The EU economy is facing significant challenges due to political instability, structural issues, and US policies on trade and defense spending.
The region is experiencing a high-risk period marked by economic stagnation, trade fragmentation, and geopolitical uncertainty, compounded by the ongoing war in Ukraine and strained relations with the US, particularly since President Donald Trump took office in January.
The EU’s historically close ties with the US have been greatly affected by Trump’s trade and defense policies. His “America First” approach introduced protectionist measures that included EU nations.
Trump’s executive order imposing a 25% tariff on steel and aluminum imports sparked concerns across the EU, with officials arguing the tariffs were unjustified and pledging to protect European industries from these policies.
The EU views these US tariffs as a source of economic uncertainty, disrupting market efficiency and integration. Additionally, the bloc opposes Trump’s decision to impose reciprocal tariffs on countries that retaliate.
EU officials consider these reciprocal tariffs a misguided approach and have warned that the bloc will respond swiftly and firmly to any barriers it deems unfair to free and fair trade, signaling a readiness to engage in a trade dispute if necessary.
Excluding EU countries from peace talks with Russian President Vladimir Putin to end the Ukraine war has further strained US-EU relations.
Trump has also criticized European nations for not allocating sufficient resources to defense, arguing that NATO members should raise their defense spending from the current average of 1.9% of gross domestic product (GDP) to 5%.
EU’S SLOW GROWTH, HIGH DEBT, GAS PRICES, INFLATION
Many European nations are grappling with high public debt and budget deficits amid slowing economic and population growth, as well as rising social expenditures. For these countries, increasing defense spending presents a significant challenge.
The EU’s economic growth forecast for 2025 stands at 1.5%, reflecting a sluggish trend in recent years compared to the US and China. Reports suggest that the eurozone’s growth rate may hover around 1% this year.
Over the past 15 years, the European economy has fallen significantly behind the US, which has led in technology and digital transformation. While the US increased its GDP by 70%, the EU saw only a 20% rise.
Declining productivity and competitiveness, coupled with rising labor costs, have eroded the region’s industrial strength, particularly against the US and China.
To regain its competitive edge, the EU aims to cut bureaucracy, expand investments in artificial intelligence (AI) and tech firms, and lower energy costs. However, whenever the EU implements economic stimulus measures, the US responds with larger and more rapid initiatives.
Meanwhile, several EU nations have not adhered to the bloc’s fiscal rules, which mandate that public debt should not exceed 60% of GDP and budget deficits should remain under 3% of GDP.
Greece, Italy, France, Belgium, and Spain all have public debt exceeding 100% of their GDP, while 13 EU member states surpass the 60% threshold.
Additionally, 10 EU countries, including Italy, Hungary, and Romania, have exceeded the 3% budget deficit-to-GDP ratio limit set by the bloc.
High public debt and budget deficits make it increasingly difficult for these nations to allocate funds toward their defense industries.
At the same time, inflation across Europe remains elevated. The European Central Bank (ECB) targets 2% inflation in the medium term, but the eurozone’s inflation rate has remained around 3% in recent months.
Furthermore, the EU’s current natural gas storage is below 50% capacity, with levels approximately 10% lower than the average. Gas prices have surged to a two-year high due to cold weather and declining reserves.