On the sidelines: Europe's leading economies are peaking
Germany has big problems: the country's economy is still in a groggy state. Statistics showed that industrial production in the country immediately fell by 4.3% in August, showing the worst monthly result in the last 20 years. In fact, the industry has returned to the level of 2005. Given the enormous difficulties with public finances in France and the continuing debt burden in Italy, despite the slightly positive dynamics, all three leaders of the EU and the eurozone simultaneously found themselves in crisis. Details can be found in the Izvestia article.
The automotive industry on the sidelines
According to the Federal Statistical Office of Germany, the collapse of industrial production occurred largely due to the very bad situation in the automotive industry. The decline in this sector immediately amounted to 18.5%. Both indicators turned out to be much worse than any forecasts made by analysts. For example, the Reuters polls were guided by an overall decline of only 1%.
Thus, production volumes fell to the lows of 2005. With the exception of short-term shocks during the global financial crisis and at the peak of the COVID-19 pandemic, there have been no such falls in decades. Industrial production is now almost 20% below its peak before the pandemic and 11.5% below the level of 2021. Car production, apart from the two mentioned crises, is generally at its lowest level since 2000.
Germany's industry has been at its peak over the past three years. The PMI business activity index in the manufacturing sector is chronically below the level of 50 points, which means a decline. It is the situation in industry, which provides more than 30% of German GDP (more than in other G7 countries), that leads to a general economic downturn, the edge of which is not visible. By the end of 2023, the country's GDP decreased by 0.3%, and by another 0.2% in 2024. The last time a recession was observed in Germany for two years in a row was in the early 2000s, and this was an exceptional case by post-war standards.
It was assumed that the restoration would begin this year. But already in the second quarter, the economy was back in negative territory, and judging by the catastrophic figures for industry in August, the third is likely to be in the red. The official forecast of the European Commission indicates zero growth for the year, but it may well be that this prediction will turn out to be too optimistic. It should be noted that the last time such a collapse was observed in the country's industry was after the Second World War.
The positions in the automotive industry are the most precarious. According to a VDA survey, more than 60% of German automakers intend to reduce the number of jobs in the country due to the difficult economic situation, despite the fact that cuts have been in full swing over the past few years. Half of the manufacturers rate their situation as "bad" or "very bad", and about 80% of companies plan to postpone or reduce investments in Germany. 28% want to move production abroad.
Questionable incentive
The new German government plans to turn the situation around through a large-scale incentive plan of hundreds of billions of euros, aimed primarily at reviving the military-industrial complex, as well as upgrading infrastructure. If the second task can provide a serious multiplier for the entire economy, then military spending is hardly capable of fulfilling any other role except short-term doping, which will simultaneously accelerate inflation. The latter, by the way, stubbornly remains above the target level of 2%, which is not at all normal for a stagnating and even declining GDP.
At the same time, in Germany, where social spending accounts for more than 30% of GDP (one of the highest rates in the world), they plan to abolish the Burgergeld, a system where every resident who is not part of the workforce receives a minimum of payments from the state, to save money. This system, which is actually a truncated version of the basic income, requires tens of billions of euros per year, moreover, more than half of its recipients are foreigners. While the cancellation of the program may be useful for stabilizing public finances, demand for goods and services will be severely affected. It is worth noting that over the past three years, the number of unemployed in the country has increased by half a million people.
France sinks the euro
In Germany, at least, the problem of public debt is not so acute. It accounts for only 60% of GDP, which gives the government some freedom of action. Neighboring France doesn't have that either. For many years now, the budget has been running a deficit of at least 4%, and total government spending has reached 57% of GDP. There is no room for maneuver, which the markets feel well. In recent months, major rating agencies have downgraded France's ratings. The need to put public finances in order requires decisions to raise taxes (which is difficult to implement due to the high fiscal share in the economy) or sharply reduce spending.
This whole situation has led to the downfall of several governments over the past year. This week, the world saw a two-act drama when Prime Minister Sebastien Lecornu resigned after less than 13 hours in office. President Emmanuel Macron managed to convince him to return to the government, but now the latter may receive a vote of no confidence in parliament, which is not controlled by the ruling party.
The spread (difference) between the yields of the French and German government debt reached its maximum this year, despite the fact that it was already high by historical standards. France is also facing an industrial downturn, albeit not as significant as Germany, but its main problem is debt, which now exceeds the dangerous threshold of 110% of GDP. This is very close to the level of Italy, which has been considered a problematic country in this regard for the past few decades. However, the Italians were able to at least stabilize the deficit situation and keep the debt at around 130% of GDP.
The ECB's high interest rates further complicate this picture, as with such expensive borrowing, debts begin to grow even faster. At the same time, it is risky to lower the rate, since inflation remains quite serious and a weakening of the PREP may lead to a new surge. At the same time, spending cuts are difficult to organize for political reasons, and secondly, they will also lead to a deterioration in the economic situation. The result is a vicious circle that is incredibly difficult to break.
Although the symptoms of the crisis vary from country to country in the eurozone, the causes are largely common. Last but not least, we are talking about the severance of economic ties with Russia (which mainly concerns Germany), but the lack of cheap energy from the east and the loss of a significant part of the Russian market have only worsened the existing problem. The poor experience of introducing green technologies in the energy sector, complex and disruptive regulation, and increased competition with China in a number of sectors have all led to a sharp slowdown in growth or even recession in many economies of the monetary union.
The situation now is in many ways similar to the one that developed about 15 years ago during the first European debt crisis. At that time, it was possible to manage with relatively little blood, limiting itself to a "verdict" for the Greek economy (whose GDP is still a quarter less than in the mid-2000s). Now, however, the threat is much more significant. All kinds of difficulties have arisen not on the periphery, but in the very heart of the EU — in Germany, France and Italy. At the same time, the debt burden of the union is much higher than in the last decade, the political situation is much more acute, and now we still need to somehow mitigate the consequences of the trade war with the United States. All this calls into serious question the future of the euro and the entire European economic project.
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