What’s Eating Into France’s Economy In 2025? France’s Budget Talks Crumble, Raising Doubts About Government’s Survival. Europe’s Ongoing Decline Has Economists Worried

For a country known for its fine wine, haute couture, and revolutionary spirit, France’s economy is looking anything but refined right now. 2024 was a mess politically, and if 2025 had any hopes of a fresh start, they were dashed quicker than you can say “budget deficit.”

Let’s get one thing straight: the French economy isn’t collapsing, but it is struggling, and the political chaos is making it worse. Companies are used to dealing with economic ups and downs—inflation, supply chain disruptions, strikes (a French specialty), and even black swan events like the pandemic. But what happens when uncertainty comes from the very people who are supposed to be steering the ship?

A Shaky Start to 2025

After a rough 2024, where governance in France hit an all-time low in the Fifth Republic, 2025 is proving to be just as unstable. François Bayrou, the newly appointed Prime Minister, was supposed to bring stability. Instead, he inherited a political minefield. Businesses and investors were hoping for clear direction, but they got more of the same indecision and infighting.

Economic data isn’t painting a pretty picture either. The economy shrank by 0.1% in the last quarter of 2024, reversing the temporary boost from the Paris Olympics. Analysts had expected things to at least hold steady, but reality had other plans. The problem? France still doesn’t have a 2025 budget. And when a country as significant as France struggles to pass a budget, it sends a ripple effect through the entire European economy.

The Political Blame Game

Political gridlock has been the name of the game since the snap elections last year. With both the far-left and far-right making significant gains, President Macron found himself forced into a precarious balancing act. The conservatives were brought in to lead, but instead of solving problems, they ended up alienating everyone else. Former Prime Minister Michel Barnier didn’t last long—his deficit-cutting budget was rejected, and he was swiftly booted out in a no-confidence vote. Enter François Bayrou, the man now trying to hold things together with duct tape and political favors.

Bayrou’s biggest challenge? Passing a budget. His initial plan involved deficit reduction, but to win over the left, he had to make concessions—more spending, job creation, and reopening the ever-divisive pension reform debate. The Socialists seemed like they were willing to play ball until Bayrou made controversial remarks about immigration, which prompted them to walk out of budget talks. The far-right cheered him on, but now his budget is hanging by a thread, and his government’s survival is in question.

Mounting Pressure on France’s Budget

Simultaneously, France’s struggle to pass the 2025 budget is causing ripples across the economy, rattling investors and shaking confidence in both businesses and households. To keep things moving, the government has already had to dish out billions in concessions just to have a shot at getting the bill approved.

Without a clear majority, the government might have to resort to constitutional loopholes to push the budget through—something that would almost certainly trigger a no-confidence vote from the opposition. Initially, the plan was to count on the Socialists’ abstention to survive such a vote, but getting them on board has already forced the government to backpedal on several spending cuts.

Bayrou, who stepped in as prime minister last December, is trying to avoid the fate of his predecessor, Michel Barnier. Barnier’s downfall came when both the left and right joined forces against him after his budget plan was deemed too aggressive in cutting public spending.

While Barnier sought support from the far-right National Rally, Bayrou is trying to play nice with the Socialists. He’s even agreed to reopen talks on pension reform—a key initiative for President Macron—and has scrapped previous plans to cut thousands of teaching jobs. So far, Bayrou has managed to survive one no-confidence vote, largely thanks to the Socialists sitting it out.

Europe’s Woes. A Downward Spiral And Economists Worried

The past year has been a rollercoaster for the eurozone, with its two biggest economies—Germany and France—caught in political and economic turmoil. Neither country has managed to put together a budget for 2025, and that’s setting off alarm bells among economists.

Experts warn that the situation is far from reassuring. Without economic growth, sound fiscal policies, and political stability, Europe could be heading for a slow decline, losing its global standing.

Neil Shearing, Chief Economist at Capital Economics states that the problem now is different from the previous [sovereign debt] crisis because it’s not just smaller economies like Greece in trouble. It’s Europe’s two economic heavyweights that are struggling.

According to Shearing, unless fundamental reforms take place, Europe could be looking at a future of sluggish growth, ongoing fiscal instability, and a diminished role on the global stage, where the U.S. and China are already locked in a superpower battle.

