Europe’s Q1 Growth Outshone by Trump’s Tariff Threat

Eurostat reports that the eurozone economy expanded 0.4% during Q1 2025 after reaching 0.2% in Q4 2024 because of its strong labor market (6.1% unemployment) and increasing consumer spending following years of inflation-caution. The prospects for economic recovery remain dimmed because President Donald Trump introduced 20% import tariffs on EU products together with 25% steel and aluminum and automobile duties on April 2. The EU depends heavily on trade with the U.S. because it represents its biggest export destination.

A 90-day tariff suspension by Trump gives minimal reason to expect a deal that would reduce the 20% tariff rate yet the situation remains unclear. Businesses that bring EU products into their operations must choose between internalizing costs or raising their prices to customers. The European Commission’s economic sentiment indicator decreased to 93.6 during March which marked its lowest point since December because of fading optimism. According to ING economist Carsten Brzeski the eurozone faces subdued economic activity because of the U.S. policy deadlock.

The eurozone’s biggest economy Germany shows no sign of improvement following its two consecutive years of economic decline. The outgoing Scholz government reduced its 2025 growth projection to zero while a new 500-billion-euro ($570 billion) investment fund received parliamentary approval to increase infrastructure development. The European Central Bank implemented seven interest rate reductions with the most recent being a quarter-point decrease on April 17 to reduce credit expenses. The economic outlook for Europe remains uncertain because center-right leader Friedrich Merz will become chancellor on May 6 while facing the threat of Trump’s tariffs.