FRANKFURT, Germany — The European economy witnessed positive growth in the first quarter of the year, showcasing a promising recovery, but this optimism was swiftly overshadowed by the trade conflict instigated by U.S. President Donald Trump. According to data from Eurostat, the European Union’s statistical agency, the gross domestic product among the 20 eurozone countries advanced by 0.4% in the initial three months of the year, showing an improvement from the 0.2% growth observed in the final quarter of 2024.
However, the mood shifted on April 2 when Trump unveiled a wave of new tariffs targeting nearly every trading partner of the U.S. Most notably, goods imported from the EU were subjected to a 20% tariff rate. This move has caused a downward revision of Europe’s growth forecast, given the region’s significant reliance on exports, with the U.S. being its primary export market.
Trump did declare a 90-day halt on what he labels as “reciprocal” tariffs, a term he uses to indicate they are based on how he perceives other nations treat the U.S., yet there is significant uncertainty surrounding the EU’s ability to negotiate terms that would lessen the 20% levy.
Concurrently, other trade barriers, including a 25% levy on steel and aluminum, as well as on vehicles that impact all trading partners including Europe, remain in effect. European exporting companies, such as those dealing in automotive and pharmaceutical goods, often must decide whether to bear the additional costs or transfer them to consumers through increased prices.
This scenario has led to a decrease in measures of business and consumer confidence across Europe. The European Commission reported a dip in its economic sentiment indicator to 93.6 in March, marking its lowest point since December. The decline in sentiment underscores how tariffs and accompanying uncertainties have negated the recent fragile return of optimism in the eurozone, according to Carsten Brzeski, global head of macro at ING bank.
“In the absence of significant shifts in U.S. trade policy, both sentiment and economic activities within the eurozone are likely to remain muted in the near future,” Brzeski observed.
Prior to Trump’s tariff announcements, there were hopeful indicators for the European economy, including a robust labor market, reflected in a low unemployment rate of 6.1%, and a willingness by consumers to spend more following years of reduced spending due to inflation.
With inflation down to 2.2%, the European Central Bank has taken steps to lower borrowing costs for both consumers and businesses by cutting its benchmark interest rate seven times during the current easing cycle, the most recent reduction occurring on April 17 by a quarter percentage point.
Additionally, the German parliament’s recent approval of a 500-billion euro investment fund, exempt from constitutional debt limitations, has sparked anticipation of heightened investment in growth-oriented infrastructure projects over the forthcoming years. This decision, made by the incoming coalition of the center-right Union bloc and the Social Democrats, has been seen as a positive step.
Nevertheless, President Trump’s tariffs have diminished projections for Germany, the eurozone’s largest economy and a persistent economic challenge. Consequently, the outgoing administration under Chancellor Olaf Scholz has updated its growth projection for the current year to zero, following two consecutive years of shrinking output. On May 6, after a national election in February, Parliament is expected to elect Friedrich Merz, leader of the center-right Union, as the new chancellor.