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Subscribe02 JAN 2025 / ECONOMY
Europe is facing a perfect storm: trade wars, redirected imports, and structural issues that threaten its place on the global stage. With Donald Trump preparing for a second term and rekindling his love affair with tariffs, the EU must brace itself for both direct challenges to its trade with the US and ripple effects that could shake global markets. This is no time to sit back. Can Brussels step up to protect Europe’s economic stability and reinforce its global influence? Let’s break it down.
The EU’s economy, deeply rooted in free trade, is under direct threat. Trump’s proposed 10% tariff on EU exports—and a staggering 60% tariff on Chinese goods—could derail Europe’s already fragile recovery. Economists predict that a broad 10% tariff on EU goods could shave 0.3 percentage points off the bloc’s GDP over two years. Key industries like automotive, manufacturing, and steel, which heavily rely on US demand, are bracing for impact. Germany, Europe’s economic powerhouse, would bear the brunt, with its export-driven economy already grappling with high energy costs and slowing global demand.
To make matters worse, redirected Chinese goods could flood European markets, leaving local manufacturers hanging by a thread. For every 1% hit to China’s GDP, Germany’s shrinks by 0.2%, and the rest of Europe feels a 0.1% pinch. Southern Europe, with vulnerable sectors like textiles, food processing, and light manufacturing, might be hit the hardest. Simon Evenett, a trade expert, summed it up: “When it comes to protectionism, someone’s ox always gets gored.” Right now, it’s Europe’s ox that’s on the chopping block.
Brussels is stuck between a rock and a hard place. European Central Bank President Christine Lagarde has called for dialogue, emphasizing that diplomacy is the best way to avoid an all-out trade war. But let’s not kid ourselves—the EU has a stick ready in its back pocket. Retaliatory tariffs targeting politically sensitive US exports like bourbon, motorcycles, and agricultural products are in the pipeline. While these measures might deter Trump, they could also escalate tensions. As Moody’s economist Kamil Kovar puts it, “Trump has the mentality of a playground bully.”
The EU’s challenge is striking a balance: protecting its economic interests without getting dragged into a tit-for-tat spiral. Past successes, like ramping up imports of US liquefied natural gas (LNG) in 2018 to avoid car tariffs, offer a playbook. But this time, with LNG capacity stretched and fierce competition from Asian buyers, the EU’s options are narrowing.
Not all EU countries are in the same boat when it comes to the fallout from these trade tensions:
Despite these challenges, Brussels has a shot at reinforcing unity. Aligning member states with common trade policies could not only address immediate pressures but also strengthen Europe’s collective bargaining power.
The EU’s actions don’t just affect its economy, they’ll send shockwaves across the globe. As one of the world’s largest trading blocs, the EU has the clout to lead in reforming the World Trade Organization (WTO) and reinforcing the rules-based trading system. However, as India's External Affairs Minister S. Jaishankar pointedly observed, "Europe has to grow out of the mindset that its problems are the world's problems, but the world's problems are not Europe's problems." This criticism underscores the need for the EU to adopt a more globally conscious approach."
Building coalitions with allies like Japan, India, and African nations could help counter rising protectionism. For instance, collaborative investment in infrastructure projects or green technology initiatives could fortify these relationships. At the same time, deepening trade ties with regions like Africa and Southeast Asia—through frameworks like the African Continental Free Trade Area (AfCFTA)—could reduce Europe’s dependence on volatile US and Chinese markets.
Meanwhile, the UK is angling for a “reset” in its relationship with the EU under Prime Minister Sir Keir Starmer. But this isn’t a feel-good reunion, it’s more of a cautious tango. The UK wants smoother trade flows and mutual recognition of professional qualifications, while the EU is pushing for a youth mobility scheme and long-term fishing rights in UK waters. Deals are on the table, but both sides know they need to sell any compromises back home. Can they find common ground? The jury’s still out.
A global trade war isn’t Europe’s only headache. Structural issues like red tape, uneven innovation, and sluggish investment continue to hold the bloc back. German economist Ulrich Kater has even compared Europe to the “late Habsburg empire,” bogged down by nostalgia for past greatness. Yet, there’s hope on the horizon. Declining interest rates could spark consumer demand, while Germany’s upcoming elections may loosen the country’s tight debt brake, unlocking funds for innovation and green technologies.
The stakes couldn’t be higher. By leveraging its economic clout, modernizing trade practices, and fostering international cooperation, the EU can weather this storm and emerge stronger. As Jean Monnet, one of the EU’s founding architects, said: “People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.” That crisis is here. The choices Brussels makes in 2025 will not only shape the bloc’s future but also define its role in a shifting global order. The world is watching—can the EU rise to the challenge? Subscribe to MYCPE ONE Insights for the latest in finance, accounting, and corporate news delivered straight to your inbox.
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