By Patricia Cohen
The forecast for Europe’s economy has been underwhelming.
Last week — in the wake of Donald Trump’s win in the presidential election — it worsened.
Significant uncertainty surrounding the Trump administration’s positions on trade, technology, Ukraine, climate change, and other issues is anticipated to deter investment and stymie growth. The possibility of a tariff conflict initiated by the United States, the European Union and Britain’s largest trade partner, would severely impact critical sectors such as automobiles, pharmaceuticals, and machinery.
Moreover, the imperative to increase military expenditure due to skepticism about the U.S. assurances in Europe would add further pressure to national budgets and escalate deficits.
Additionally, Trump’s more aggressive stance toward China could force Europe to choose sides or risk consequences.
“Europe’s worst economic nightmare has materialized,” stated Carsten Brzeski, chief economist at ING in the Netherlands. He cautioned that these developments might push the eurozone into “a severe recession” next year.
With political unrest in Germany and France, Europe’s two foremost economies, this latest setback could not come at a more inopportune time.
On the same day that Trump’s victory was disclosed, German Chancellor Olaf Scholz effectively dissolved his coalition government due to profound disagreements over expenditures and deficits.
For Germany, already experiencing a second consecutive year of recession, the economic difficulties posed by another Trump term are particularly pressing. Its economy faltered after Russia invaded Ukraine in 2022 and the influx of affordable Russian gas — a crucial factor for its industrial accomplishments — ceased.
Germany is facing challenges on multiple fronts. Volkswagen, the continent’s leading automaker and Germany’s largest employer, recently indicated it would likely close facilities and reduce its workforce. The influx of competition from Chinese electric vehicles has already impacted the sector’s sales both internationally and within Europe.
Leaders find themselves conflicted between appeasing China or taking a confrontational approach. Last month, the German government voted against the EU’s initiative to impose tariffs as high as 45% on electric cars sourced from China. Nations like Spain abstained. A majority consented, and in retaliation, China imposed new tariffs on European brandy, predominantly imported from France.
Reciprocal tariffs between the United States and the EU would further diminish the prospects for the automotive industry. The United States is the leading market for vehicles exported from Germany, accounting for nearly 13% of the 3.1 million cars it shipped internationally in 2023.
Trump’s rhetoric during the campaign about making the EU “bear a significant burden” for not purchasing enough American goods and imposing blanket tariffs of 10% or 20% may serve as a negotiating starting point. However, even analysts anticipating milder actions suggest targeted tariffs on the automotive sector are probable.
“Many in Europe have not yet comprehended the significance of integrating geopolitical considerations with economic policy,” expressed Hildegard Müller, president of the German Association of the Automotive Industry.
Increased American tariffs undoubtedly impact far more than Germany and the automotive sector, extending to Novo Nordisk, the pharmaceutical firm behind Ozempic, alongside industries like food, wine, cheese, pearls, chemicals, nuclear reactors, glassware, shoes, and numerous others across more than two dozen nations.
Luisa Santos, deputy director of BusinessEurope, a lobbying organization representing thousands of enterprises, cautioned that tariffs would inflate costs and hinder investment.
“We still cling to the hope that, given the weight of the economic connection, they might be reconsidered and perhaps avoided,” she mentioned concerning tariffs. The EU’s direct investment in the United States reached $2.4 trillion in 2022, fostering over 3.4 million American jobs, according to the EU.
Currently, the average U.S. tariff imposed on European imports hovers around 3% to 4%.
In parallel, heightened U.S. duties on China, another of Trump’s trade commitments, are likely to prompt Chinese manufacturers to boost sales outside the United States, intensifying competition with European producers.
European firms may seek to establish or expand production facilities in the United States. Nonetheless, any manufacturer utilizing materials sourced from China would encounter rising costs regardless of their operation’s location.
Vestas, a Danish firm and the leading wind turbine producer globally, announced it is already increasing output at its two American plants in Colorado. Over 40% of its orders originated from the Americas during the quarter ending in September.
“The landscape surrounding tariffs has significantly changed,” Vestas CEO Henrik Andersen noted during a recent call with industry analysts. He remarked that Vestas has had to maneuver around tariffs enforced during both the first Trump administration and the Biden administration. “That’s why you strive to exclude more and more volumes and components of Chinese origin when operating in the U.S.,” he noted.
The necessity for a unified EU response dominated the summit held last week in Budapest, Hungary.
“The urgency has escalated compared to a week ago,” stated Mario Draghi, the former Italian prime minister who has just completed a report on European competitiveness.
Draghi advocated for an increase in public investment by $900 billion annually to enable Europe to break free from economic stagnation and enhance its competitiveness vis-à-vis the United States and China.
More crucially now, he emphasized the need to amplify efforts to connect the economies of the bloc through a unified capital market and by issuing common bonds, ideas that have sparked controversy.
“Don’t inquire what the U.S. can offer you; instead, question what Europe should do for itself,” Italian Prime Minister Giorgia Meloni remarked during the meeting. “Europe must establish equilibrium. We understand what we need to accomplish.”
By the conclusion of the meeting, leaders endorsed a declaration pledging to enhance Europe’s competitiveness.
However, the question remains whether the EU can convert those aspirations into tangible action, given the rising political fragmentation within Europe and the ascent of right-wing parties skeptical of extending additional authority to Brussels.