Political Paralysis and Budget Stalemates

Both France and Germany are in political deadlock, unable to pass a budget for 2025, and it’s already cost both governments their jobs. Germany heads for new elections in February, while France may also see a fresh round of parliamentary elections in the summer. Until then, both nations are operating on provisional budgets, essentially carrying over their 2024 financial plans, with no clarity on when they’ll finalize 2025 spending.

To be noted, France and Germany are dealing with different financial headaches—one from overspending, the other from underspending.

France’s Money Problems: The country had a budget deficit of 6.1% in 2024, with public debt climbing to 112% of GDP, according to the IMF. New Prime Minister François Bayrou is now facing the same uphill battle as his predecessor, Michel Barnier, trying to unite a fractured parliament to get the budget passed.

Germany’s Spending Freeze: In contrast, Germany’s economy is stalling due to excessive fiscal restraint. The country’s strict “debt brake” policy limits deficit spending, despite its relatively low debt burden. Chancellor Olaf Scholz’s coalition collapsed over budget disagreements, forcing snap elections in February.

Shearing points out that Germany’s rigid fiscal policy isn’t just hurting itself—it’s dragging down the entire region. If Germany loosened up and spent more, it would stimulate imports from countries like France and Italy, ultimately boosting economic growth across the eurozone.

Europe Needs to Focus on Growth—But Can It?

Economists are warning that without clear budget plans, Europe’s major economies won’t be able to fully prioritize policies that drive real economic expansion. This is just another chapter in the continent’s recent history of sluggish growth.

Several factors have been at play here: the war in Ukraine, soaring energy prices (which have hit Europe’s energy-heavy industries hard), weak demand from major trade partners like China, and sluggish consumer spending within Europe itself. On top of that, deeper structural issues—like low productivity growth and declining competitiveness—have only made things worse.

The European Central Bank (ECB) has tried to jumpstart economic activity by cutting interest rates. In December, it made its fourth rate cut of the year, bringing its key rate down to 3%. The ECB expects the euro zone economy to grow by 0.7% in 2024 and 1.1% in 2025, with inflation projected at 2.4% for 2024 and 2.1% in 2025.

But ECB President Christine Lagarde wasn’t exactly optimistic. She warned that risks to economic growth are still “tilted to the downside,” citing concerns over global trade friction and shaky consumer and business confidence.

Some economists, like Kallum Pickering from Peel Hunt, believe the ECB needs to be more aggressive with rate cuts in 2025. But others argue that rate cuts alone won’t fix Europe’s deeper problems—like weak productivity growth or the potential tariffs the U.S. could slap on European imports if President-elect Donald Trump follows through on his trade threats.

Goldman Sachs’ chief Europe economist, Jari Stehn, isn’t expecting a great year ahead. His team predicts just 0.8% growth for the euro zone in 2025—far behind the 2.5% growth forecasted for the U.S.

Investors are still searching for silver linings, though. Some are hopeful that Germany’s upcoming elections could lead to stronger fiscal support. But according to Stehn, any new spending measures are likely to be “limited.” Others are looking at Europe’s high savings rate, wondering if consumer spending might finally pick up. Again, Stehn isn’t convinced.

He emphasized that while lower interest rates will help somewhat, but to be realistic—energy prices, China, and structural issues aren’t going away just because rates are lower.

The Last Bit

Bottom line? 2025 is shaping up to be another tough year for Europe.

Until France and Germany can get their houses in order, Europe’s economic outlook remains bleak. Investors are nervous, households are cutting back on spending, and businesses are holding off on investments. If this downward trend continues, Europe may find itself sidelined in a world where economic power is increasingly concentrated elsewhere.

The ongoing uncertainty around the budget for both France and Germany is dragging down domestic demand, and this sluggishness is likely to linger for a while. Even though inflation is cooling and real wages are on the rise, concerns over job security and economic uncertainty are pushing households to save more rather than spend. This means consumer demand is expected to stay weak in 2025.

On top of that, trade tensions are likely to dent exports, which doesn’t bode well for France’s industrial sector. While services are holding up better than manufacturing, they too are expected to slow down. Meanwhile, order books in construction are shrinking, signaling another rough year ahead for the sector.

Looking at the big picture, the economic outlook for France’s economy in early 2025 isn’t exactly promising. Growth is expected to hover around 0.1% in the first quarter, barely recovering from the 0.1% contraction at the end of 2024. For the full year, GDP growth is forecasted to hit just 0.6%, falling short of the government’s already modest 0.9% projection. A stronger recovery might not materialize until 2026, but with global uncertainties and a tight fiscal policy at home, even that rebound could be a slow one.