European stock markets are showing signs of pessimism amid political turmoil in France and Germany. The German DAX dropped 0.45%, the French CAC 40 fell 0.71%, and the Euro Stoxx 600 index slid 0.12% on Monday. Europe’s two largest economies are facing significant political and economic challenges, including threats of tariffs on their exports to the United States. In contrast, U.S. markets performed better: the tech-heavy Nasdaq reached a new high, rising 1.24%, the S&P 500 gained 0.38%, while the Dow Jones industrial index dipped 0.25%.
Reasons and Context
Experts have long warned that France and Germany, often seen as the driving forces of Europe, are experiencing a deep crisis. Sophie Pornschlegel from the Jacques Delors Institute in Brussels argues that the problems in Paris and Berlin are weakening the European Union as a whole. “The issue with France and Germany is that without these two countries, European policy becomes much more challenging. They remain demographically strong and are the most economically significant countries. So, the absence of a government in Germany until at least June 2025 and the difficult situation in France make it harder for the European Commission to pursue ambitious initiatives,” she said.
Germany is facing a severe political and economic crisis, marked by large-scale job cuts, the closure of major companies, and strikes. As predicted by opposition leader Friedrich Merz of the CDU/CSU and a potential chancellor candidate, Chancellor Olaf Scholz failed to secure a vote of confidence from the Bundestag. This has triggered early elections in February, seven months ahead of schedule.
In France, the National Assembly approved a law allowing the state to operate temporarily pending the 2025 budget to avoid a shutdown. Amid another change in the prime ministership, Moody’s downgraded France’s credit rating, citing concerns that “political fragmentation” will impede meaningful fiscal consolidation and predicting that “there is now very low probability that the next government will sustainably reduce fiscal deficits beyond next year.”
Forecasts and Comments
Most forecasts for the situation are pessimistic, particularly concerning the manufacturing sector. Purchasing Managers’ Indices (PMI) for Germany and France’s manufacturing sectors were weaker than expected due to declining global demand and a recession exacerbated by political instability.
China, where credit demand has fallen to its lowest level since 2009, is also negatively impacting the economic outlook. In response, European business indices reflected the trend: the Euro Stoxx Luxury 10 index dropped 0.82%, and the Stoxx Europe 600 Energy index fell by 0.98%.
Despite recent interest rate cuts by the European Central Bank (ECB), President Christine Lagarde indicated that the downward trend will persist. She also noted that economic growth in the eurozone could be further threatened by protectionist measures from the U.S.
