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[00:00:00] The Why Curve, with Phil Dobbie and Roger Hearing. What's happening in Europe? France and Germany, the EU's biggest beasts, are stumbling badly. France can't agree a budget or get an effective government. Germany's economy can't get out of the doldrums, and it's facing elections that could strengthen the far right. And all this as the United European Front against Russia is beginning to crumble. And the EU faces a trade war with a Trump-led US. So what's going on with Europe in 2025?
[00:00:30] And what will it mean for the UK and the rest of the West? The Why Curve. I think the problem is, it's twofold, isn't it? One is the US is just so dominant now. It's not just a problem for Europe, it's a problem for the rest of the world. But Europe obviously is reliant on the US as a trading partner, but also... And a political-military ally. That as well. And the US is grating ahead so much. So all the investment is going to the US.
[00:00:58] Who wants to invest in Europe when the US is doing so well? Well, there's more to it. I mean, I think the China thing has been a massive problem for Germany. Yeah, that too. I mean, which, you know, the leading economy. I mean, France have been living on the edge quite a long time, economically and now politically. But Germany, you know, seen as the absolute bedrock, really, of European money. And it really isn't going anywhere. As an export nation. Yeah, yeah, yeah. And I mean, China is a massive, massive issue because that's where they heavily invested.
[00:01:26] The same way that Germany heavily invested in getting cheap power out of Russia. It then obviously spent a lot of time making exports to China and neither thing's working. Well, China could come back. I mean, the focus on China is that they are less of an export nation. And maybe Europe needs to think that way as well about how they can get more domestic growth. Thinking domestic as in across the whole of Europe rather than country by country, which is another issue they face. But if China grows and they are there for domestic consumption more than export growth,
[00:01:54] then perhaps that means that there's an opportunity for more exports into that. Yeah, but maybe that whole system's about to grind to a halt with Trump coming in and the whole tariffs issue. I mean, a lot of you are thinking this is going to be an absolute nightmare. Well, the combination of Trump there saying, well, OK, we're going to block your exports or we're going to put tariffs on them. We're going to slow down international trade. And the impact that's going to have everywhere in the world means that really you do have to focus on domestic growth. And you've got to invest for that. And Europe's got the problem.
[00:02:24] I mean, in the United States, they're very happy to keep on running up government debt. Europe's got very stringent controls on that. Yeah, and the French didn't make huge debts anyway. Yeah, but I mean, comparatively speaking, it's still not very much compared to the United States. And because everyone racked up so much debt during the pandemic, the focus now is on getting down that debt. But we're not out of the problems created by the pandemic. And yet everyone's trying to unwind spending. Yeah, but it's not just the economics.
[00:02:50] The fact is France is obviously facing a political, well, complete gridlock, really. They can't move because the parliament is divided in such a way that... Over debt. Well, over debt, but more than that. I mean, it's to do with a general sort of rejection of the establishment. Same thing in Germany. I mean, Germany, the country of very stable politics forever. And they can't really put together an effective coalition. Because people feel like they are so much worse off. That's part of it. But it's not the whole thing. I mean, don't forget you've got migration.
[00:03:19] There's a massive issue in all this. Anyway, let's hear from someone who knows about this in some detail and is indeed studying it. And that's Simon Tubo. He's an associate professor of politics and international relations at the University of Nottingham. And he joins us now. So, Simon, just before you came on, I mean, we identified two key issues. I'm sure there's a lot more. But one was the amount of debt that countries in Europe are carrying and how they're trying to backtrack from that debt.
[00:03:45] And, you know, the implications that has on standard of living and all that sort of stuff. And then the other one is immigration. Are they the two big things that are causing all this division, do you think, within politics within Europe? So, I would say on the immediate front, I think the question of the debt is the most pressing one. The question of immigration is there. It's in the background.
[00:04:12] It's been there as a kind of continuous issue of politics for, well, 20 years, but with a rising crescendo over the last 10 to 15. But the question of debt and the reduction of the annual budget deficits that governments are running and that they need to reduce in order to tackle that debt,
[00:04:35] that is certainly the reason for the political instability that's being witnessed both in France and in Germany over the last three months. So, the French one, for example, we know that the reason that the previous prime minister, Barnier, fell was because they couldn't get the budget through, essentially. And it came down to a vote of confidence. But is it because there isn't a willingness across the political spectrum to tackle this issue? Because it's pretty obvious what the problem is.
