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If the major economies of the European Union are showing economic and financial fragility, far beyond what could have been imagined until recently, what are the prospects for development, not just economic development, for European countries if President Trump were to decide to impose a system of tariffs, forcing them to import oil and natural gas from the United States...
The game is over, and now all of Europe will pay for it. While we wait to see what decisions and legislation Trump will make after his inauguration, one of the few undeniable facts for 2025 is the realization that not only the European Union (EU) but all of Europe is heading towards a real and present crisis. A series of events such as Brexit, trade wars between the USA and China, and covid, in addition to the geopolitical turmoil of the past two years, have revealed economic and financial fragility far greater than could be imagined.
In 2024, while news of factory closures, bankruptcies, and layoffs exposed cracks in the German economy and called into question Germany’s role as the “locomotive of Europe,” the continent’s second largest economy, France, instead managed to hide its problems by capitalizing on the attention and, especially, revenue from the Summer Olympics held in Paris. In fact, it is estimated that they contributed 0.2% to French GDP, bringing its growth to about 1.1% In 2024. Another factor contributing to the expansion of the French economy was the containment of electricity prices due to the French policy of keeping its nuclear power plants running. Average electricity prices in France at the end of November 2024 were around €98/MWh compared to €102/MWh in Germany and showed a significant decrease compared to November 2023, when they were around €132/MWh. However, the spot price of electricity in France at the beginning of January 2025 was around €70/MWh, which is still well above the level of late 2020, when it was around €48/MWh. While France has managed to contain electricity prices, the same cannot be said for natural gas prices. In July 2024, it was announced that the average selling price of natural gas for households increased by about 12% from a year earlier to reach €129/MWh, corresponding to the level in Germany. However, the economic burden on French families is higher than on German families because, with equal purchasing power, prices are respectively €110/MWh and €106/MWh.
Economic difficulties for France began to emerge as early as mid-2024
The general increase in energy and raw material prices, which reached as much as 100% compared to 2010 prices, became for France, as for the whole of Europe, one of the factors that spurred the growth of inflation. France’s inflation rate is estimated to be 2.4% at the end of 2024, which corresponds to the level of the eurozone. However, although the French economy, at least theoretically, looks healthier, albeit slightly, than the European Union average (+0.9% of GDP per year), some data seem to show a different situation. According to data from the French Central Bank (FCB), November 2024 has recorded about 65,000 bankruptcy cases, a 20% increase compared to the same period in 2023 and well above the average for the decade 2010-2019. The most affected sectors are transportation, finance, and real estate, while the main affected businesses are SMEs. Statistics are also ruthless when it comes to business bankruptcy: for all of 2024, there were over 54,000 of them.
France’s economic woes began to manifest themselves as early as mid-2024, when French bank BNP Paribas said that for the first time since 2016, France’s May 2023 to May 2024 period recorded 60,000 corporate insolvencies, largest number in the world. A study by financial company Coface, published in September 2024, showed that payment terms in France have increased, reaching 51 days compared to 48 days in 2023, and about 30% longer than in German companies at 32 days. In addition, 85% of companies surveyed said they had at least one late payment in 2024. Thus, the extension of payment deadlines seems to reflect the acute difficulty in repaying financial obligations, emphasizing the precarious equilibrium of the national economic and financial system.
Also exacerbating an increasingly precarious economic situation in France is the political stalemate, created after the snap elections called by the French president in June 2024.
However, the “bread and circuses” of the Summer Olympics only temporarily diverted attention from France’s real problem. Starting in the second half of 2024, many French companies began announcing plans for layoffs and plant closures. Michelin and Valeo have decided to close two plants in France and cut 1250 and 1000 jobs respectively. Auchan decided to lay off 2000 employees, Airbus 2500, Dulux 16% of its workforce in France, and even the Swiss bank UBS announced that due to the unfavorable economic situation in France, it will prepare job cuts in its network in France.
The increasingly precarious situation is exacerbated by the political stalemate following the snap elections called by the French president in June 2024. The election results, in fact, did not reveal a real winner, depriving the French parliament of the strong majority needed to decide and govern the country. In six months, we have witnessed the capitulation of two Prime Ministers who, after failing to pass the national budget, lost a vote of confidence in Parliament. In January 2025, the new (third) prime minister submitted the same draft budget as his predecessor to the French parliament for approval, casting a shadow over the future of France, which had not experienced a period of such great political uncertainty since the Fifth Republic in the 1960s.
