The past quarter has heightened uncertainty over the growth trajectories of major economies, which are facing a global shock to confidence and a reorganization of their relative competitiveness. The American exceptionalism of growth that has long been above potential, even under restrictive monetary policy, is being questioned by new trade policies acting as a negative shock and leading to a slowdown in growth. Although the European economy will be negatively affected, the asymmetrical nature of the shock makes it less vulnerable. Additionally, Europe's desire for greater strategic autonomy is taking shape through increased spending on infrastructure and defense, offsetting the negative impact of the trade shock and putting the Eurozone on an upward growth trajectory. This supports the hypothesis of "European exceptionalism."
The Trump administration's trade policy contrasts with previous narratives of exceptional US growth while Europe lagged behind, particularly due to higher energy prices. Trump's policies act as a supply shock to the US economy, with higher input prices leading to slower growth and higher inflation risks. With inflation above target for five years and increased risk of inflation expectations going off track, the Fed is acting cautiously.
Conversely, Trump's policies constitute a demand shock for Europe, particularly affecting the Eurozone by causing declines in growth and inflation. Despite negative impacts on European companies' competitiveness in the US market, this shock affects Europe less than it does America. The ECB has more room to maneuver with interest rate cuts due to lower European inflation impacts. Despite risks of higher inflation linked to retaliatory measures and fiscal stimulus in the Eurozone, decoupling between monetary policy stances is set to continue.
In spite of multiple external shocks, an upward revision of Eurozone's growth potential based on domestic factors sets up scenarios for 2025 and 2026. Potential growth is revised upwards for this decade compared with official projections from its start. Employment continues contributing positively despite demographic challenges due to rising employment rates and participation rates supported by labor market reforms.
Around this dynamic trend growth cycle developing in late decade will be supported by strong fiscal impulses from public spending. Delays in implementing the European Recovery Plan (NGEU) concentrate significant spending over two years positively impacting growth via fiscal multipliers deepening capital stock productivity increases resulting from structural reforms fundamental elements plan.
For major Eurozone economies like Germany Italy Spain anticipate common acceleration domestic demand breaking two-year decline Germany sustained Italy Spain modest France driven stronger private consumption recovery investment contributes pace Germany Italy Spain upturn delay France.
In France economic activity grew weakly first quarter 2025 expected rise slightly second quarter accelerate slightly second half year real rebound comes 2026 driven resumption investment initial impact German government measures risks downside short-term activity.
Italy incomplete recovery recent fall purchasing power despite strength employment limits potential household consumption recovery positive surprises investment likely continue improvement financing conditions subsidies energy digital transition weakness industrial orders weigh productive investment construction shows resilience doubts remain about post-pandemic sector allocation favoring less productive sectors.
Germany back on track exposed protectionist policies stimulated federal investment plan effects minimal 2025 planning delays significant funds expected 2026 positive knock-on effects European neighbors whole Eurozone.
Spain easing monetary policy energy disinflation rising real incomes targeted fiscal stimulus underpinning domestic demand recomposition trade balance weakening goods continued robustness market services tourism smaller contribution past result deceleration normalization compared strong post-pandemic recovery years.
UK GDP increasingly driven domestic demand fundamentals household consumption deteriorated worsened labor market situation restrictive fiscal policy household consumption public spending only components make positive contributions.
To learn more consult publication “Europe – 2025-2026 Scenario: European economies in a waiting and transition phase”, June 2025