The economic challenges currently Germany are facing can be largely attributed to political instabilities. For Germany, the first crisis came from the collapse of governing coalition. Known as Ampel-Koaliten, the alliance between SPD, the Greens, and FDP, had conflicts in fiscal policy and economic strategy. The SPD and the Greens wished to increase the public expense, particularly in climate change and social welfare.

The Federal Ministry for Economic Cooperation and Development previously estimated that there should be 86 billion Euros investment each year to push the green transformation, while the actual number in 2024 only meet 52% of the requirement.  Meanwhile, FDP insisted a strict financial discipline, advocating the ‘debt brake’ regulated by the constitution, which was to cut government spending to avoid adding more debts. The German Constitution regulates that the limit of structural deficit is 0.35% of the GDP, while the actual case for 2024 was 1.2%, making the fiscal burden extremely large. This irreconcilable conflict eventually led to the disintegration of the union in November 2024. Olaf Scholz dismissed the finance minister from the FDP, marking the disintegration of the governing coalition. In December 2024, the German government collapsed after losing the vote of confidence. The president dismissed the parliament and scheduled a new election on February 23rd. The result of the new election will determine the future of German economy. The administrative paralysis disrupted policy making and implementing process, freezing over 80 climate action regulations and €23 billion in planned green energy subsidies, 12 billion euros in corporate investment approvals were delayed during the fourth quarter alone.

 The uncertainty of policy had also led to a negative impact on market confidence. IFO Business Climate index, an index that measured the market sentiment in Germany, has dropped to 84.1, which was the lowest level since 2009 (the global financial crisis).

Similar to Germany, the conflicts between parties are not easily conciliable. In fiscal policy, the Ensemble advocates for the delay of retirement and control the budget for public expenditure. This is because if maintaining the status quo, the debt interest expense will reach 10% in 2025, and the gap of old age pension will reach 13 billion Euros by 2027.

Opposition forces split sharply: left blocs want wealth taxes funding social programs, while the right demands 30 billion Euros auto/energy subsidies with “80% French jobs” rules. Tensions flared last March when dockworkers blockaded a port over Chinese battery plants getting 2.3 billion Euros aid but few local hires.

Unlike Germany’s almost paralyzed coalition, France forces the reform using executive power. According to the article 49.3 of the French Constitution, the Prime Minister can forcibly pass a bill without a parliamentary vote. In 2024, this clause was used 11 times (a historical record) to push through legislations. Although this allows France to dodge Germany’s 34% delay in lawmaking, it deeply weakens the legitimacy and people’s confidence to the government. According to the poll conducted by Elabe, French confidence towards the system had already fallen to lower than 45%.  

Another concerning phenomenon is the fall of traditional strength industry in Germany and France. Traditionally, Germany and France have strong market dominance in automotive manufacturing, aerospace, machinery, and chemical industries. In quarter 3 2024, the shutdown rate for Internal Combustion Engine (ICE) has reached 41%. In France, the aerospace export declined by 12% 2024. One important reason was the rise of energy cost. One of the important reasons, as many have discussed, is the rising energy cost due to the Russia-Ukraine war. In German chemical industry, the share of energy costs in total production cost rose from 21% in 2021 to 34% in 2024. Besides that, the strict environmental protection policies also added burden to the industries.

The climate protection law in Germany required German chemical companies 65 Euros of emission fees for each ton of carbon; the French government planned to build 10 new nuclear reactors, but due to the EU’s environmental evaluation, the construction process is only 25% of the schedule. Due to the Carbon Border Adjustment Mechanism (CBAM), the French aluminum industry had to increase 1.8 billion Euros in 2024, which had led to the increase of electricity price for 9%. Though the environmental protection is always of great significance, we must admit that the side effects are also severe.

Alongside the energy cost and demanding environmental protection law, there are also external factors that brought challenges to these industries. As the manufacturing in China continuously to make progress, the European products no longer have absolute advantages, leading to a decline in export. The share of German car exports in 2024 fell from 24% in 2019 to 17%, while the share of Chinese electric vehicles in the EU market soared from 4% to 19%. Meanwhile, China offers a relatively friendly business environment with a well-developed industrial supply chain, therefore many German and French companies are seeking cooperation with China and transferring part of their productions. BASF closed 17 per cent of capacity in Ludwigshafen and announced a 3 billionn investment in Zhanjiang, China; Arston transferred its Hydrogen-train project to CRRC, China, as it cannot stand the green technology development cost (40% exceeding the budget).

A more serious risk awaiting is Donald Trump’s presidency. His “Reciprocal Tariff” hasn’t been declared yet, but it is estimated it will impose 10% tax to the European cars (the current level is 2.5%). It is estimated that the export of Volkswagen and BMW would shrink 4.8 billion Euros, Stellantis’s 45% of cars selling in the US might be imposing additional tax as they used components from EU manufacturers. Meanwhile, the US subsidies seemed to be more appealing than Europe’s. The Republican initiatives increased the subsidy for EVs from 7500 to 12500 dollars.

Thyssenkrup’s electrolyze plant was moved to Texas, USA, using the Inflation Reduction Act (IRA) subsidy support of up to 50%. It is paradoxical that the Germany and France already had high deficit rates, but if they could not provide a more appealing incentive, the ceding of industry could be even more severe. The political instability impairs people’s confidence, energy cost and environmental policies squeeze the traditional industries, and geopolitical games intensify external pressures. The two major economies in Europe had been experiencing hardship, and such hardship could impact the development of the entire Europe. To survive, the EU must shield critical industries, building self-dependent supply chain, and perhaps replace ideological rigidity with reality.

By Xingchen Liu