BRUSSELS — Even before the French and German governments collapsed, Europe’s economy had enough difficulties. Tepid growth and lagging competitiveness versus the U.S. and China. An auto industry that’s struggling. Where to find billions for defense against Russia? And now Donald Trump threatening tariffs.
Solutions will be harder to find while the two countries that make up almost half of the eurozone economy remain stuck in political paralysis well into 2025.
Where once there was the so-called French-German axis to push Europe ahead, now there’s a vacuum. French Prime Minister Michel Barnier resigned Thursday after losing a vote of confidence, and while President Emmanuel Macron will appoint a successor, the new head of government will lack a majority. Elections are not constitutionally permitted until at least June.
Germany’s coalition led by Social Democratic Chancellor Olaf Scholz with the Greens and pro-business Free Democrats fractured in November, triggering an early election on Feb. 23. Talks to form a new government could last into April.
At least Germany’s likely new chancellor, conservative opposition leader Friedrich Merz, appears open to loosening constitutional restrictions on borrowing to enable pro-growth spending and investment, said Mujtaba Rahman, managing director Europe at Eurasia Group.
France, however, could be facing “complete paralysis on the economic question,” Rahman said. “It’s highly unlikely they’re going to get a political equilibrium that has a mandate to implement a credible fiscal course correction.”
“And that’s obviously a problem for Europe because it means the great potential of the European economy is not what it otherwise should be, because you don’t have France and Germany firing on all cylinders,” he said.
Then there’s Europe’s lagging business environment, dissected by former European Central Bank head Mario Draghi in a report that contains recommendations such as common borrowing to support public investment; EU-wide industrial policy; and integrating financial markets to help startups raise capital. Yet “nothing can move in Europe without Franco-German alignment,” Rahman said.
Meanwhile, Europe’s auto industry has sought a review of tough EU emissions standards in 2025 instead of 2026, saying slackening demand for electric cars means they won’t be able to avoid heavy fines and that the money would be better used to develop new electric vehicles.
Anne-Laure Delatte, a French economist and head of research at the National Center for Scientific Research, said financial markets remain cautious but are not overly alarmed by France’s political instability. But economic weakness in France and Germany could have broader implications for the European Union.
“This could either weaken Euro