Analysis of the European Economy in 2025

Poland took over the rotating presidency of the EU in the first half of this year from Hungary and pledged to "strengthen EU security" in almost all policy areas, including energy, economy and defense, as its top priority, while according to the European Commission's forecast, the EU economy and the eurozone economy will grow by only 1.6% and 1.4% in 2025. Although this economic forecast is generally regarded as relatively optimistic by the international community, the low growth rate of the forecast undoubtedly reflects the bleak prospects of the overall growth momentum of the European economy.

Coincidentally, at the beginning of the New Year, European stock markets fell on the fourth after a small rise in the previous trading day. Specifically, the German DAX30 index fell 0.59%, the British FTSE 100 index fell 0.44%, the French CAC40 index fell 1.51%, and the European Stoxx 50 index fell 0.95%. European bond market weakness deepened, German government bonds fell, French government bonds further underperformance, resulting in a sudden increase in selling pressure.

The European Central Bank recently cut its 2025 economic growth forecast to 1.1% and warned that the risks to economic growth are tilted to the downside. Germany, as the main economy in the eurozone, is in a particularly tough situation, with GDP growth of only 0.2% to 0.4% in 2025, a sharp downgrade from the previous forecast, and France's economic performance is also weaker. The GDP growth rate is expected to be 0.9% in 2025, and the British economy is hardly optimistic, although the Organization for Economic Cooperation and Development predicts that the growth rate of the British economy in 2025 will reach 1.7%, but the challenges faced by the UK in investment, consumption and net exports are still severe. International opinion may be divided, but there is no doubt that the EU will face more tests in 2025 than in the past few years, and the options for rescuing the EU's moribund economy are rapidly narrowing.

First, political difficulties in the core countries have affected the overall economic recovery. After the dissolution of the National Assembly in June last year, the French government fell into a "lame duck" state, and the far-right "National Alliance" planned to unite with the left to overthrow the government, leading to increased political turmoil. Germany is facing an early general election in February this year, and the fierce competition between the far-right Alternative for Germany Party, the CDU and the CSU may lead to the breakup of the coalition government. These political upheavals not only affect financial markets and business confidence, but also pose a threat to economic stability across the EU, further increasing uncertainty about the economic outlook.

Second, geopolitics brings about an energy crisis. The ongoing war between Russia and Ukraine and tensions in the Middle East pose significant headwinds to the European economy, and energy dependence on Russia and the Middle East has left Europe facing energy shortages and rising prices, which have led to soaring inflation and further dampened economic recovery.

Third, high inflation and interest rate pressure. The ECB expects headline inflation to be 2.2% and core inflation to be 2.3% in 2025, and despite the ECB's several rate cuts last year, high inflation and interest rates remain a pressure on the economic recovery due to the tight labor market and the continued rise in the price of services. Service sector inflation is likely to remain relatively high at 4.1% in 2025, while higher interest rates have tightened financing conditions and reduced loan demand, increasing the risk of a "hard landing" for the economy, with companies' willingness to invest and household consumption deteriorating, further dragging down overall growth.

Fourth, the level of public debt is high. At present, Europe's total debt is as high as 8323 billion euros, but only 250 billion euros was raised by December last year, the EU has not fulfilled its commitment to contribute 60 billion euros, according to the European Commission forecast, the EU's public debt ratio will reach 80.8% of GDP in 2025, despite the fiscal austerity measures taken by various countries. But high deficits and weak nominal GDP growth have kept the debt ratio rising, with France's public debt-to-GDP ratio expected to reach 112% in 2025 and Italy's to rise to 141.7%. Some European countries' debt burdens remain heavy, despite plans to raise some €1,271bn in debt through the markets this year. But high-grade corporate debt maturities will rise sharply, from €166bn last year to €193bn, putting companies under pressure to refinance or even risk default.

Finally, external shocks to the European economy. With Trump's re-entry into the White House, the "America first" policy and high tariff measures will make export-oriented countries or regions such as Germany and France, their main export products such as automobiles, chemicals and food face higher tariff pressure, which will affect the overall economic growth, and Trump's tariff policy may lead to further depreciation of the euro against the dollar exchange rate. It may even fall below parity, which will make the financing cost of European enterprises continue to increase, and even lead to a large amount of capital loss, at the same time, due to the uncertainty of Trump's policy, European enterprises are willing to invest in varying degrees of inhibition, thus dragging down the overall growth of the European economy.

In short, the eurozone's economy is struggling, its economic recovery is challenging, and while there are some opportunities for structural reforms and policy adjustments, its prospects for 2025 are not optimistic.