Brussels (Brussels Morning Newspaper) – In the first quarter, the eurozone economy experienced growth that surpassed forecasts, marking a cautiously optimistic beginning to 2025. However, this positive momentum is threatened by a potential trade war with the U.S., a strengthening currency, and declining business sentiment, according to data.
The world’s second-largest economic bloc has seen minimal growth in recent years as businesses have restrained investments and households worked to recover wealth diminished by high inflation. This has left Europe in a precarious position even prior to the recent spike in trade tensions. Although 2025 was long regarded as pivotal for its gradual recovery, the focus has shifted to the U.S.
President Donald Trump’s “Liberation Day” has prompted warnings from policymakers about lasting damage to the global economy, regardless of whether tensions are ultimately resolved.
Is euro zone growth strong enough to last?
In contrast, Eurostat reported that the 20 eurozone nations experienced a 0.4% economic growth in the first quarter, exceeding the anticipated 0.2%, thanks to rapid growth in Spain. Nonetheless, the fundamental trend was much weaker due to a 3.2% growth in Ireland, primarily fueled by activities of large foreign firms established there for tax advantages.
Germany, the largest economy in Europe, saw a growth of only 0.2%, whereas France increased by 0.1% and Italy by 0.3%. This indicates that, aside from Ireland, the region’s growth was nearing the 0.2% anticipated by economists.
Will Trump’s tariffs push Europe toward recession?
Since the end of the quarter, the outlook has considerably worsened. Recently, some of Europe’s major companies, including Volkswagen and Mercedes-Benz, have issued warnings in recent days that tariffs will hurt profits, hinder sales, and could limit investment. On Tuesday, a crucial sentiment indicator revealed a significant decline, eliminating any prospects of recovery and establishing a downward trend after remaining stable for much of 2024.
The European Central Bank has indicated that, in addition to the trade war, the financial market volatility caused by U.S. policies, combined with a general decline in sentiment, will hinder growth.
However, the bloc was observed to grow by less than 1% even before Trump’s tariff announcement, indicating that any further significant damage could bring it near a recession.
Could U.S. economic fallout reverse Trump’s trade stance?
Nevertheless, many economists and policymakers believe that the U.S. is likely to face a greater impact than other economies, which may motivate the Trump administration to reconsider its policies. Meanwhile, the ECB has been rapidly lowering interest rates to protect the bloc and is expected to take further easing measures in June, yet it remains relatively ineffective against such a widespread downturn.
The new German government’s increased fiscal spending on defence and infrastructure will be beneficial, but it will take time to legislate and implement. Therefore, little to no fiscal boost is expected this year.
One advantage of the trade tensions is that concerns about inflation have mostly faded. Decreasing energy costs, a robust euro, and slower growth are expected to exert downward pressure on prices, allowing the ECB to reduce rates further to bolster the economy.