[00:05:05] It's a massive debt. Yeah, so you could say that. So, I would say that it was partly a question of willingness of the political forces that are in the parliament to work together. That was mainly the reason why Barnier fell. And there were two facets of that.
[00:05:28] The first was that he had prepared the budget, but rather than send it to parliament for amendments and then submit it to a vote, he chose to make it a question of the responsibility of government, which means that the whole budget is ratified intact and is sort of ploughed through the parliament without a vote.
[00:05:56] More diktat than... Yeah, so this is this famous article 49.3. And the only way to oppose that was for the opposition to pass a motion of no confidence against the government. So, they decided to make the government fall rather than to accept a budget over which they had very little influence. But this was in a parliament that is, as you say, hugely divided, the far left and the far right, seeming quite dominant.
[00:06:25] What does that reflect about France at this stage? Because it's, you know, on the surface at least, a pretty successful, powerful economy at the centre of Europe. What's going on? Why are the extremes so powerful? Yeah, so basically, there is the centre and the extreme left and the extreme right. They're all evenly sized, more or less, in the parliament. None of them can have a legislative majority. And there's a conflict between the extremes and the centre.
[00:06:54] And the centre is basically Macron's coterie of parties and Le République and the former Gaulist parties. And their budget was one that was predicated on reducing the deficit, reducing debt. And it was going to be, this was going to be financed through a mixture of tax hikes and spending cuts. And it was about one third tax hikes, two third spending cuts. So, it was going to be painful.
[00:07:21] But the extremes are in favour of greater protection, right? It's greater social support. It's greater support for energy prices. It's greater support for the reimbursement of medical prescriptions. It's greater support for job placements and so on. And keeping the really generous, extraordinary pension system. That's right. Right, yeah.
[00:07:47] And so, you have that very fundamental conflict between the centre and its kind of more economically liberal vision of how to get back into the black, if you like, and how to reduce debt. And then you have the extremes, which are on opposite sides of the spectrum on a number of issues, primarily to do with identity questions. But when it comes to the budget and it comes to the role of the state, they're aligned insofar as they are in favour of greater protection, greater public spending.
[00:08:17] And so, how… Which is interesting, isn't it, in itself? I mean, the extreme right and the extreme left both saying the government should spend more. And actually, I mean, there is that question, isn't there? I mean, should they? If you look at, I mean, obviously, it doesn't fit within the rules of the EU and they should be trying to, you know, get the government deficit down. Yeah. But you look at how the US has carried on spending. So, you know, their debt to GDP, 122%. Europe, 81%. The UK, 100%.
[00:08:46] So, actually, you know, there's a bigger problem in the UK than there is in Europe. So, I mean, there is a case to say, well, you know, maybe Europe should just keep those, you know, just backtrack on those rules for a few more years just while the economy recovers. Yeah. So, the member state governments of the EU were given some breathing space during COVID and during the energy crisis that followed Russia's invasion of Ukraine.
[00:09:13] So, they were given the extraordinary nature of those circumstances. They were given some reprieve over meeting the budgetary deficit rules and the debt rules that the commission have set. But both of those have, you know, have ended really. I mean, the war in Ukraine hasn't ended, but the energy, there's a spike in energy prices has diminished.
[00:09:41] And so, it's back to normal times, if you like, for all of these countries, including Germany, including France. And so, they now have to reckon with the expanded role of the state and of state spending that has unfolded over the last five years. And there's a big pushback, or historically has been in Germany, against any idea of excessive spending and building up debt.
[00:10:10] The Germans have had historical idea, of course, for a good reason that this is not a good way to go. And yet, Germany now seems to be stuck in a loop of economic downturn and political dysphoria in the same way as France. Yeah. So, they're comparable situations. The only difference is that France is actually economically doing better.
[00:10:39] They've experienced, under Macron's presidency, a rise in inward and in foreign investment in the French economy. There's been a rise in entrepreneurship. There's been a fall in unemployment to a decade's low. I think it's 7% now in France. And France never managed to get it down below 10 for decades. So, France is doing better, but it has this issue of having overspent, really, over the last five years and needing to tackle that.
