After a surprisingly strong start to the year—consumer spending was solid and unemployment had dipped below pre-pandemic levels—Europe’s economy was sailing high on optimism. Prospects for the future have darkened considerably thanks to the tariffs imposed by U.S. President Donald Trump. The United States is by far the largest single export destination for the EU. This essential role gives the continent’s economic muscle some stability.
In the first quarter of the year, Europe’s economy grew by just 0.4%. This represents a slight gain over the last quarter, which grew by just 0.2%. This increase is a demonstration of the return of consumer confidence and spending after years of hesitance during inflationary periods. Unemployment across Europe is at a historic low of 6.1%, a sign of an incredibly strong labor market underpinning the potential for additional economic activity.
The imposition of a 25% tariff on steel, aluminum, and cars has raised significant concerns among European leaders, particularly in Germany. Germany, the eurozone’s largest economy, has rightfully gained the moniker the “economic problem child.” Its heavy reliance on exports – compounded by the harmful effects of U.S. trade policies – have further earned this reputation.
Just days earlier the German parliament had approved a remarkable €500 billion ($570 billion) investment fund. This fund would function outside of the normal constitutional constraints on national debt. The change is intended to encourage development during a difficult fiscal environment. The outgoing government, led by Chancellor Olaf Scholz, has reduced Germany’s growth expectation for the year to zero. This dangerous step is a reminder of the instability that continues to pervade our country.
The European Central Bank (ECB) has tried to relieve these burdens by making credit cheaper for consumers and businesses to access. Late last month, on April 17, the ECB lowered its benchmark interest rate by a quarter of a percent. Yet despite these efforts, measures of business and consumer optimism have plummeted. This steep drop is largely attributable to the current tariff debacle.
Carsten Brzeski, an economist with ING, noted that the current situation serves as “another illustration of how the last four weeks of tariff tensions and uncertainty have entirely wiped out the tentative return of optimism in the eurozone.” He further stated, “Unless there are major changes in US trade policy, sentiment as well as economic activity in the eurozone will remain subdued over the coming months.”
Europe’s economy is disproportionately dependent on exports, most notably to the United States. The tariff situation is still highly detrimental to prospects for future growth. The better economic performance seen in the first quarter could quickly be erased by these outside fiscal forces. With rising uncertainty and downgraded growth forecasts, stakeholders in Europe are closely monitoring developments in US trade policy that could reshape their economic landscape.