Eurozone development threatened by world commerce struggle, economists warn

A doable world commerce struggle and regional political paralysis are the 2 greatest threats dealing with the euro zone economic system in 2025, in accordance with a Monetary Occasions ballot of 72 economists.

US President-elect Donald Trump has pledged to impose taxes of as much as 20% on all US imports, and tariffs of as much as 60% on China, upon his return to the White Home on the twentieth. January.

If Trump retains his phrase, the tariffs would characterize essentially the most vital improve in American protectionism for the reason that Nice Despair and lift the prospect of retaliation elsewhere.

The eurozone, which runs a big commerce surplus with america, is seen as extraordinarily uncovered not solely to greater tariffs but in addition the specter of China dumping low-cost items on world markets in response to Trump’s actions.

“Trump’s second presidency now poses the largest political and financial threat,” mentioned Mujtaba Rahman, managing director for Europe at analyst agency Eurasia Group. “Europe will probably be uncovered to tariffs and strain from Trump to impose extra aggressive decoupling with China. »

A trade conflict The triggering of US tariffs is sort of taken with no consideration by economists surveyed by the FT: 69 p.c of respondents take into account it probably, whereas 68 p.c warn that such a state of affairs is the almost certainly. nice risk to the area subsequent yr.

Nearly all respondents – 81 p.c – ​​mentioned a second Trump time period would weigh on euro zone development.

In keeping with economists, the results of Trump’s commerce insurance policies threat weighing on manufacturing in Europe even earlier than they’re put in place. “Expectations for Trump’s Tariffs.” . . strongly incentivize corporations to attend to take a position till among the uncertainty is resolved,” mentioned Tomasz Wieladek of T Rowe Worth.

On common, the 72 respondents count on that Eurozone economy improve by solely 0.9 p.c. This is able to be the third consecutive yr of below-normal development and under the 1.1 p.c predicted by European Central Financial institution employees in December.

However there may be broad consensus that the only forex space can keep away from a recession. The largest exception is John Llewellyn, a former senior economist on the OECD and Lehman Brothers, now a accomplice at Unbiased Economics.

Predicting that the eurozone economic system would finish subsequent yr down 1 p.c from its begin, Llewellyn mentioned that “traders are at present unduly complacent about what President Trump is prone to convey.” “.

“Financial stability is far more fragile than the trendy era acknowledges,” he mentioned.

Most economists surveyed (61%) assist ECB President Christine Lagarde’s name for EU policymakers to enter into commerce talks with Trump to keep away from an all-out commerce struggle.

“[The EU] could need to use the specter of retaliation as a part of the negotiation. However in the end, tariffs are a self-inflicted evil, and the EU can be higher off not utilizing them,” mentioned Isabelle Mateos y Lago, chief economist at BNP Paribas.

A number of economists level to the EU’s in depth expertise in commerce negotiations and its place as one of many world’s largest buying and selling blocs. “The EU is much from being in a weak place,” mentioned Christian Dustmann, director of the Berlin-based financial assume tank Rockwool Basis.

Nevertheless, a vocal minority warned that searching for a commerce take care of america would solely encourage extra aggressive motion. “Trump has the mentality of a playground bully,” mentioned Kamil Kovar, senior economist at Moody’s.

Carsten Brzeski, world head of macro at ING Financial institution, mentioned tariffs weren’t the one risk to the European economic system emanating from america in 2024. “US tax cuts, deregulation and decrease greater power costs can even make the US economic system extra engaging relative to the US economic system. Eurozone.

Along with geopolitical dangers, Europe’s lack of ability to resolve its inside issues is taken into account a significant threat by nearly a 3rd of these surveyed.

Ulrich Kater, chief economist at German financial institution Deka, mentioned Europe would quickly resemble the “defunct Habsburg Empire.” It was economically and technologically backward, mired in paperwork and dominated by the “melancholy reminiscence of its former greatness”.

Requested about potential causes for optimism, one in 5 respondents cited falling rates of interest and a few hope for an uptick in shopper demand.

An analogous proportion of analysts say Germany’s snap elections in February may result in changes to the nation’s strict constitutional curb on debt and elevated funding.

“The psychological despair in Germany could possibly be reversed if a brand new coalition was capable of current a coherent reform program and elevate the debt brake,” mentioned Moritz Kraemer of German financial institution LBBW.

Nevertheless, Marcel Fratzscher, director of the Berlin-based financial assume tank DIW, was much less optimistic. “Don’t count on a brand new German authorities to kick in and convey the much-needed enhance of confidence,” he mentioned.

With the center-right Christian Democratic Union poised to grow to be essentially the most highly effective occasion, coalition negotiations may show complicated and final months. Moreover, CDU chief and lead candidate Friedrich Merz has to date proven solely restricted urge for food for modifications to the debt brake.

Paradoxically, a fifth of economists hope that the gloom may flip right into a blessing in disguise, because the state of affairs may grow to be so critical that Europe may finally decide to essential reforms.

“A hostile worldwide political local weather presents a possibility for European governance,” mentioned Lena Komileva, chief economist at consultancy (g+)economics.

LBBW’s Kraemer identified that expectations had been “now so low that there’s additionally potential for upside surprises.”

Further reporting by Alexander Vladkov in Frankfurt

Knowledge visualization by Martin Stabe