European flag with coins stacked on each other in different positions

By Emil Bjerg, journalist and editor

As Europe enters the second Trump era, its economies face a delicate balance between modest recovery and mounting risks. Recent forecasts paint a picture of sluggish growth amid persistent economic and political challenges.

The EU economy experienced modest growth at around 0.9 percent in 2024 after a year of stagnation in 2023. For 2025, the European Commission forecasts EU GDP growth to reach 1.5%, while the euro area is expected to grow by 1.3%. While that is progress compared to the years prior, the progress is moderate: UN predicts the global growth to be 2.8 percent in 2025.

From Wirtschaftswunder to Stagnation

Germany, Europe’s largest economy, remains a significant concern. That happens as German companies, particularly in the automotive sector, are losing market share to US and Chinese manufacturers. In the automotive sector, China has evolved from a key export market to a main competitor for Germany. At the same time, geoeconomic fragmentation is impacting Germany, as the country is no longer receiving cheap energy from Russia and could soon face tariffs from the US. After potentially experiencing its first consecutive annual recessions in over two decades, Germany’s recovery in 2025 is expected to be weak with OECD projecting a growth of 0.7%, while the Bundesbank forecasts only 0.2 growth for the world’s third biggest economy.

Trump’s Tariffs

After Trump’s inauguration, one question trumps them all for the European economies: will Trump go forward with his announced tariffs?

While this could once again be a negotiation position, it could indicate that Trump may have his initial focus on tariffs directed towards US neighbors.

Trump’s proposed tariffs include a 10% universal tariff on all US imports and a 100% tariff on vehicles imported into the US. Both could significantly impact European economies and in particular, the big export economies. Should the proposed tariffs, experts have warned of a general recession in the EU.

Goldman Sachs estimates a 30% risk of European recession in 2025: “We expect 2025 to be another challenging year for the Euro area economy. First, US President-elect Trump’s plan to impose tariffs is likely to weigh significantly on growth”, the investment bank writes.

By the end of 2024, well after his election victory, Trump wrote on Truth Social that he had “told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!”

One could view that statement as an indicator that the proposed tariffs are a negotiation position. In his inauguration speech, Trump declared that “We are establishing the External revenue service to collect all tariffs, duties and revenues. It will be massive amounts of money pouring into our treasury, coming from foreign source.”

At an Oval Office signing ceremony following Trump’s inauguration on Monday, Trump promised to impose 25% tariffs on Mexico and Canada beginning already on February 1st, while not mentioning tariffs on the EU. While this could once again be a negotiation position, it could indicate that Trump may have his initial focus on tariffs directed towards US neighbors.

EU’s gameplan 

While some economic experts observe that Trump could have a hard time imposing tariffs, the EU has prepared a plan a and a plan b, if Trump goes forward with his tariff plans.

As the early measure, the EU plans to negotiate with the US to avoid tariff imposition, potentially offering increased imports of US goods, particularly in energy and defense sectors. Here, the EU has already increased imports since Russia’s invasion of Europe.

If negotiations fail, the EU is likely prepared to implement retaliatory tariffs. As Garcia Bercero, a fellow at policy research firm Bruegel says “Any strategy needs to include both elements [negotiation and retaliation]. Otherwise we would not be credible in a negotiation.”

These options could include targeting products from US swing states to apply maximum political pressure. It could also impose taxes on digital services provided by American tech companies. The EU could also increase tariffs on specialized US imports that rely on European expertise.

Political Turmoil in the Main European Economies

Today, political instability in both Germany and France adds another layer of uncertainty to the eurozone’s economic prospects and political resilience.

A potential drama over tariffs will take place in a politically weakened EU. For many years, France and Germany constituted an economic and political powerhouse, driving the EU forward. Today, political instability in both Germany and France adds another layer of uncertainty to the eurozone’s economic prospects and political resilience.

In Germany, Chancellor Olaf Scholz’s “traffic light” coalition collapsed in late 2024 due to irreconcilable fiscal disagreements. A snap federal election will be held on Sunday, February 23, 2025. Polls suggest the center-right CDU/CSU is poised to lead the next government. Meanwhile, the far-right AfD continues to make significant gains, creating significant division in Germany.

In France, President Emmanuel Macron’s political influence has diminished significantly since several poor elections in 2024. Macron’s previous government under Michel Barnier collapsed due to a no-confidence vote over budget disputes. The 2025 budget remains a major point of contention, with previous attempts to pass it leading to government collapse.

In other words, it’s a weakened EU that meets an experienced American President, who has been elected with a strong mandate.

A Path Forward for Europe

The EU’s significantly lower growth rates, compared to China and the US, have sparked ongoing conversation around strengthening European competitiveness. Mario Draghi, former president of the European Central Bank, has been a leader of this conversation with his report on European competitiveness.

The Draghi report explicitly supports joint borrowing as a means to finance large-scale investments in innovation and decarbonization. While progress has been made in integrating some of Draghi’s recommendations into EU policy discussions, achieving consensus on common investments remains challenging. The EU’s historical reliance on unanimity voting for fiscal matters often slows down decision-making. However, Draghi’s call for extending qualified majority voting could pave the way for more efficient implementation of shared financial mechanisms.

While progress has been made in integrating some of Draghi’s recommendations into EU policy discussions, achieving consensus on common investments remains challenging.

Draghi highlights Europe’s innovation gap, with many corporate “unicorns” relocating abroad due to regulatory and financial barriers. To counter this, the report proposes creating a European Advanced Research Projects Agency (ARPA), incentivizing venture capital, and reforming pension regulations to channel savings into investments.

The European Green Deal has set a target for Europe to become the world’s first climate-neutral continent by 2050. At the same time, the European Green Deal holds potential to drive new growth with investments in sustainable innovations. it is well-positioned to leverage this transition to enhance its global competitiveness and economic growth.

As the American focus under President Trump shifts towards fossil fuels, the EU could eye a chance to position itself as a world leader in sustainable technologies, at once tackling climate change while also reinvigorating its economy and innovation landscape.

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