A potential global trade war and regional political paralysis are the two biggest threats facing the Eurozone economy in 2025, according to a Financial Times poll of 72 economists.
US President-elect Donald Trump has vowed to impose tariffs of up to 20 percent on all US imports, with tariffs rising to 60 percent on China, when he returns to the White House on January 20.
If Trump is true to his word, the tariffs would represent the most significant increase in US protectionism since the Great Depression and raise the prospect of retaliation elsewhere.
The Eurozone, which holds a huge trade deficit with the US, is clearly seeing not only higher prices but also the threat of China dumping cheap products on world markets in response to Trump's actions.
“Trump's second presidency is now the biggest political and economic risk,” said Mujtaba Rahman, managing director for Europe at the Eurasia Group analysts. “Europe will be exposed to tariffs and pressure from Trump to force the removal of China.”
A trade dispute caused by the tariffs imposed by the US is almost taken as given by the economists polled by the FT: 69 percent of respondents think it is possible, while 68 percent warn that such a situation is the most dangerous thing in the region next year.
Almost all respondents – 81 percent – said that the second term of Trump will weigh on the growth of the Eurozone.
The collapse of Trump's trade policies is likely to hamper production in Europe even before it is set, economists say. “Expectations for Trump's tariffs . . . giving companies a strong incentive to wait to invest until the uncertainty is resolved,” said Tomasz Wieladek of T Rowe Price.
On average, 72 respondents expected The Eurozone economy increasing by only 0.9 percent. This will 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 consensus that a single currency can prevent recession. John Llewellyn, a former economist at the OECD and Lehman Brothers who is now a partner at Independent Economics, is an outsider.
Predicting that the Eurozone economy will end next year one percent smaller than it started, Llewellyn said “investors are currently unduly concerned about what President Trump might bring”.
“Economic stability is much weaker than the modern generation realizes,” he said.
The majority of economists – 61 percent – returned the call of ECB president Christine Lagarde to EU policy makers to engage in trade talks with Trump to avoid a trade war.
“(The EU) may want to use threats 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, 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 largest trading blocs. “The EU is far from a weak point,” said Christian Dustmann, director of the Berlin-based economic think-tank Rockwool Foundation.
However, a minority of voices warned that seeking a trade deal with the US would only encourage tougher action. “Trump has the mentality of a bully in the playground,” said Kamil Kovar, chief economist at Moody's.
Carsten Brzeski, head of global macro at ING Bank, said tariffs are not the only threat to the European economy from the US in 2024. The Eurozone.”
Alongside geopolitical risks, Europe's inability to address its domestic problems is seen as a key risk by close to a third of all polled.
Ulrich Kater, an economist at Germany's Deka Bank, said Europe would soon resemble the “defunct Habsburg empire”. It was lagging behind economically and technically, bogged down in bureaucracy and dominated by “the melancholic memory of its former greatness”.
Asked about possible reasons for optimism, one in five pointed to lower interest rates and the prospect of increased consumer demand.
A similar share of analysts believe that Germany's snap election in February could lead to changes in the country's credit policy and boost investment.
“The psychological depression in Germany can be reversed if the new coalition is able to demonstrate a coherent restructuring process and lift the debt burden,” 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 act and provide the security it needs,” he said.
While the centre-right Christian Democratic Union is poised to become the strongest party, coalition negotiations are likely to be difficult and could take months. Furthermore, CDU party leader and leading candidate Friedrich Merz has so far shown limited desire to change the debt brake.
Surprisingly, a fifth of all economists hope that the gloom could be a blessing in disguise as the situation could be so dire that Europe could finally embark on the necessary reforms.
“The hostile international political environment provides an opportunity for European governance,” said Lena Komileva, an economist at the (g+) economic consultancy.
LBBW's Kraemer stressed that expectations “are now so low all around that there are also some surprises”.
Additional reporting by Alexander Vladkov in Frankfurt
Data visualization by Martin Stabe