[00:11:07] In Germany, the malaise, the economic malaise is more structural. So, they're really sort of dealing with the ripple effects of rising geopolitical tensions with Russia and with China. So, they were relying on cheap Russian gas and they were relying on exports of manufactured goods to China. And both of those have been collaterals of rising political tensions.
[00:11:35] And that explains the problem in German industry, where there's been a number of really sizable layoffs. I mean, thousands of employees in some of the large German manufacturing groups. These are the kind of, you know, the side, the well-known German giants.
[00:12:00] These are the kind of problems associated with weak demands and weak production and rising energy costs. And so, there you're dealing with a more kind of pernicious problem than just the deficit.
[00:12:25] And is it possible to make a direct link between that and the political problems, the fall of the government, of course, the upcoming elections, and the rise of the AFD, the far-right party there as well? Yeah. So, I would say that you can make a kind of distant link between that background economic malaise that I've just spelt out and the fall of the government. The government fell largely on the question of the budget and debt.
[00:12:55] And as was mentioned, the Germans have adhered for a long time to what they call the debt break. So, you know, when it goes above a certain level, they have to start to tackle it. And the question was how to do that. And there was a dispute between two sets of partners in the outgoing coalition, the Greens and the Social Democrats, and their partners, which were the Liberals,
[00:13:18] over exactly how much more money the German government could spend trying to provide support to industry and also trying to provide support for the green transition. And the government fell over that in largely the same way that the French government fell. It was really to do with the accounts in the next 12 to 36 months.
[00:13:43] There is a more direct link between what we've just described in terms of the transformation of the German economy and the malaise that is at the basis of the support for the radical right parties, including the AFD. I think the supporters for these parties are individual voters that are discontent. They have suffered a loss of recognition, a loss of status.
[00:14:13] They experience, you know, some, you know, despair or at least a sort of lack of hope regarding their own economic prospects. And so that is definitely something that fuels the support for the radical extremes in Germany. Well, also, I mean, something needs to be done, doesn't it?
[00:14:32] So, and you mentioned that word transition, and that's it is an economy that if you assume that, for example, China becomes a more self-sufficient economy, they rely less on imports from Germany, for example. They certainly don't need cars from Germany, do they? They seem to be doing a very good job of making their own cars in China these days. We've got German, you know, growth will be, well, maybe 0.2 percent this year, probably flatlining in reality. And you mentioned unemployment.
[00:14:58] I mean, it's back up at 6.1 percent, not quite as bad as it was during the, you know, the worst of the pandemic when it got up to 6.4 percent. But it's not far off that, is it? So whichever, whatever numbers you look at for Germany, the indicators are just not good. And if you think that that will just sort itself out somehow without some sort of cash injection or without some sort of new approach, I mean, there has to be a transition to the German economy.
[00:15:27] And you can't do that without spending money, can you? Yeah, I think that this is the key thing. And I think that a new government, well, a new party in government will be able to deliver a fresh approach.
[00:15:45] And if it's a party that is either the CDU in a majority or the CDU, the CDU or the kind of the conservative center-right parties, the heir of the, this was Merkel's party. And if in a coalition with a junior partner like the Liberals, I think that at least they will have the cohesiveness as a government to provide fresh direction and to be effective.
[00:16:15] Do you think they really can come up with fresh ideas, though? Because these are the people who've been round and round and round doing it. I mean, Merkel, some people now point back and say that that's where the problem really began, that she followed policies that led to where we are now. Yeah, I think that's right. And it is a characteristic of the German political system that it is based on consultation or coordination and cooperation between different powers.
[00:16:45] You have the federal government, you have the lower chamber, the upper chamber. You have the industrial partners, the employers and the employees and the trade unions. And they all work in a system geared towards consensus. So the idea that you will have a radical departure is unlikely in the case of Germany. What you're more likely to see is kind of a gradual change in bringing about some fresh ideas.
