2024 was very difficult for the eurozone, as its largest economies, the Germany and the Francehave faced political and economic turmoil, meaning neither has a budget for 2025.

According to CNBC, economists say the trajectory for both countries is worrisome, warning that lack of growth, fiscal imbalances and political intransigence could lead to decline and loss of prestige for Europe as a whole.

“The situation today is different from the previous crisis [δημόσιου χρέους] to the extent that Europe’s most acute problems are no longer concentrated in smaller economies such as Greece. Instead, it’s Europe’s two most important economies where they are,” Neil Shearing, chief economist at Capital Economics Group, said in a December analysis.

“Europe faces continued decline without fundamental reforms at its core,” Shearing said, noting that “it is hard to avoid the conclusion that Europe’s future is one of very low growth, continued concerns about fiscal sustainability and a declining position in a world increasingly characterized by superpower competition between the US and China.

Today, neither France nor Germany have a budget for 2025, amid political tensions that ultimately led to the fall of their governments.

New elections are due in Germany in February and analysts are betting on new parliamentary elections in France next summer. Countries are now operating on interim budgets after carrying over the 2024 tax and spending provisions to the current year, and it is uncertain when they will agree on the 2025 budget.

France and Germany face different economic challenges, reflecting both the risks of overspending and underspending.

France had a budget deficit estimated to reach 6.1% and a debt of 112% in 2024, according to the IMF. The new government under Prime Minister Francois Bairro is expected to struggle to convince warring lawmakers on all sides to vote on a 2025 budget, just as his predecessor Michel Barnier did.

Germany, meanwhile, faces early federal elections in February after the governing coalition under Chancellor Olaf Scholz collapsed in the fall over disagreements over economic and fiscal policies. Germany’s problem is reduced spending and underinvestment that have led to declining economic growth.

“In stark contrast, Germany’s problem is overly tight fiscal policy,” noted Capital Economics’ Shearing. “The so-called ‘debt brake’ is significantly reducing its scope for spending, even though Germany’s public debt burden is low. With a stagnant economy, Germany would benefit from a looser fiscal policy,” he noted.

Focus on growth

Economists say the lack of fiscal plans means Europe’s major economies will not be able to fully focus on policies aimed at economic growth, continuing a worrying trend of anemic growth in recent years.

This has been caused by a confluence of events, such as the war in Ukraine and rising energy prices, which have hit energy-intensive industries in Europe, but the situation has also been exacerbated by weaker demand – both in terms of external demand from countries such as China, as well as from weaker consumer demand within Europe – as well as from deeper structural problems such as low productivity growth and lack of competitiveness.

The European Central Bank has sought to boost economic activity in the Eurozone by cutting interest rates, cutting interest rates by 25 basis points in December – the fourth cut this year – to 3%. The central bank said it expects the eurozone economy to grow by 0.7% in 2024 and 1.1% in 2025. Inflation in the bloc was forecast at 2.4% in 2024 and 2.1% this year.

ECB President Christine Lagarde warned at a press conference in December of the possibility of “greater frictions in global trade” and that “weakening confidence could prevent consumption and investment from recovering as quickly as expected.”

Some analysts, such as Kallum Pickering, chief economist at Peel Hunt, told CNBC that the ECB should be bolder and go ahead with further rate cuts in 2025.

Other analysts say rate cuts cannot help with structural problems, such as low productivity growth, and headwinds, such as potential tariffs on European imports from the US, which are likely to be introduced by the president-elect. of the USA Donald Trump.

“Our base case scenario is that Europe will face a pretty tough year in 2025,” Jari Stehn, Goldman Sachs’ chief economist for Europe, told CNBC, with the investment bank forecasting 0.8% growth for the euro zone in 2025 – versus 2.5% for the US over the same period.

“There are many issues … high energy prices, China’s slowdown, political uncertainty, trade tensions are all negative things,” he said. However, investors were still looking for potential bright spots in the region.

“People are wondering whether in Germany, when there are new elections, we could have more fiscal support – maybe, we think there will be some, but we think ultimately it will be limited,” Stehn said.

“People are also wondering if the European consumer could eventually surprise to the upside, as the savings rate is high, there is actually quite a bit of money that could be spent, but again we think there will be some support, but it is unlikely to there will be a big upside surprise,” he added.

Stehn noted that lower interest rates “will help somewhat with saving and stimulating consumer spending, and that’s one reason why we think Europe will indeed grow next year, despite these challenges.”

“But at the same time, I think we also have to be realistic about the headwinds that we’ve talked about, like energy prices, China, structural things. Cutting interest rates isn’t going to fix all of these things,” he concluded.