Latest News

Latest News

France And Germany: Europe In Trouble

The European malaise is profound. The economic decline is palpable, and Europe becomes incidental on a global chess board dominated by the United States and the global South.

By EC Invest

Discontent is growing. After months of strong turbulence, France has just ended the shortest government of the Fifth Republic and will remain ungovernable until the next legislative elections next summer. In Germany, the outgoing coalition failed to offer a clear strategy for a country at a turning point that precipitated new parliamentary elections. The outlook is bleak.

Different problems, same unease

While France and Germany face a deep malaise, the causes are different. The economy of services par excellence, France has suffered less than Germany in recent years, and Paris boasts. But most remarkable, France only knows how to grow if it gets into debt. While its average growth has been, since 2020, of 0.8% (compared to 0.1% for Germany), the French budget deficit was 6.4% on average, compared with less than half (2.9%) in Germany. France, therefore, continues to spend a lot - government spending reaches 57% of GDP compared with 48% in Germany - and only sometimes in the best way since the growth gap is limited. The economic multiplier effect of public spending, generating more growth than it costs, is not there.

In Paris, the debate on the place of the state in the economy and how to make it less expensive and sustainable over time continues to dominate attention. For real strategic vision issues, such as the competitiveness of the economy and its ability to generate enough wealth so that France can preserve its standard of living, it prefers easy solutions, such as protectionism, By making it look like building barriers to the rest of the world will solve all problems with a magic wand.

Yet, like the rest of Europe, France remains dependent on foreign trade, and the lack of Chinese demand is enough to undermine its most significant stock market. If nothing is done, the country’s economic decline will eventually render the French state unable to provide the services that the French expect.

ECI FRANCE and GERMANY Europe in Trouble GRAPHIC 920x320

Germany: the end of an era

For Germany, the problems are different. The reforms France is trying to push through have been implemented across the border for about 20 years, including the Schroeder era. Very unpopular, they laid the foundations for an extended period of prosperity under Angela Merkel, who then settled for four terms marked by immobility:

Investment was limited, as the country preferred the dogma of public accounts to balance at all costs, even though it financed itself at negative rates on the debt markets. Germany needs to catch up in its digitalisation; its infrastructure has aged, and its education system has hardly adapted to the needs of a constantly evolving society.

Three factors then stunted the country’s competitiveness. First, nuclear energy was abandoned, an area where the government had considerable expertise. Expensive, it has sharply lowered energy prices, weighed on household purchasing power and increased Germany’s dependence on Russian gas. With the war in Ukraine and the end of this cheap gas, the fate of German industries - especially the most energy-intensive ones - is said: natural gas is four times higher than that practised in the US, and they are no longer competitive. They can either close down or relocate.

The energy transition and the switch to electric cars have then deprived German car manufacturers of their main competitive advantage: high-quality internal combustion engines, which have been the pride of German industry, give way to technologies it does not dominate (software, batteries) and on which competitors such as China or South Korea have a significant competitive advantage.

Finally, how can we not mention the ever-more-sophisticated and expensive regulatory framework Brussels and Berlin have established? This framework entails higher costs and weighs on innovation capacity and competitiveness.

These factors have precipitated the decline or exodus of industries once the basis of the Teutonic economy.

Since Olaf Scholz became Chancellor, some 250 billion euros of capital have left the country for other more welcoming countries. A major divestment in Germany will weigh on its productivity and competitiveness and eventually impoverish it. The government has significant assets and a healthy fiscal position, enabling it to invest in its future.

However, given the price lag in innovation, which will weigh on productivity, and the unfavourable demographic profile, a rapid recovery of the German economy should not be expected.

Debt markets are attentive

For now, the debt markets are taking the political crisis and the lack of a credible budget in France rather well, indicating that they still trust the European Central Bank to keep interest rates at acceptable levels. Suppose it is true that the French debt levels offered by the Greek debt are mainly because the debt prospects have greatly improved. At around 2.9% for 10-year rates, French debt remains manageable, even if it is true that the gap with German debt has been at its highest since 2012. At 113% of GDP, the French public debt is high and considerably restricts the room for manoeuvre available to the country in the coming years.

On the other hand, Germany, with a public debt of about 64% of GDP, has ample room for more investment if it eliminates the constitutional restraint on public spending/investment.

Although the malaise is deep in France and Germany, both countries are not at the same stage of their mourning. In France, denial gives way to anger without anyone worrying about the future or speaking the truth to the French. The country is, therefore, heading towards a troubled period.

Germany is in the middle of a resignation phase but has the will – and the means – to move on to reconstruction. If the challenges are numerous, a government capable of formulating a long-term strategy, abandoning current dogmas, and investing in the long term would be able to revive Germany in the medium and long term.

Equity markets share these very different visions. While the French CAC is depressed, rightly so, the DAX reaches peaks that are difficult to justify, so there will be challenges to revive the first European economy.

We only invest in these markets through individual shares, which you can find listed below.

ECI OPTIMIZE INVEST CARTEIRA MAI24 920x320

Partner for Consumers, Associations and Companies to improve Financial Solutions and Markets.

Telephone:

+351 210 321 939

Address:

Avenida Eng. Arantes e Oliveira, n. 13, 1ºB 1900-221 Lisboa Portugal