probably the rise in global protectionism,” experts write.
THE APPLE OF DISPUTES, FREE TRADE
From the German perspective, a new free trade agreement could provide some breathing room – for example between the EU and the South American countries of Argentina, Brazil, Uruguay and Paraguay. The so-called Mercosur agreement would create the world’s largest free trade area with around 700 million people. The EU Commission concluded the negotiation phase in December, it is still unclear whether and how the agreement will be ratified by the member states.
The only thing that is certain is that Germany and France are not moving in the same direction here. France has already made it clear that it is against a comprehensive free trade agreement. “The trade issue is a classic bone of contention between Germany and France,” says political scientist Demesmay. “In France, people are much more critical of large trade agreements than in Germany. There is a feeling that the future of the country is no longer in their hands – and that is politically dangerous.”
HOW TO DEAL WITH TRUMP?
The lack of unity could become a problem when Donald Trump is elected US president again. Even during his first term in office (2017-2020), Europeans often seemed confused and unable to cope with the president’s constant new announcements and tweets. Europeans are better prepared today than they were eight years ago, says ING chief economist Brzeski. But they would do well not to simply react to what Trump is doing.
“Instead, they should focus on their domestic economy, invest in their infrastructure and push forward with structural reforms.” Here, close coordination is essential: “We know from the past: if the two largest economies do not work together and do not advance the European project, progress in Europe will be very slow,” Brzeski emphasizes. (DW)
