The euro zone economy is characterized by serious economic troubles in all three of its major economies: Germany, France, and Italy. These are not countries at Europe's periphery, such as Greece, where trouble has arisen before. This makes the euro zone at risk of a new round of sovereign debt crisis that would be more dangerous than that which roiled world financial markets in 2010-2012.
And that's before taking into account the risks stemming from President-elect Donald Trump's tariff plans. He pledged as a candidate to impose 10-20% tariffs on all countries, including Europe. Tariffs of that scale would heighten the economic danger, which could spill over into U.S. and world financial markets.
Germany's Economic Challenges
Start with Germany. Until recently it was Europe's main engine of economic growth. In 2023, Germany was the only G-7 economy to experience a recession. This year, the International Monetary Fund projects only minimal economic growth. Germany's energy- and export-dependent economy has been beset by shocks. Its natural gas supply was disrupted in the wake of the Russian-Ukraine war, while demand for German exports, especially from China, has slowed abruptly. Being an export-oriented economy, Germany is particularly exposed to an international trade war emanating from the United States.
"There is a broad consensus that Germany needs fundamental economic reform if it is to shift away from traditional manufacturing to those industries better suited to a digital and technically more advanced age."
But that will require political will and the ability to implement much-needed economic reform. Chancellor Olaf Schotz's government collapsed last month, underlining the scarcity of those assets. Add an aging population to its fractured politics and Germany's prospects for regaining economic momentum appear poor.
France's Economic Woes
Troubled as the German economy might be, France's economy is very much more worrisome. While it is somewhat less sclerotic than Germany, France has highly compromised public finances and is drifting toward a state of ungovernability. France's budget deficit has widened to around 6% of gross domestic product while its debt level has risen to over 100% of GDP, according to the IMF.
"President Emanuel Macron called snap elections in June."
His party lost its parliamentary majority and cannot take much needed corrective budgetary measures. Indeed, the government now appears at risk of falling because of opposition to budget measures from both far-right and far-left parties that gained substantially in the elections.
"The markets have taken notice that France could be headed toward a debt crisis..."
Currently France's government has to borrow at interest rates very similar to those faced by Greece during its crisis period.
The Italian Debt Situation
As if this were not sufficient reason for concern about the European economic outlook, Italy's debt level well exceeds that of France. Indeed, at around 140% of GDP it is around 20 percentage points higher today than it was at the time of its 2012 debt crisis.
"Like France... stuck in a Euro straitjacket..."
This situation makes it difficult for Italy to use budget belt-tightening without triggering a recession.
A Warning for U.S.-Europe Trade Relations
Before imposing punitive import tariffs on Europe...