Germany and France face financial crisis

The rise of hard-right and hard-left parties in France and Germany reflects a deepening crisis within the eurozone.

Rachel Reeves is facing challenges as the UK economy shrinks for the second consecutive month, and inflation remains stubbornly high. The first Labour budget in over 14 years received a lukewarm response. However, compared to France, where Emmanuel Macron struggles to pass his measures, and Germany, where Olaf Scholz recently faced a no-confidence defeat, Reeves’ situation appears more stable. Labour’s commanding parliamentary majority shields it from similar disruptions.

While peripheral countries like Greece, Ireland, and Portugal suffered during the financial meltdown 15 years ago, the crisis has now spread to Europe’s core economies. Although France is not another Greece—and the European Central Bank (ECB) is better prepared to intervene—a sense of déjà vu looms. Warning signs reminiscent of the pre-2008 global financial crisis are emerging, yet they’re being ignored, just as they were in the past. Scholz’s precarious position in Germany’s snap election and Macron’s struggles to pass a full budget highlight looming political and economic instability.

At the heart of the problem are Europe’s stagnant economies and generous welfare systems, which were sustainable in postwar decades when growth was strong and demographics were favorable. Baby boomers ensured a high worker-to-retiree ratio, and Europe could focus on welfare spending thanks to the U.S. subsidizing defense costs during the Cold War. Today, however, Europe faces low birth rates, an aging population, and the financial burden of increasing defense spending due to the Russian threat.

More critically, economic growth has stalled. Germany’s economy has stagnated since the Covid-19 pandemic began, while France’s annual growth rate hovers under 1%. This sluggish growth fuels voter discontent, as seen with Scholz, while attempts to balance budgets through tax hikes and benefit cuts—Macron’s current approach—are equally unpopular.

The eurozone has failed to fulfill its original promise. When launched 25 years ago, the single currency was expected to accelerate growth and narrow the economic gap with the U.S. Instead, growth has slowed, and the gap has widened. Flaws in the euro’s design—like its one-size-fits-all model and absence of a common fiscal policy—were apparent from the outset. Neoliberal assumptions that low inflation and balanced budgets would drive prosperity have proven inadequate.

The consequences of this failure are significant. Europe, particularly Germany, has been slow to adapt, clinging to traditional industries like fossil-fuel-based car manufacturing and falling behind in digital innovation. Mario Draghi’s recent report on Europe’s competitiveness diagnoses these issues but offers few actionable solutions.

Interestingly, closer integration within Europe—such as the creation of the single market in 1985 and the euro’s launch in 1999—has been followed by weaker economic performance. While some argue that more integration is needed, Draghi’s recommendation for a top-down EU-wide solution appears misguided. The push for “more Europe” has tested its limits, and mainstream parties are losing support. It might be time to consider a step back from further integration before Europe faces even deeper turmoil.

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