Trump's threats have jolted Europe

Gulf Today

26-03-2025

US President Donald Trump's erratic policymaking has given Europe an unexpected spur to action, but any sense of 'Europhoria' about the region's chances of turning this moment into a longer-lasting revival is likely premature.
Trump's threats on tariffs and questioning of America's future security role in Europe have drawn an energetic response, perhaps best symbolised by Germany's plans to spend hundreds of billions of euros on defence and infrastructure. Some European companies are becoming more optimistic about sales, while growth projections for the euro zone economy have been upgraded. The euro has risen and investors are ditching US stocks for their long-neglected European counterparts, according to Reuters.
Yet while some analyst notes now include the phrase 'Make Europe Great Again' – a play on Trump's MAGA slogan – the surge in optimism ignores Europe's unresolved problems: high energy costs, a fragmented internal market, and looming tariffs from its biggest customer, the United States. 'Is the Europhoria justified?,' asked Holger Schmieding, an economist at German bank Berenberg. 'The more positive outlook for Europe makes sense. But as usual, the sudden swing may be a little overdone in some cases.'
Euro zone shares have risen 12% since Trump's inauguration on January 20, while US stocks have fallen by 6.7%. US consumers and investors have also turned much more pessimistic than their European counterparts. Economists polled by Reuters have upgraded their 2026 growth forecasts for the euro zone for the first time in nearly a year, to 1.3% from 1.2%. While that is still less than the 2% predicted for the United States, there was further positive news on Monday as closely watched factory gate data showed euro zone business growth expanding at its fastest pace in seven months. Some European officials have pointed out that the region's widely deprecated fondness for rules looks like a virtue compared with unpredictable policymaking elsewhere.
Angelique Renkhoff-Muecke of Bavaria's metal and electrical industry association was even blunter about the growing doubts over legal certainty for business in the US.
'Anyone who is not already there is thinking about whether they should go,' she said.
A potential trade war with the United States, starting with tariffs due to take effect on April 2, is the biggest risk for an export-oriented economy like Europe's. The European Central Bank estimates a 25% US tariff on imports from Europe would dent euro zone output by about 0.3 percentage points in the first year. Retaliatory measures by Europe could increase the damage to about half a percentage point.
Any sustained investment gains in Europe are unlikely until the fog surrounding Trump's plans clears. Indexes that measure trade and broader economic policy uncertainty using sources such as newspaper articles, disagreements among forecasters and filings have shot to all-time highs.
'Businesses are not in a good position to plan for their investments,' said Atanas Kolev, co-author of one paper on the economic drag created by uncertainty. To be sure, Europe's new-found spending courage can help the region insulate itself from trade headwinds – especially those sectors that benefit directly from Germany's spending plans, such as defence and construction. Rheinmetall, Europe's top ammunition maker, expects significant sales growth in 2025, and missile maker MBDA will invest in its Italian unit to boost production in expectation of more orders. Peter Huebner, president of Germany's construction industry association HDB and a board member of Strabag's German division, expected both orders and sales at his unit to rise this year.
'Every euro invested in infrastructure increases gross domestic product by two and a half times (that amount),' he said.
But executives elsewhere, including the beaten-down steel sector, are concerned funds may take years to find their way into the economy and fail to tackle other pressing issues, most notably red tape and energy costs.