[00:17:13] But the direction of travel for most European economies is the same. And it's one that is geared towards some kind of transition in the sources of energy. Right. So trying to affect the transition away from reliance on fossil fuels and towards renewables and using that as the basis for industrial regeneration,
[00:17:41] which requires the introduction of new technologies, their development, their scaling up and the development of a skilled labor force for the manufacturing of those new technologies. But as you say, that's a Europe wide issue, isn't it? And so to deal with that on a country by country basis is problematic. And I wonder whether that is part of the problem of the EU. So Mario Draghi talked about, you know, tackling these issues. And defense obviously falls into the same bucket as well.
[00:18:11] As does migration, which is the thing we haven't really mentioned. Well, let's get on to that in a second. But just in terms of how you fund a transition energy wise, it needs Europe wide investment. It needs the issuing. It needs, you know, issuing European bonds rather than sovereign bonds for individual countries. And that investment goes into delivering an energy solution, which is built where it makes the most sense, irrespective of what country it's sitting in. But is Europe just too parochial for that sort of thinking?
[00:18:41] I mean, certainly Mario Draghi's, you know, approach seems to have been stuck in a bookshelf somewhere. It doesn't seem to be a great deal of appetite for acting on it, does it? Yeah, so I think you're absolutely right in your diagnosis of the challenge of finance. Where does the money come from? Because in a way, the sums of money required are too colossal for any individual company or sector or even member state of the EU to provide.
[00:19:09] So the money will have to come from all sources. It will have to come from the European level, from whatever money can be raised on the back of the European budget, as was done for the COVID recovery fund. They issued bonds on the back of the European budget.
[00:19:32] So these were not bonds that were kind of sovereign European bonds, but rather using the EU budget as a kind of collateral. So that would be one source for the future. Something similar is being touted for defense spending, which will also have to rise. It'll have to also come from the member states.
[00:19:51] And so they will need to be more creative, I think, than has been the case at present in terms of generating new sources of revenues in a way that doesn't leave citizens out in the cold and doesn't choke the economy. So it's a very fine balancing act.
[00:20:08] And then it's going to have to come from the corporate sector because private companies also have to be incentivized to make the right investments in the right sectors and to be provided with insurance regarding some of these investments. And here there are some number of institutions that have another role to play, including the European Central Bank and also the European Investment Banks.
[00:20:32] And they can provide all of the instruments, the financial and legal instruments to minimize the risk for the private sector. So it's a huge challenge, you're right. But I think that the EU's difficulty is not a lack of fresh thinking. I think Mario Draghi's report was influential. It was well received.
[00:20:57] And I think it will provide the template for the thinking of EU leaders in the next five to 10 years. But the thinking of those leaders, that's what you're talking about, the ways in which they can actually work together. And Simon, one of the problems is that they don't seem to be able to do that. If you have the two major pillars, Germany and France, in the kind of mess that they're in, when you say EU leaders, that's really what it comes down to. Yeah. How can they act in these things?
[00:21:24] And I will bring in migration at this point, because I think that is one of the things that's driving the political agenda in all these countries. And again, it's something that they've talked about a European wide response to, but they haven't really got one. Is that still part of the problem? Yeah, I think you're right. So there are two concepts. So just regarding the kind of vacuum of leadership that the current instability in France and Germany has created, I think you're right. This is a problem.
[00:21:52] That's the engine that's been driving European integration since the days of De Gaulle and Adenauer, and that has faltered. But what that does do is to provide more authority and more power and more discretion to the European institutions. Von der Leyen has just been reelected as president of the commission. She has a fresh mandate.
[00:22:14] She has a very clear agenda of what she wants to achieve, and she can even now do so against the objections of some of the member states, as was witnessed when she signed a new trade agreement with South America between the EU and Mercosur, the regional trading bloc there. Even over the objections of President Macron, who's obviously been weakened by this situation. So I think this will provide more space to the EU institutions.
[00:22:43] And to the extent that the commission and the council can work together, then in a way you've got a situation that allows for better and faster and more effective decision making, because the member states are not necessarily trying to exert their own independent influence. So that could be one, let's say, salutary side effect of this turmoil in France and Germany.
[00:23:11] But when it comes to working together on migration, see, this is an area where there's still a real disagreement over how to manage this. And this is an area where the member states still have most of the authority for how to deal with asylum seekers and illegal migrants.
