Economists believe that the European economy faces the danger of a prolonged decline

Last year was a difficult one for the euro zone, with its biggest economies, Germany and France, with political and economic turbulence meaning neither has a 2025 budget.

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

“Today’s situation differs from the previous (sovereign debt) crisis in that Europe’s most pressing problems are no longer concentrated in smaller economies such as Greece. Instead, Europe’s two most important economies are struggling,” said Neil Shearing, the group’s chief economist. Capital Economics said in an analysis in December.

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

Neither France nor Germany currently have a budget for 2025 amid a political struggle that eventually toppled their governments.

New elections in Germany will be held in February. and analysts are betting on new parliamentary elections in France next summer. Countries are now working on interim budgets after shifting 2024 taxation and spending to this year, and it is unclear when either will agree on a 2025 budget.

France and Germany face various economic challenges that reflect both the dangers of overspending and underspending.

According to IMF estimates, France’s budget deficit in 2024 was 6.1%, and the accumulated debt was 112%. A new government led by Prime Minister Francois Bairro is expected to struggle to get warring MPs from all sides to pass the 2025 budget. like his predecessor Michel Barnier.

Meanwhile, Germany will hold snap federal elections in February after Chancellor Olaf Scholz’s ruling coalition collapsed in the autumn due to divisions over economic and budget policy. Germany’s problem is underspending and underinvestment, which has led to lower economic growth.

“On the contrary, Germany’s problem is an overly tight fiscal policy,” noted Schering of Capital Economics.

“Its so-called ‘debt brake’ significantly reduces the scope for deficit spending, even though Germany’s public debt burden is low. With a stagnant economy, Germany would benefit from a softer fiscal policy — and that would almost certainly lead to more imports from other countries. countries, this will help support growth (and thus fiscal consolidation) in France and Italy,” he noted.

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

This was caused by a combination of events such as the war in Ukraine and rising energy prices, a factor that hit energy-intensive industries in Europe, but was also exacerbated by lower demand – both in terms of external demand from the likes of China and weaker consumer spending demand in Europe, as well as deeper structural problems such as low productivity growth and lack of competitiveness.

The European Central Bank seeks to boost economic activity in the euro area by cutting interest rates by cutting 25 basis points in December — its fourth cut this year — to raise the key rate to 3%. The central bank said it expects the euro zone economy to grow by 0.7% in 2024 and 1.1% in 2025. Inflation in the bloc was 2.4% in 2024 and 2.1% this year.

ECB President Christine Lagarde told a press conference in December that risks to economic growth “remain to the downside,” warning of the potential for “greater friction in global trade” and that “decreasing confidence could prevent a rapid recovery in consumption and investment as expected.”

Some analysts, such as Calum Pickering, chief economist at Peel Hunt, told CNBC that the ECB should be bolder and go for more rate cuts in 2025.

Others say that rate cuts cannot help with structural problems, for example low productivity growthand headwinds such as potential tariffs on European imports into the US bound for the US., which will likely be introduced by US President-elect Donald Trump.

“Our baseline is that Europe is in for a pretty tough year in 2025,” Jari Sten, Goldman Sachs’ chief European economist, told CNBC, with the investment bank forecasting 0.8% growth for the euro zone in 2025 — compared to with 2.5% for the US, over the same period.

“There are a lot of issues … high energy prices, China’s slowdown, political uncertainty, trade tensions are all negative,” he told CNBC’s “Squawk Box Europe.” However, investors were still looking for potential bright spots in the region.

“People are asking if we in Germany, when there are new elections, can we get additional financial support – maybe we think there will be, but we think it will end up being limited,” Stan said.

“People are also asking if the European consumer can finally surprise the upside, the savings rate is high, there’s actually quite a lot of money (to spend) but again we think there will be some support but it’s unlikely to be a big surprise “.

Stan noted that lower interest rates “will help save and boost consumer spending, which is one of the reasons why we really think Europe will grow next year despite these challenges.”

“But at the same time, I think we also have to be realistic that a lot of the headwinds that we talked about (like) energy prices, China, structural things. Cutting rates won’t fix all those things,” he said.

“At the end of the day, it’s going to be a challenging environment.”