A attainable international commerce struggle and regional political paralysis are the 2 largest threats dealing with the Eurozone economic system in 2025, in accordance with a Monetary Occasions ballot of 72 economists.
US president-elect Donald Trump has pledged to impose levies of as much as 20 per cent on all US imports, with the tariffs rising to 60 per cent on China, as soon as he returns to the White Home on January 20.
If Trump is true to his phrase, the tariffs would characterize essentially the most important rise in US protectionism for the reason that period of the Nice Melancholy and lift the prospect of retaliation elsewhere.
The Eurozone, which holds a big commerce surplus with the US, is seen as acutely uncovered to not solely greater tariffs but in addition the specter of China dumping low-cost merchandise on international markets in response to Trump’s actions.
“Trump’s second presidency is now the single biggest political and economic risk,” stated Mujtaba Rahman, managing director for Europe at analysts Eurasia Group. “Europe will be exposed to tariffs and a push by Trump to force more aggressive decoupling from China.”
A commerce battle triggered by tariffs imposed by the US is sort of taken as a given by economists polled by the FT: 69 per cent of respondents contemplate it doubtless, whereas 68 per cent warn that such a state of affairs is the largest risk for the area subsequent yr.
Virtually the entire respondents — 81 per cent — stated a second Trump time period will weigh on Eurozone progress.
The fallout of Trump’s commerce insurance policies is prone to dent output in Europe even earlier than they’ve been put in place, economists say. “The expectations of Trump tariffs . . . provide companies with a strong incentive to wait with investments until some of the uncertainty is resolved,” stated Tomasz Wieladek of T Rowe Worth.
On common, the 72 respondents anticipate the Eurozone economic system to increase by simply 0.9 per cent. This might be the third yr of subpar progress in a row and is beneath the 1.1 per cent that the European Central Financial institution’s workers predicted in December.
However there may be broad consensus that the one foreign money space can keep away from a recession. John Llewellyn, a former senior economist on the OECD and Lehman Brothers who’s now a associate at Unbiased Economics, is the largest outlier.
Predicting the Eurozone economic system would finish subsequent yr 1 per cent smaller than at first, Llewellyn stated “investors at present are unwarrantedly complacent about what President Trump is likely to bring”.
“Economic stability is far more fragile than the modern generation recognises,” he stated.
A lot of the polled economists — 61 per cent — again ECB president Christine Lagarde’s name to EU policymakers to have interaction in commerce negotiations with Trump to keep away from an all-out commerce struggle.
“[The EU] may want to use the threat of retaliation as part of the negotiation. But ultimately, tariffs are a self-inflicted harm, and the EU would be better off not using them,” stated Isabelle Mateos y Lago, chief economist at BNP Paribas.
A number of economists level to the EU’s huge expertise in commerce talks and its place as one of many world’s largest buying and selling blocks. “The EU is far from in a weak position,” stated Christian Dustmann, director of Berlin-based financial think-tank Rockwool Basis.
Nonetheless, a vocal minority warned that looking for a commerce take care of the US would solely encourage extra aggressive motion. “Trump has the mentality of a playground bully,” stated Kamil Kovar, senior economist at Moody’s.
Carsten Brzeski, international head of macro at ING Financial institution, stated tariffs weren’t the one risk to the European economic system stemming from the US in 2024. “US tax cuts, deregulation and lower energy prices will also make the US economy more attractive compared with the Eurozone.”
Subsequent to geopolitical dangers, Europe’s lack of ability to repair its do-it-yourself issues is seen as a key threat by near a 3rd of all polled.
Ulrich Kater, chief economist at Germany’s Deka Financial institution, stated Europe was quickly going to resemble the “late Habsburg empire”. It was falling behind economically and technologically, slowed down by forms and dominated by “melancholic remembrance of its former greatness”.
Requested about potential causes for optimism, one in 5 referred to declining rates of interest and a few hope of an uptick in shopper demand.
An analogous share of analysts imagine Germany’s snap elections in February would possibly result in tweaks within the nation’s tight constitutional debt brake and enhance funding.
“The psychological depression in Germany could be turned around if a new coalition would be able to present a coherent reform programme and lift the debt brake,” stated Moritz Kraemer of German lender LBBW.
Nonetheless, Marcel Fratzscher, director of Berlin-based financial think-tank DIW, was much less optimistic. “Don’t expect a new German government to hit the ground running and provide a much-needed boost to confidence,” he stated.
Whereas the centre-right Christian Democratic Union is poised to be the strongest get together, coalition negotiations may be complicated and may drag on for months. Furthermore, CDU get together boss and lead candidate Friedrich Merz has up to now solely proven a restricted urge for food for adjustments to the debt brake.
Paradoxically, a fifth of all economists hope the gloom might change into a blessing in disguise because the scenario would possibly change into so dangerous that Europe would possibly ultimately embark on essential reforms.
“A hostile international political climate presents an opportunity for European governance,” stated Lena Komileva, chief economist at (g+)economics consultancy.
LBBW’s Kraemer confused that expectations have been “now so low all around that there is also some potential for upside surprises”.
Further reporting by Alexander Vladkov in Frankfurt
Knowledge visualisation by Martin Stabe
