Will Austerity Save Europe?
As Europe braces for a potential trade war after the United States elects Donald Trump as its president, its two largest economies are struggling. For the second year in a row, Germany is on the brink of zero growth. While France is expected to grow by less than 1 percent in 2025, persistent structural problems challenge its economic future. The question arises: Is Europe’s economic stagnation the result of insufficient public spending, or are bloated and inflexible welfare states dragging them down?
The High Price of Aggressive Stimulus
For example, France’s aggressive stimulus policies have pushed its budget deficit to 6 percent of gross domestic product (GDP).
Its debt-to-GDP ratio has surged to 112 percent, up from 95 percent in 2015. In 2023, President Emmanuel Macron faced widespread protests over raising the retirement age from 62 to 64. Although significant, this change merely scrapes the surface of France’s fiscal challenges. As European Central Bank President Christine Lagarde warned, France’s fiscal trajectory is unsustainable without far-reaching reforms.
Many American and British progressives admire France’s model of big government, hoping their own countries would adopt similar policies. However, debt markets have recently perceived the risks associated with France’s ballooning debt, pushing yields higher. Remarkably, the French government now pays a higher risk premium than Spain, a cautionary tale of the high cost of unchecked debt accumulation.
Debt and the Limits to Growth
With real interest rates on government debt expected to remain >elevated unless a recession occurs, France cannot rely on straightforward economic growth to address its debt and pension problems altogether. Instead, this growing debt burden will almost certainly hinder its long-
How do the differing economic approaches of France and Germany inform the debate on austerity measures in Europe?
## Will Austerity Be Europe’s Savior?
**(Interviewer):** Joining us today is Professor [Guest Name], a leading economist specializing in European Union economies. Professor [Guest Name], thank you for joining us.
**[Guest Name]:** Thank you for having me.
**(Interviewer):** Europe is facing a number of economic challenges, from stagnant growth to burgeoning budget deficits. Some argue that austerity measures are the answer, while others believe increased public spending is necessary. What is your take on this debate?
**[Guest Name]:** It’s a complex issue with no easy answers. While some might point to France’s aggressive stimulus policies and resulting 6% budget deficit as proof that spending doesn’t work, the situation is far more nuanced.
France’s structural problems run deep, and simply throwing money at the issue might not be the solution. On the other hand, Germany, often lauded for its fiscal discipline, is teetering on the brink of zero growth.
**(Interviewer):** So, are you suggesting a middle ground?
**[Guest Name]:** Absolutely. We need a balanced approach. While controlling budget deficits is crucial, simply slashing public spending willy-nilly can have a devastating impact on social safety nets and economic growth.
Instead, we need targeted investments in areas like education, infrastructure, and innovation to boost productivity and long-term economic prospects.
**(Interviewer):** With a potential trade war on the horizon following President Trump’s election, does this add further pressure on European economies?
**[Guest Name]:** Undoubtedly. The potential for protectionist policies from the US poses a serious threat to European exports and economic growth. This makes it even more important for Europe to focus on internal reforms and strengthening its own economic foundation.
**(Interviewer):** Professor [Guest Name], thank you for shedding light on this complex issue.
**[Guest Name]:** My pleasure.
