Eurozone growth is threatened by a global trade war, economists warn

A potential global trade war and the weakening of regional politics are the two biggest threats facing the Eurozone economy in 2025, according to a Financial Times survey of 72 economists.

US President-elect Donald Trump has promised to impose tariffs of up to 20 percent on all American imports, with tariffs rising to 60 percent on China, once he returns to the White House on January 20 .

If Trump is true to his word, the tariffs would represent the biggest increase in US defense spending since the Great Depression and raise the prospect of retaliation elsewhere.

The Eurozone, which has a large trade surplus with the US, is seen to be exposed not only to higher tariffs but also to the threat of China dumping cheap products on world markets as a result of Trump’s actions.

“Trump’s second presidency is now the single biggest political and economic risk,” said Mujtaba Rahman, chief European director at analysts Eurasia Group. “Europe will be exposed to tariffs and Trump’s push to force an aggressive divestment from China.”

A trade conflict triggered by tariffs imposed by the US is almost the same as given by economists surveyed by the FT: 69 percent of respondents think it is likely, while 68 percent warn that such a situation is a threat the largest in this area next year.

Almost all respondents – 81 percent – said that Trump’s second statement will affect the growth of the Eurozone.

The collapse of Trump’s trade policies could reduce output in Europe even before it is set, economists say. “Prospects of Trump tariffs . . . give companies a strong incentive to hold off on investments until uncertainty is resolved,” said Tomasz Wieladek of T Rowe Price.

On average, 72 respondents expect to The Eurozone economy growing by just 0.9 percent. This would be the third year of subpar growth in a row and is below the 1.1 percent that European Central Bank staff had forecast in December.

But there is broad agreement that a single currency area can avoid recession. John Llewellyn, a former chief economist at the OECD and Lehman Brothers who is now a partner at Independent Economics, is the most prominent.

Predicting that the Eurozone economy will end next year by 1 per cent more than at the start, Llewellyn said “investors are not currently interested in what President Trump can bring”.

He said: “Economic stability is much more fragile than today’s generation realizes.

The majority of economists polled – 61 percent – echoed ECB president Christine Lagarde’s call for EU policymakers to engage in trade talks with Trump to avoid a permanent trade war.

“(The EU) may want to use the threat of retaliation as part of negotiations. But in the end, tariffs are self-inflicted, and the EU would be better off not using them,” said Isabelle Mateos y Lago , chief economist at BNP Paribas.

Many economists point to the EU’s vast experience in trade negotiations and its position as one of the world’s biggest trade barriers. “The EU is far from a weak position,” said Christian Dustmann, director of the Berlin-based economic think tank the Rockwool Foundation.

However, a minority of voices warned that seeking a trade deal with the US would only encourage more aggressive action. “Trump has the mentality of a playground champion,” said Kamil Kovar, senior economist at Moody’s.

Carsten Brzeski, global head of macro at ING Bank, says tariffs are not the only threat to the European economy from the US in 2024. Eurozone. ”

Next to environmental risks, Europe’s inability to fix its artificial problems is seen as a risk by almost a third of all those who were asked.

Ulrich Kater, chief economist at Germany’s Deka Bank, said Europe would soon resemble “the late Habsburg empire”. It was economically and technologically backward, stifled by bureaucracy and ruled by “a melancholic recollection of its former greatness”.

When asked about possible reasons for optimism, one in five mentioned the drop in interest rates and the hope of a rise in consumer demand.

The same part of the analysts believe that the German elections in February can lead to a change in the country’s solid debt and increase investment.

“The depression in German sentiment could change if the new coalition is able to present a sustainable reform program and raise debt,” said Moritz Kraemer of German lender LBBW.

However, Marcel Fratzscher, director of the Berlin-based economic think tank DIW, was less optimistic. “Don’t expect the new German government to take office and provide a much-needed confidence boost,” he said.

Although the Christian Democratic Union is determined to be the strongest party, coalition talks are likely to be difficult and could take months. Furthermore, CDU party leader and leading candidate Friedrich Merz has so far shown little desire to change the bill.

Surprisingly, a fifth of all economists hope that the depression could turn into a blessing as the situation could get worse enough that Europe could finally start making the necessary changes.

“The hostile international political situation provides an opportunity for European governance,” said Lena Komileva, chief economist at (g+) economic consultancy.

LBBW’s Kraemer stressed that expectations “are now down to the point where there is potential for surprises”.

Additional reporting by Alexander Vladkov in Frankfurt

Data visualization by Martin Stabe