Europe Takes Action Amid Trump’s Policy Shifts, But Unresolved Issues Could Stifle Long-Term Growth

U.S. President Donald Trump's unpredictable policies have unexpectedly motivated Europe to take action, but any optimism about turning this momentum into long-term growth might be premature. Trump's threats of tariffs and doubts about America's security role in Europe have spurred a robust response, notably with Germany's plans to invest hundreds of billions of euros in defense and infrastructure.

Some European businesses are becoming more optimistic about their sales, and growth projections for the eurozone economy have been revised upward. The euro has strengthened, and investors are shifting away from U.S. stocks in favor of European ones.

However, despite the surge in optimism, Europe's lingering issues—such as high energy costs, a fragmented internal market, and potential tariffs from the U.S.—remain unresolved. "Is the Europhoria justified?" asked Holger Schmieding, an economist at Berenberg Bank, noting that while the positive outlook for Europe makes sense, the shift in sentiment may be overdone.

Since Trump's inauguration on January 20, eurozone stocks have risen by 12%, while U.S. stocks have fallen by 6.7%. Meanwhile, U.S. consumers and investors have grown more pessimistic. For the first time in nearly a year, economists have raised their 2026 growth forecasts for the eurozone to 1.3%, up from 1.2%. Though still lower than the 2% predicted for the U.S., there was also positive news as factory gate data showed the eurozone's business growth at its fastest pace in seven months.

Some European officials now view the region’s traditionally cautious approach to rules as an advantage over the unpredictability elsewhere. Angelique Renkhoff-Muecke of Bavaria's metal and electrical industry association expressed growing concerns over the legal uncertainties facing businesses in the U.S.

The biggest risk for Europe’s export-driven economy, however, is a potential trade war with the U.S., with tariffs expected to take effect on April 2. The European Central Bank estimates that a 25% tariff on U.S. imports from Europe could reduce eurozone output by 0.3 percentage points in the first year, with retaliatory measures increasing that damage to about 0.5 percentage points.

Sustained investment growth in Europe is unlikely until the uncertainty around Trump’s policies clears. Economic uncertainty, as measured by indexes tracking trade and policy risk, has reached all-time highs. “Businesses are not in a good position to plan for their investments,” said Atanas Kolev, co-author of a study on the economic drag caused by uncertainty.

Nevertheless, Europe’s newfound willingness to spend could help mitigate trade challenges, particularly in sectors like defense and infrastructure, which are directly benefiting from Germany's increased spending. Companies like Rheinmetall, Europe's top ammunition maker, and missile manufacturer MBDA expect significant growth in 2025. Infrastructure firms, such as Germany’s Heidelberg Materials and Austria’s Strabag, anticipate short-term boosts from Germany's spending program.

Peter Huebner, president of Germany’s construction industry association HDB, expects both orders and sales to rise this year. “Every euro invested in infrastructure increases GDP by two and a half times,” he said. HDB also expects a sales increase in 2025, after forecasting a 1.4% decline this year.

However, some sectors, including steel, worry that the funds may take years to be allocated and that the root problems—such as red tape and high energy costs—won’t be addressed quickly. "Money alone won't do the trick," said Stefan Rauber, CEO of Saarstahl, a German steelmaker.

Klaus Adam, a professor at University College London, echoed this sentiment, pointing out that no steps have been taken to address inefficiencies within the eurozone's 32-year-old single market. “Stability and rule of law are appreciated more now, but there’s also a drag because we could move faster on some fronts,” he said.

Paraphrasing text from "Reuters" all rights reserved by the original author