With the dust still settling from the heated U.S. presidential elections, one area of concern remains at the forefront—potential trade tensions between the United States and Europe. The presidency of Donald Trump, characterized by aggressive tariff policies, poses significant risks for the European economy. After Trump’s victory, many are left wondering how these tariffs will impact transatlantic trade, especially when the European Union (EU) is already grappling with its own economic challenges.
Germany, as the continent's economic powerhouse, has recently found itself staring down the barrel of zero growth for the second consecutive year. The outlook for France isn't much brighter, as forecasts indicate its economy may see less than 1% growth by 2025.
Trade tariffs were one of Trump’s main tools during his previous administration, especially aimed at China, but European markets are now bracing for the potential fallout. One of the key worries is how these tariffs will disrupt trade flows, amplify inflation, and create ripples across the economy of nations already under strain from high public debt and sluggish growth.
Interestingly, the underlying ailments of Europe's economies have long been debated. Some experts argue the stagnation arises from insufficient economic stimulation, akin to Keynesian principles, whereas others attribute it to bloated welfare states. Regardless of the cause, there is consensus around one pressing issue: band-aid solutions of higher budget deficits and lower interest rates won't save the day.
Take France, for example. The government has adopted aggressive stimulus measures, pushing its budget deficit to 6% of GDP. This is alarming when considering the nation’s debt-to-GDP ratio has surged from 95% to 112% since 2015. Just last year, President Emmanuel Macron faced fierce protests after raising the retirement age from 62 to 64—an important step, but still just nibbling at the edges of France's underlying fiscal challenges.
Perhaps adding to the complexity, Christine Lagarde, President of the European Central Bank, recently highlighted the unsustainable nature of France's fiscal path. The high-risk premiums attached to French bonds, now higher than those of its neighbor Spain, are ringing alarm bells across investment circles.
Could these economic hurdles make Europe’s economy vulnerable to external shocks, particularly as Trump reimplements his tariff policies? According to Kenneth Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University, the heavy debt loads engulfing countries like France inevitably dampen long-term economic prospects. With real interest rates expected to remain high barring any significant recessions, it’ll be hard for France to magically grow its way out of debt troubles.
Meanwhile, Germany, with its comparatively modest debt-to-GDP ratio of 63%, has some fiscal room to maneuver. The nation could realize significant growth by investing in its crumbling infrastructure and improving its educational system—twin pillars desperately needing attention. Yet, plans to inject new life back to these sectors appear tangled up by rigid fiscal constraints, such as the “debt brake” policy which limits annual deficits to 0.35% of GDP.
Germany’s recent complacency leads one to question if its economic dynamism is waning. Past reforms from former Chancellor Gerhard Schröder made the labor market significantly more flexible than France, helping rescue Germany from economic despair. Unfortunately, recent shifts toward more leftist economic policies threaten to undo these achievements.
Take, for example, major infrastructure projects like Berlin’s Brandenburg Airport. Its completion was delayed by ten years and cost three times more than projected. This dilapidated approach has raised concerns over Germany's ability to maintain its status as the leader of the European economy—a title it has held firm for decades.
Underneath it all lies the looming question of how long Germany can sustain its current economic malaise. Political instability has emerged, with Chancellor Olaf Scholz's coalition government recently crumbling after he fired Finance Minister Christian Lindner. With elections looming, internal party dynamics could spell trouble for the future direction of economic policy.
Even as Germany—and Europe at large—struggles, some nations may still weather the storm slightly more favorably. For example, Prime Minister Giorgia Meloni’s Italy is expected to maintain its economic footing, possibly outpacing its neighbors. Small economies like Spain and Poland could also help balance out the turmoil left by economic giants like France and Germany.
Despite all these hurdles, one bright spot remains: Europe’s standing as a prime tourist destination. With American travelers feeling buoyed by the strong dollar, Europe’s tourism sector is seeing sustained activity. Yet, even with this bolster, forecasts for Europe’s economic growth are less than rosy for 2025.
Overall, as Europe find itself standing on shaky ground, the re-imposition of Trump-era tariffs could only exacerbate existing issues, compounding the challenges faced by its economies. The region clearly needs more than temporary fixes; what’s required is comprehensive reform and action, lest it finds itself on the receiving end of economic complications resulting from U.S. trade policy decisions.