[00:23:34] But if there's more autonomous decision making being made at the European level, I mean, that might be, I mean, you know, there's actually some forward motion on some of these big issues that we're talking about. But I could see that backfiring as well. So if the UK was still a member of the EU, for example, that would, you know, that would be the nail in the coffin, wouldn't it?
[00:23:54] And, you know, people would be going, well, OK, so you're taking more decisions now in what we see as a sort of quasi elected body where a lot of decisions are made by civil servants more than members of parliament. I mean, it almost needs to be some form of, you know, if the EU is going to have a greater say in a more cohesive Europe-wide approach, there needs to be some sort of political reform in how the EU is structured.
[00:24:24] But also that the opposition in France and Germany, particularly on the right, is quite anti-European. You know, they would be more offended by more decisions coming from Brussels. Yeah, my point. Yeah, yeah, I think that's right. I think that there is a risk that a highly ambitious European commission generates some resentment in the capitals.
[00:24:50] But I think it's a question of whether or not that delivers effective policy, because I think that, you know, if members of the European public have to choose between governments which are unstable, governments which can't agree on policy, governments which are unable to tackle some of the major problems that are at our doorstep to do with the green transition or to do with immigration,
[00:25:21] they won't necessarily be happier with that outcome than one in which some of the problems that we just discussed are being tackled more effectively, more visibly by European level institutions. In particular, if there's a sweetener at the end of it, and this is where the question of finance comes.
[00:25:39] If there's a better consultation in place with EU institutions, the member states and the corporate private sector for injecting funds into European economies, then that will have a notable effect on trying to bring back growth, bring back competitiveness, and see a new dawn of growth.
[00:26:06] So it's a question of, you know, choosing between two different types of devils. So you could say, well, okay, we are going to stick to that stability and growth pact that you can't go into more than 3% deficit year on year in your budgets. But hey, don't worry, because we're going to spend more at the European level. Yes, I think that that's something you're likely to see.
[00:26:32] I don't think there's going to be any relaxation of the budgetary compacts, the fiscal compacts. But there may be some ways of providing financing through alternative means and through more collective means. But Simon, you mentioned about the part of that, you know, the collective action maybe being on defense. And of course, that's the other devil in a way we haven't mentioned so much, which is Russia, the front against Russia, Russia in Ukraine, the pressure from the east.
[00:27:01] And one of the whole ideas of Macron and the German government before was holding United's strong position in opposition to Putin and giving backing to Ukraine. Does the weakness in Paris and Berlin actually undermine that? So in the short term, yes. And I think not just the political instability, but the budgetary pressures will put pressure on providing aid to Ukraine.
[00:27:29] And I think that that was already visible before the showdown in France when there was a recalibration of the amount of assistance that the French government would provide to Ukraine, kind of defense assistance. And it was scaled back. And in the case of Germany, now they're the second largest contributors to Ukraine's war effort after the United States. So that has been a fairly steadfast source of support.
[00:27:57] But again, with ramifications for budgetary pressures. So the amount of money available does determine how generous European states can be with Ukraine and is also a measure of its strength against the Russian threat. Because not only do these countries have to support Ukraine, they also have to ramp up their own defenses.
[00:28:24] And they have to do so as a matter of an oath that they have made to other NATO allies, including the United States, who will certainly be verifying that they do so now. And so they also need to be able to do that. So this is a real, another source of a pinch point, if you like, on European budgets.
[00:28:49] But I think that, again, trying to pool resources, trying to do this in a collaborative way, and trying to use the effects of scale is the way of achieving that. None of these European member states can alone provide the sort of financial wherewithal for providing new defense contracts,
[00:29:14] new military systems that is required for beefing up defense at the European level. I think the only way that can be achieved is if, for example, you have industrial pooling. So you have large Europe-wide defense groups that try and produce the kind of advanced weaponry that is needed.
[00:29:39] And that can work if they are provided with EU-wide defense contracts. So you would have to have member states coming up with common procurement rules for employing these European industrial groups. And if that is achieved, then obviously the cost per government is going to be far, far greatly diminished.
