Latest News

Trump's policy swerves inspire Europe to action, but 'Europhoria" may be premature

The erratic policies of U.S. president Donald Trump have given Europe a sudden spur to action. However, any "Europhoria," about the chances for a lasting revival in this region is probably premature.

Germany's plans for hundreds of billions in defence and infrastructure spending is perhaps the best example of how Germany has responded to Trump's tariff threats and questions about America's future role as a security force in Europe.

The growth forecasts for the Eurozone economy have also been revised upwards. Investors are abandoning U.S. stock for the long-neglected European stocks as the euro has increased.

While some analyst notes include the phrase "Make Europe great again" (a play on Trump’s MAGA slogan), the surge of optimism ignores Europe's problems. These include high energy costs and a fragmented market as well as looming tariffs by its largest customer, the United States.

Holger Schmieding asked, "Is Europhoria justified?," Holger Schmieding was an economist with the German bank Berenberg. The more positive outlook is logical. As usual, in some cases the sudden change may have been a bit overdone.

Since Trump's January 20 inauguration, euro zone shares are up 12% while U.S. stock prices have dropped by 6.7%.

U.S. investors and consumers are also much more pessimistic compared to their European counterparts. For the first time since nearly a full year, economists surveyed by have raised their growth forecasts of the euro zone to 1.3% in 2026 from 1.2%.

Although this is less than the 2% forecast for the United States there were more positive news Monday, as closely monitored factory gate data revealed that the euro zone's business growth expanded at its fastest rate in seven months.

Some European officials pointed out that the region’s dislike of rules is a virtue when compared to other regions' unpredictable policymaking.

Angelique Renkhoff Muecke, of the Bavarian metal and electrical industry association was even more blunt about the growing doubts regarding legal certainty in business in the U.S.

She said that anyone who hasn't already gone is considering it.

TRADE RISK

The biggest risk to an export-oriented European economy is a potential trade war, which will begin with tariffs that are due to go into effect on April 2.

According to the European Central Bank, a 25% U.S. duty on imports into Europe would reduce euro zone production by approximately 0.3 percentage points within the first year. The damage could be increased by half a percentage points if Europe takes retaliatory action.

It is unlikely that Europe will see sustained gains in investment until the fog around Trump's plans has cleared. The indexes used to measure the uncertainty of trade and economic policy using newspaper articles, forecasters' disagreements and filings are at an all-time high.

Atanas Kolev, co-author of a paper about the economic drag caused by uncertainty, said that businesses aren't in a position to plan their investments.

Europe's newly found spending courage will help to insulate the region from trade headwinds, especially for sectors such as construction and defence that directly benefit from Germany's plans.

Rheinmetall, Europe’s largest ammunition manufacturer, is expecting significant growth in sales in 2025. MBDA, the missile maker, will invest in their Italian unit in order to increase production, in anticipation of more orders.

Infrastructure companies, from Heidelberg Materials in Germany and Strabag in Austria to Swiss Geberit or France's SPIE, expect that the German spending program will have a short term impact.

Peter Huebner is the president of Germany’s construction industry association HDB, and board member of Strabag’s German division. He expects both orders and sales to increase at his unit this year.

He said that "every euro invested in infrastructure will increase gross domestic product (by two-and-a-half times this amount)."

HDB said it believes sales will rise in 2025, for the first increase in five years. Sales fell by 1.4% in January.

Executives in other sectors, such as the struggling steel industry, worry that funds will take years to reach the economy, and may not be able to address other pressing issues.

Stefan Rauber is the CEO of German steelmaker Saarstahl.

Professor Klaus Adam of University College London echoed this sentiment, noting the fact that there have been no steps taken to resolve the snags that are preventing the free movement of capital, labour and goods on the 32-year old single market.

He said, "Stability is good. People appreciate it now more than ever before because others are erratic." "But it's also a bit of an inconvenience because... we could be moving a lot faster on certain fronts," he said.

(source: Reuters)