The political crisis in France and Germany is causing distrust among investors and could trigger a domino effect in the EU

Sonsoles Martín

07/12/2024

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The economic crisis comes after the dismissal of the French Prime Minister and the breakdown of the coalition in the German government.

In just one month, the two largest economic powers in the European Union have been in absolute chaos. First, Germany in November when Chancellor Scholz, a man who has been criticized more than once for being “too institutional,” this time decided to break up his coalition government.

And then France, three days ago with the motion of no confidence against a weak Michel Bernier, just three months after Macron appointed him Prime Minister. Two collapses that will have economic consequences.

The markets, explains David Cano, general director of AFI Inversiones, "are applying a demand for additional profitability to French bonds, the famous risk premium is increasing, and that is a thermometer of a loss of confidence and credibility in international investors that France is experiencing." Cano says that if the world economy grows at a rate of 3% and your country grows at a rate of 1%, "you are obviously left behind."

France can trigger a domino effect in the rest of the Union,

Because the situation in the country coincides with that of Germany; so the knock-on effect and contagion on other important economies such as Italy or Spain is obvious. "We must forget about any economic re-acceleration next year," says Cano.

On a political level, Jaime Coulbois, a political science researcher at the Autonomous University of Madrid, explains that in France the solution would be a negotiated stable majority.

Macron has to guarantee the support of either the New Popular Front or the National Rally. "The truth is that National Rally has already failed him once, and on top of that, Macron has an absolute phobia of making a pact with the France insoumise, a central player on the left," says Coulbois, "he is in a hellish situation because none of the options benefit him."

Coulbois explains that these two political collapses in Europe, combined with Donald Trump´s arrival at the White House, have impulsed far-right parties and populist speeches among the population.

The polls show the conservative CDU/CSU as the favorite for the February elections. The far-right party could become the second most voted party, gaining a significant boost, but will not be part of a future government thanks to the cordon sanitaire to which all the democratic parties in Germany are committed.