The EU in crisis: taking stock of the economy
There is currently a lack of economic growth in the European Union. In addition, demographic change and unresolved structural problems are slowing economic activity. Once the European elections have been held in June, the new EU government will face major challenges. KOF’s international economic experts have analysed the situation in the three largest EU member states Germany, France and Italy.
With a population of 450 million people and a gross domestic product (GDP) of over 15 trillion euros, the European Union is one of the largest economic areas in the world and is also Switzerland’s most important trading partner.
However, Europe has been lacking economic growth for some time now. A comparison with the levels of GDP per hour worked in the United States over time makes this particularly clear (see chart G 2). The list of problems facing European economies is long: resistance to reforms is generally high and many structural problems remain unresolved. For example, digital technology is lagging behind and no adequate response has yet been found to demographic change. In addition, the EU is being much more seriously affected by the war in Ukraine and its consequences than other economic areas owing to its dependence on Russian gas. Moreover, many Asian economies have caught up with Europe economically and technologically. Currently, for example, Chinese competition in low-cost electric vehicles poses a threat to the traditional German and French car industries.
EU citizens will elect a new parliament from 6 to 9 June. After the European elections, one of the first tasks for the newly elected parliament will be to elect the new President of the European Commission. Major challenges await the new EU government. At the same time, public confidence in established politics is low. In many countries, such as France (National Rally) and Germany (AfD), right-wing populist parties are achieving high poll ratings or, as in Italy (Brothers of Italy), are even in government.
We have used this complex political and economic situation ahead of the European elections as an opportunity to take a closer look at the three largest EU countries Germany (84 million inhabitants), France (68 million inhabitants) and Italy (59 million inhabitants) and to analyse their respective economic and policy challenges in detail. Since Brexit, these three countries have accounted for almost half of the EU population. Analysis shows that the economy is likely to pick up again in the second half of the year – partly owing to falling inflation – while the achievement of a higher growth path is dependent on the success of economic policy reforms.
Germany
How is the German economy doing at the moment?
The German economy remains weak. The politically uncertain environment, firms’ cautious recruitment plans and past crises are weighing on consumer sentiment, leading to consumer restraint. Producers of capital goods – particularly in the automotive industry – are suffering from restrictive monetary policy. The export industry is unable to keep pace with the global economic recovery, and the competitiveness of energy-intensive goods has suffered. However, the economy is expected to regain momentum over the course of the year thanks to normalised inflation, lower energy prices, rising real wages and the prospect of falling interest rates.
What are the key (economic) policy issues for Germany?
German politicians set up the Climate and Transformation Fund (KTF) to help drive the transformation of the German economy. The Federal Constitutional Court’s legal action against the transfer of pandemic loans to the transformation fund and the resulting budget freeze sparked a debate about the need to adjust the debt ceiling. In addition to decarbonisation, digital technology and the modernisation of public infrastructure, further issues on which politicians need to provide clarity are the more effective integration of refugees into the labour market, the overhaul of citizen’s benefit and the military budget.
What are the major economic and structural challenges currently facing Germany?
However, the economic recovery is expected to be moderate, as structural problems are weakening growth potential. Germany is suffering from demographic ageing. Positive net immigration is supporting population growth but exacerbating the skills mismatch in the labour market, which is already suffering from worker shortages and low labour productivity. A high level of bureaucratisation and a lack of innovation in the technology sector are also weighing on the economy.
France
How is the French economy doing at the moment?
Like other countries, France experienced a period of economic weakness in the second half of 2023. However, declining inflation, pension increases and higher savings income are strengthening households’ purchasing power and are likely to stimulate private consumption. Investment, particularly in construction, is likely to remain negative in the first half of 2024 owing to restrictive monetary policy. The aviation industry stands out as a result of its exceptionally positive economic situation.
What are the key (economic) policy issues for France?
Households’ purchasing power – traditionally an important subject of debate – is currently more topical than ever following the recent surge in inflation. Social inequality also remains a perennial issue. The reform policies adopted under President Emmanuel Macron are likely to be a factor in France’s encouraging economic performance in recent years. Unemployment is trending downwards and has risen only slightly recently despite the weak economy. However, the lack of consensus on the implementation of reforms has caused a feeling of marginalisation among various groups, resulting in recurring (violent) protests such as the ‘gilets jaunes’ in winter 2018/19, the demonstrations against raising the retirement age last year, and the recent farmers’ protests. This is accompanied by a resurgence of the far right, which is also benefiting from debates around identity and security.
What are the major economic and structural challenges currently facing France?
France has one of the highest levels of national debt in Europe, amounting to around 110 per cent of GDP. Despite this debt having declined in recent years, its upward trend is unbroken. Nonetheless, the rising interest burden in the eurozone will only become acute for France in the medium term owing to its long bond maturities. The challenge is to achieve a more sustainable fiscal policy without slowing economic growth and jeopardising social peace. French policymakers have provided clear and widely accepted answers to two other challenges. As far as climate change and energy security are concerned, the focus is on nuclear power and new reactors are being planned. In terms of geo-industrial policy the focus is on subsidising major investments, which is consistent with Colbertism.
Italy
How is the Italian economy doing at the moment?
Economic growth in Italy has been weak in recent years. In addition to the sharp rise in energy prices, which has caused private consumption to decline, increasingly restrictive financial conditions are weighing on investment activity. Furthermore, the growth stimulus resulting from residential construction investment, which benefited from fiscal subsidies under the super-bonus programme, is waning. The economy will regain some momentum next year on the back of a further decline in inflation, rising real wages and less restrictive monetary policy.
What are the key (economic) policy issues for Italy?
Italy is facing the problems of an ageing population, falling birth rates and an exodus of skilled labour, which is putting a strain on its healthcare and pension systems. Furthermore, structural problems such as inefficient bureaucracy, a slow investment approval process, outdated infrastructure and a lack of technical innovation are acting as a drag on long-term growth. The efficient use of funding from the Recovery and Resilience Facility, a core element of the NextGenerationEU recovery fund, will be crucial in the implementation of structural reforms. In addition, the growing imbalance between the northern and southern regions of the country could have a long-term impact on economic development and social stability. Youth unemployment – which, at around 37 per cent, is more than twice as high in the south as it is in the north – is a particular problem.
What are the major economic and structural challenges facing Italy at the moment?
Italy’s high national debt and budget deficit are among the country’s most acute challenges. Amounting to almost 140 per cent of gross domestic product, Italy’s public debt is one of the highest in the eurozone, limiting the government’s fiscal headroom for much-needed investment and imposing high interest payments on the budget. Strategies that reduce debt while maintaining public services are essential to ensure the stability of the financial system. In addition, reforms of the tax system, the labour market and the business environment as well as measures to promote digital technology are some of the other political measures required in order to relieve the burden on households and firms and promote domestic investment.
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