CAMBRIDGE – As Europe prepares for a potential trade war after US President-elect Donald Trump takes office in January, its two largest economies are struggling. While Germany is heading into its second consecutive year of zero growth, France is expected to grow by less than 1% in 2025.
Is Europe’s economic stagnation the result of insufficient Keynesian stimulus, or are its bloated and sclerotic welfare states to blame? Either way, it is clear that those who believe simple measures like higher budget deficits or lower interest rates can solve Europe’s problems are detached from reality.
For example, France’s aggressive stimulus policies have already pushed its budget deficit to 6% of GDP, while its debt-to-GDP ratio has surged to 112%, up from 95% in 2015. In 2023, President Emmanuel Macron faced widespread protests over his decision to raise the retirement age from 62 to 64 – a move that, while meaningful, barely scratches the surface of the country’s fiscal challenges. As European Central Bank President Christine Lagarde recently warned, France’s fiscal trajectory is unsustainable without far-reaching reforms.
Many American and British progressives admire France’s model of big government and wish their own countries would adopt similar policies. But debt markets have recently woken up to the risks posed by France’s ballooning debt. Remarkably, the French government now pays a higher risk premium than Spain.
Read more here.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
