Is Europe’s Economic Engine Stalling?
As the global political stage shifts with the incoming administration in the United States, concerns are brewing in Europe about a potential trade war. Adding to the anxiety are economic struggles faced by the continent’s two largest economies, Germany and France. While Germany braces for a second consecutive year of stagnant growth, France is projected to see a meager growth rate of less than 1% come 2025.
The question on many minds is this: is Europe’s economic stagnation a result of insufficient government spending, or is it the fault of bloated welfare states? Some argue that simple measures like increased deficits or lower interest rates are insufficient to solve the crisis, referencing American economists like Carmen M. Reinhart.
"The sluggish, indebted economies of Europe and Japan are prime examples" of how excessive debt can drag down growth, Reinhart and others have argued, citing their research published in 2010 and 2012.
France, a model often admired by American and British progressives for its expansive social safety net, provides a stark example. Aggressive stimulus policies have pushed its budget deficit to 6% of its overall economic output, while its national debt has ballooned to 112% of GDP, a significant jump from 95% in 2015. These mounting financial pressures triggered widespread protests across France in 2023 following President Emmanuel Macron’s controversial decision to raise the retirement age from 62 to 64.
“French President Emmanuel Macron faced widespread protests over his decision to raise the retirement age from 62 to 64, a move that… barely scratches the surface of the country’s fiscal challenges,” the piece highlighted.
While a positive step, this reform barely begins to address France’s deep-seated financial issues.
Indeed, even as France continues to grapple with its debt exceeding 112% of GDP, a warning from European Central Bank President Christine Lagarde echoes through the halls of power. France’s economic trajectory, she stated, is wildly unsustainable without major, far-reaching reforms. Debt markets have seemingly taken notice, with France now paying a higher interest rate premium than Spain.
Across the border in Germany, the situation brings a different set of challenges. With a more manageable debt-to-GDP ratio of 63%, Germany remains in a better position financially. However, its infamous "debt brake," which places a strict limit on annual deficits,
"Germany has ample room to revitalize its crumbling infrastructure and improve its underperforming education system," argued one analyst. "If implemented effectively, such investments could generate enough long-term growth to offset their costs."
hinders its ability to respond flexibly to economic downturns. As one German official put it, “Germany’s ‘debt brake’, which caps annual deficits at 0.35 percent of GDP, has proven too inflexible… the next government must find a way to work around it.”
What’s needed now is a serious conversation about solutions.
Germany, known for its efficient labor market, could potentially pave the way forward. Reinstatement of key elements from the "Hartz reforms" of the early 2000s, which significantly boosted Germany’s flexibility and dynamism, could be a starting point.
However, a recent leftward shift in German economic policy has undone much of this progress, raising questions about the country’s ability to deliver on critical infrastructure projects like Berlin’s Brandenburg Airport, a project plagued by delays and budget overruns, ultimately opening a decade late and costing three times the original estimate.
The world watches as Europe grapples with these economic crossroads.