The situation is likely to deteriorate very quickly, as markets have already begun to question the stability of the French state.
The economic problems of the French state are not new, but in light of the new European rules, according to which the public debt of the member states of the Union cannot exceed 60% of GDP and the annual deficit cannot exceed 3% of GDP, the situation in France has begun to cause concern. Since 2008, France has experienced a sharp increase in public debt, which peaked in 2020 and then declined slightly. However, the country’s GDP is projected to grow again to 112% in 2024. Medium-term forecasts assume further growth of 5% by 2026 and GDP growth of 124% by 2029. Historically, the country has run government deficits, but since 2008 the situation has worsened significantly. Despite cutting government spending by about $21 billion, or 0.7% of GDP, in June 2024, S&P Global Ratings (S&P) downgraded France’s credit rating from “AA” to “AA-”, keeping the outlook at “Stable,” said the agency, adding that the downgrade was due to expectations of deteriorating public finances. Although then Finance Minister Le Marie defended his choice, arguing that it was necessary in order to save the French economy during both the covid and the war in Donbass, the same minister had to revise the state budget deficit in 2024, estimated to rise from 4.4% to 5.5% of GDP. Then, in September 2024, Le Marie, after his resignation following a vote of no confidence in the government, recognized that the state of France’s public finances would not improve in the future. The current Minister of Finance confirmed at the beginning of 2025 that 2024 should end with a deficit of 6.1% of GDP, whereas, according to initial estimates, the state budget deficit for the current year should be 5% to 5.5%.
The situation risks deteriorating very quickly as markets have already begun to question the stability of the French state. After the June 2024 elections, there was indeed a fall in the market value of government bonds, which led to an increase in the spread between ten-year French government bonds and German government bonds, which at the beginning of December reached 0.883%. While French government bond rates appear to be starting to fall slightly, the spread with German bonds is not far from the high of +0.9%, reached in 2012 during the eurozone sovereign debt crisis. In October 2024, Fitch published its forecasts for the French economy, revising them downward and once again emphasized that public finances remain the main challenge for the country’s economic development. In December 2024, the French Central Bank also revised its estimates of national economic growth for 2025, downgrading them from 1.2% to 0.9% and noting that the correction was dictated by political instability and uncertainty about France’s finances.
Both a slowing economy and government bond volatility could put the French banking sector under severe pressure. French banks account for 15% of the country’s total debt, and as of June 2024, the largest financial institutions held about 560 billion dollars in government bonds. Thus, if the market price of the bonds remains below its nominal value for an extended period of time, transalpine banks would have to face potential liquidity risk caused by losses in the value of government bonds, forcing financial institutions to raise funds in the market at unfavorable interest rates and thus undermining their profits in the medium term. Back in late June 2024, Fitch hypothesized that the political stalemate could have negative consequences for the French banking system, fearing the possibility of a credit rating downgrade of the banks themselves. In July 2024, S&P Global Ratings recorded an increase in volatility risk for French banks, stating that the profitability of transalpine financial institutions will not improve in the short to medium term as both corporate investment and, more generally, the provision of new Lending is constrained by the lack of confidence associated with ongoing political uncertainty. While S&P believed that French banks had the necessary liquidity to deal with any market shocks, Moody’s did not share this view and at the end of 2024 not only downgraded France’s sovereign rating, but also downgraded the long-term deposits, senior unsecured debt, and long-term bonds of seven French banks, including BNP Paribas and Credit Agricole, emphasizing that it expects French public finances to deteriorate in the near future.
If, therefore, the first two economies of the European Union show an economic and financial fragility far greater than could have been imagined until recently, what are the prospects for development, not only economic, of the European countries? What if President Trump decides to impose a system of tariffs, forcing them to import oil and natural gas from the United States? Both the choice of reduced revenues, given the risk of restricting exports to the USA, its main trading partner, and the further rise in inflation due to higher energy import costs, are potential causes that could lead to a deterioration in the medium term of the economies and public budgets of European countries, having to compensate either for the lack of trade revenues or for the rise in production costs and, more generally, in consumer prices.
