Over the last three years, the economy of the European Monetary Union, or the euro area, has grown at an average annual rate of 0.9 percent. That is significantly below its noninflationary growth potential currently estimated at about 1.6 percent.

And the short-term growth outlook is getting worse. There is now a high probability that a weak 0.7 percent growth during the first half of this year will be further eroded by soaring energy prices.

The ongoing wars in the Middle East and Ukraine are cutting energy supplies. In the four months to July, the euro area energy prices have been rising at an average annual rate of more than 10 percent. Downward pressures on energy supplies are such that only during the month of July energy prices shot up 2.7 percent.

The resulting euro area inflation rate has accelerated to nearly 3 percent in July from 2.4 percent in the previous month, and preliminary estimates are now putting inflation for August at 3.3 percent.

That makes the 2.4 percent policy interest rate of the European Central Bank (ECB) untenable at a negative real rate of 1 percent.

Raising interest rates is the last thing the euro area needs

What follows is an inevitably rising interest rate in a weak and slowing euro area economy.

And the fiscal policy has no room to help. Budget deficits to GDP in euro area’s four largest economies range from 2.1 percent in Spain to 5.1 percent in France, while the public debt to GDP goes from 64 percent in Germany, to 102 percent in Spain, 118 percent in France and a whopping 140 percent in Italy.

Such a precarious state of public finances would not even allow the Europeans to copy Japan’s mistakes with energy price subsidies. As the Japanese discovered, they could not fool the markets because they were not dealing with temporary and reversible external shocks.

The Europeans must know – and should have known all along -- that energy prices are the fundamental structural issue underlying their unbalanced and unstable economies.

So, what is the way out?

The answer is: Peace and a genuine European Union with deeply integrated economic, social and security policies. It is past the time the Europeans buried old hatreds and petty rivalries that twice lit up the world in the last century and led to the largest butcheries the world has ever known.

The Europeans have lost control over the long running Middle East tragedy, but they could – and emphatically should – build a stable and peaceful architecture of their own continent. That would revive productive flows of commerce and finance -- and would also open old lines of abundant and reasonably priced energy supplies.

Sadly, all that now is a tall order.

Important political changes are under way in France and Germany, but it is far too early to tell how much one can bet on constructive and productive policy changes in these two countries that represent one-half of the euro area economy.

Revive the French-German partnership

The first round of French presidential elections will be on April 18, 2027, with a runoff on May 2, 2027. According to the IFOP poll, conducted August 24-25, 2026, Marine Le Pen, the leader of the far-right Rassemblement National (National Rally) wins the first round with 33-35 percent of votes.

In the second round, Marine Le Pen would win the presidency with 52.5 percent or 69.5 percent of votes, depending on who is the likely opponent.

If she wins, she said she would cut the budget deficit to 3 percent of GDP from the current 5.1 percent. That would comply with one of the monetary union’s treaty obligations.

In her four previous runs for French presidency, she was not particularly inclined to observe the euro area rules or administrative constraints of a huge European Commission bureaucracy. And neither was she enthusiastic about the proverbial French-German partnership in the European Union’s policy initiatives.

That partnership is an enduring myth and a possible source of problems should a far-right Alternative for Germany come to power. AfD is now the highest polling German party, with a 7 percent lead over the CDU/CSU governing coalition. That, and the Chancellor Merz’s low approval rating of 14 percent, could bring big policy changes in the months ahead.

Perhaps the most important thing we now know about the likely new French and German leaders is their attachment to peace and economic prosperity.

One could, therefore, only hope that they would remember the solemn call the former French President François Mitterrand made during his historic speech at the European Parliament on January 17, 1995: “Mesdames et Messieurs: le nationalisme, c’est la guerre!”