[00:30:04] So to the extent that this can be done at the European scale, then the threat can be effectively countered. And if you do get that situation, say, I don't know, five, ten years' time, where the European Commission has taken on more of a greater role in terms of budgeting and managing the collective economy for Europe. And defense. And defense. Yeah. If it gets into that situation, does that mean the political turbulence,
[00:30:32] and it starts to find answers to things like immigration, does that mean the political turbulence that we're seeing between individual member states starts to calm down a bit? See, I don't know. In a way, there was an academic that said to me that polarization, it's a bit like toothpaste. And once you get it out of the tube, you can't get it back in. And so the cat is out of the bag.
[00:31:01] I mean, the AFD, its support may recede in time, but it's not going to disappear. I think it's there to stay. It's become part of the furniture. The question is, can it be normalized? And can the issues that it stands for become part of normal competition between political parties
[00:31:25] without it generating the kind of aghast reactions that neo-Nazis are in our midst? And that becomes a question of whether or not these parties can indeed be normalized. And to some degree, my view is that they are becoming normalized. They are governing increasingly in a number of countries. And that has had some effects for democratic backsliding in certain countries like Hungary.
[00:31:55] But in other countries like Italy, for example, you just end up really with a sort of fairly conservative political party in power with all kinds of ramifications for certain issues, for example, on reproductive rights. But Italy is still a reliable European player, comfortable in the EU and comfortable in NATO.
[00:32:21] So there hasn't been a fragmentation of the European Union simply because that party that used to belong to the far right has come into power. So it depends, you know, it depends on the extent to which these parties and what they stand for becomes normalized. And where in five years do you think Europe will be? I mean, how is all this going to shake down in terms of the European economy, for example? Is it going to become a more self-sufficient economy?
[00:32:50] Is it going to because it's, you know, if we assume that China is going to go down that road or is there still going to... The US is going to impose tariffs and who knows what. Yeah. So does that self-sufficiency become the new way of operating? Does that mean Germany, for example, has to be less of a manufacturing nation or less of an export outside Europe nation anyway? And, you know, and what's the responsibility for all the other countries within that? I mean, Spain's doing quite well, isn't it? But it's doing quite well because of tourism, because of the tourism bounce back. And I guess, you know, each country has its own strengths in that respect.
[00:33:20] And Germany used to be manufacturing what's it going to be in five years' time, for example. And where does France stand? European Union and the European economies will follow a global trend. And one trend that's been set in the United States for maybe not greater protection. I think that the EU will try and counter any trade war with the United States.
[00:33:44] They'll try and first find an agreement with the United States for a new kind of trade arrangement. And it'll be a kind of sectoral agreement to see if they can reduce the trade imbalance with the United States. If they can't achieve that, then they'll have to apply countervailing measures and apply their own tariffs on United States exports.
[00:34:09] But the other trend in the United States has been what they refer to as onshoring. So trying to reduce this geographical scope of global supply chain so that there isn't a dependence on other countries, including China, and trying to bring production back closer to the United States. And that was initiated by Trump, but also continued by Biden for all of their seeming differences.
[00:34:36] There was a consensus there that jobs needed to be brought back closer to home. And I think that you're likely to see that with the European Union as well. And I think that, for example, the production of medical equipment was revealed during COVID to be something on which we relied on production in China and which exposed us to the fragility of these global supply chains.
[00:35:01] So I think that that tendency is going to be one that Europe continues like other European countries. You don't have to bring it all on, as you say, on shoring on all sides, really. That's right. It's an interesting prospect for 2025 and how Europe is going to move forward and beyond that. But to think of more stable, is more stability the word or is it just are we more of the same in 2025? Oh, I think more of the same in 2025. In the politics of it, it's going to be more of the same.
[00:35:31] It's just that that will be less novel. We'll all get used to it. So we'll just get used to it. Stable instability. Simon, thanks very much indeed for being with us. My pleasure. And we shall see how it works out. Good to talk. Great. Thank you. Nice to talk to you. Not so sure there's going to be much stable instability around in the United States next week. Because we are so close now, aren't we, to that inauguration next week? And yes, what is going to happen? What is Donald Trump going to do in his second term?
[00:35:59] Will we get any sort of sense of it, even from his inauguration speech? And how is it going to affect the world? Because it's very much a world issue, economically and politically. The world is waiting. The world is waiting. And that is what we will be addressing next week. Next week on The Y Curve. Join us for that. Thanks for joining us today. The Y Curve.