Europe’s economy is stuck in a rut. The latest figures, released this week, show Eurozone GDP flat in the fourth quarter and growth across the European Union as a whole up by just 0.1%.
Nothing captures the gloom quite as well as Eurostat, the official statistics body, describing the Eurozone’s poor performance with the headline “GDP stable in the euro area”. Once upon a time, growth of zero was rightly described as stagnation rather than stability.
There are bright spots – Spain and Greece continue to put in a strong showing – but the overall picture is not a pleasant one. Germany’s economy contracted by more than analysts expected, France’s output also declined, and Italy’s economy unexpectedly registered zero growth.
Since the pandemic whilst output has grown by almost 13% in the United States compared to 5.2% in Italy, 3.4% in France, and a small (0.2%) contraction in Italy. Britain’s further quarter numbers are not yet out, but as of the end of the third quarter of this year, GDP had grown by 2.9% since COVID hit.
The threat of tariffs from the new American administration has further depressed confidence in the continent’s economic prospects. Whilst Canada and Mexico ( and somewhat unexpectedly recently Colombia) appear to be first in line and China remains a major bugbear of President Trump, many European policymakers expect the White House to turn to Europe eventually.
In the immediate aftermath of the election, private sector economists were quick to revise down their estimates of European growth in 2025. Goldman Sachs, for example, as reported by the Financial Times cut their European estimates as soon as the election results became clear.
The investment bank’s economists have cut their 2025 growth forecast for the Eurozone from an already-pessimistic 1.1 percent to 0.8 percent. The UK economy will now grow only 1.4 percent, according to Goldman Sachs, down from a previous forecast of 1.6 percent. Predictions for 2026 were also trimmed.
With Trump continuing to wield the threat of tariffs, Lagarde acknowledged that greater trade frictions could both upset the inflation outlook and weigh on the 20-country euro zone’s already lackluster economy.
“The risks to economic growth remain tilted to the downside. Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy,” Lagarde said.
US tariffs, as this column and the various Expert Panels of the Clark Center have repeatedly noted over the last year, will likely have a negative impact on US growth in the medium to longer term. But in the short term, much of the pain will be felt by the countries on the receiving end of protectionist measures.
Complicating the picture further, the distribution of that pain within countries is likely to be asymmetric. The pain experienced by American consumers facing higher prices will likely be widely spread, whereas in the export industries overseas impacted it will be much more concentrated.
The Clark Center’s European Experts Panel weighed in this month, looking at the impact on Europe.
Asked whether “a baseline US tariff of 10% on all European imported goods would have substantially damaging economic consequences for many countries in Europe”, the results were unsurprising. Weighted by confidence around three quarters of respondents either agreed or strongly agreed.
Equally unsurprising was the response to the proposition; “Disruptions to global supply chains from new tariffs and trade wars will lead to measurably slower global growth over the next five years”. The agreement here was almost unanimous with just 2% uncertain and no respondent disagreeing or strongly disagreeing.
Perhaps the most responses came to the question “Rather than responding to threatened tariffs with retaliatory measures, unilaterally opening EU markets to US exports would deliver better outcomes for European industry”.
To non-economists, this may sound counterintuitive. It can be hard to see why a country should respond to the aggressive trade policy of a partner by opening up rather than retaliation. But given that imposing tariffs are costly to one’s own firms and households, there is a strong argument that – at least on first principles – turning the other cheek when it comes to trade wars is a better outcome than getting drawn into tit-for-tat cycles of retaliation.
Of course, what complicates the issue is both the political economy of the situation (the exports hit may well demand European measures to pile the pain on US exporters and seek to drive a policy reversal) and the game theory.
Overall 39% of respondents either agreed or strongly agreed (again weighted by confidence) whilst a plurality of 44% were uncertain. Expert opinion here then was genuinely divided.
As Olivier Blanchard, of the Peterson Institute, put it whilst disagreeing “I think the structure of the game is a prisoner’s dilemma. Once the US puts tariffs, it is very likely that the best response is to do the same.”.
On the other hand, Pol Antras of Harvard argued that “I know it is somewhat counterintuitive, but the EU would gain much from not escalating and selling itself as an economic area in which one can do business without capricious policy disruptions.”.
The experts then very much agreed with the consensus that US tariffs on Europe would hit an already precarious economy hard. But when it comes to how the continent should respond, the jury is still out.
