Franco-German economic engine of Europe stuck in reverse
France’s new Prime Minister, Michel Barnier, has spooked businesses and investors across Europe after unveiling a “shock therapy plan” to hike taxes on corporations and the wealthy in a bid to confront the nation’s spiralling debt, writes Josh Schlicht.
The tenuous and controversial alliance struck between centre-right Barnier and centrist President Emmanuel Macron now risks unravelling. The proposed measures, including tens of millions in spending cuts and numerous tax increases, threaten to tarnish Marcon’s pro-business legacy and could hinder France’s already flagging economic growth.
Defying Macron – whose powers are now limited to foreign policy – Barnier has asserted that his measures are the “harsh medicine” necessary to pull France back from the “precipice of financial crisis”.
The proposals will be very difficult to pass even if Macron’s Ensemble unites behind Barnier’s Republicans as the two parties together still lack a parliamentary majority. Little room for cooperation exists elsewhere as France’s emboldened hard-right called the proposal a “fiscal injustice”. Meanwhile France’s left-wing coalition, the New Popular Front, has vowed to take down the minority government, launching an unsuccessful no confidence vote earlier this week.
France finds itself in a bind, forced to choose between austerity and business-harming tax rises or further political gridlock.
While the French economic situation looks dire, its neighbour to the East, the once-great industrial power of Europe, is facing arguably even greater hardships. Earlier this week, Germany's economic minister announced that the country's economy is projected to shrink by 0.2 per cent in 2024, setting the stage for a second straight year of contraction.
Since Russia’s invasion of Ukraine, the German economy has lagged behind the rest of the G7 nations, with high energy prices, lagging industrial output, and tight fiscal restraints severely limiting the export-driven nation’s ability to recover growth.
A recent Volkswagen announcement only worsened German econo-pessimism as the critical auto manufacturer revealed plans to cut jobs and shutter factories across the country. Emblematic of Germany’s woes as a whole, the iconic brand’s decline has elicited fear that the country’s industrial prowess has come and gone.
Whereas France has struggled with overspending, Germany has had the opposite problem, unable to stimulate economic growth through deficit spending due to austere anti-inflation constitutional measures.
Economic malaise and budgetary constraints are not limited to Europe’s mainland. Figures released today by the ONS divulged a 0.2 per cent UK GDP growth in August, the first positive move in months. While we should be wary of single month GDP figures that are later revised, it is a modest improvement on July. But financial analysts are concerned that September and October are unlikely to sustain the growth trend as Labour’s looming budget has investors and businesses on edge.
According to a report from the BBC, firms across the UK have halted hiring and investment, fearing what Labour’s “painful” decisions might mean for them.
Chancellor Rachel Reeves has an unenviable task on her hands delivering her eve of Halloween budget. But would she trade places with Barnier? Almost certainly not.
Josh Schlicht
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