Source: Rating agencies, Refinitiv, ING
Looking at the 10-year yield French bond and compared to the German one we see that the spread is reaching at 88bps implying that further political instability will lead also to economic uncertainty and risk, taking into account the expected 2025 European economic slowdown and the tariffs imposed by the USA. Spread widening may imply the probability of rating downgrades are increasing as France will be facing difficulties in addressing its fiscal problems. Additionally the French government faces a notion of non-confidence after it failed to pass the social security budget, and despite many concessions to Mrs Le Pen. Now the far right- and left-wing parties have joined forces to overthrow the Barnier government. This will be decided today, Wednesday 4th December on the National Assembly Voting. The probability of such a scenario, that is the fall of the government, is a very high one, and will lead to a period of political and economic uncertainty.
During a period of economic slowdown for France and for Germany, and the election of Trump in the USA, the above are not good news. French public deficit is expected to remain at high levels of around 6% of GDP, while the 2025 budget is unlikely to be voted since a consensus for a new government seems to be difficult to be reached. While the French political and economic expectations are negative, the German ones are not either giving a light of hope. German economy is expected to have shrunk by 0.2% in 2024 continuing the decline of 0.3% in 2023 and is hoping to return to growth in 2025. That expectation remains to be seen as more car factories are expected to be shut soon and the adverse competition from China and now the USA are not considered as factors of positive impact especially on an economy with heavy reliance on exports and facing also political unrest. The German 3 party coalition collapsed on the day as Donald Trump was announced as the new President of the United States. Germany is expected to encounter several issues during Trumps second term in office, including security and climate policy, trade policy, and the economic and military support for Ukraine.
The Vice Chancellor and Economy Minister Robert Habeck made a public statement after the government’s collapse that “this is the worst time for the government to fail.” Indeed the country seems more vulnerable than the first term of the Trump administration while the competition with China for more quality products has been intensified with Germany being on the losing side.
Concluding this short analysis, we find as most appropriate the quote to DW news agency of Mr Martin Gornig, director of industrial policy at the German Institute for Economic Research (DIW) in Berlin, as he calls for “systemic changes not only in Germany but the entire European Union”. Gornig added that “we must avoid throwing billions around without clear direction. We’re not on the brink yet.”
Considering all the above information we can say that Europe is in unhealthy condition with its biggest countries having the most serious condition and threatening of spreading EU wide the “disease”. The EU central bank will be asked soon to take part in the treatment of this dire situation and we hope that Mr Goring suggestions will be heard and not overlooked, taking into account that not only Germany and France need a boost but also the other members that are expected to be indirectly affected.
Haris Stavrinides MBA Distinction, MSc Finance
Founder and Partner at OSYS Global Corporate Consultants (www.osysglobal.com), a corporate advisory firm to international business companies with specialization on Financial Services structures Email: haris@osysglobal.com
