For decades, Europe’s economic model has thrived on trade surpluses, exporting more than it consumes while relying on the rest of the world to absorb the excess. This system, however, is now under severe threat, not solely due to US President Donald Trump’s trade policies, but due to deep-rooted structural weaknesses within the continent itself. The region’s economic stagnation, lack of competitiveness, energy dependency, and geopolitical vulnerabilities are all converging into its biggest crisis since the World War II.
The European economy has been facing persistent economic challenges — low productivity, weak innovation, and regulatory rigidity. Unlike the United States and China, which have aggressively pursued industrial and technological growth, Europe has lagged behind in key sectors such as artificial intelligence, semiconductors, and cloud computing.
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A 2024 European Union report, led by former Italian Prime Minister Mario Draghi, highlights Europe’s declining economic competitiveness. While California alone has produced a quarter of the world’s tech unicorns, Germany—a similarly sized economy—has produced a mere 2% of high-value start-ups. Without urgent reform, Europe risks being sidelined in the global technological race.
The Trump factor – A catalyst for change?
Trump’s return to power has aggravated Europe’s crisis. His modern mercantilist policies are based on the belief that persistent trade deficits weaken American security and economic strength. As a result, he has pushed for aggressive tariffs and protectionist policies, particularly targeting Europe.
A 25% tariff on European exports, as proposed by Trump, could severely impact key industries, particularly the automobile sector. European automakers already face stiff competition from China’s electric vehicle giants like BYD. A further squeeze from the US market could cripple Europe’s automotive industry and force leaders to reconsider their traditional reluctance to embrace industrial policy.
Risk of financial isolation
Beyond tariffs, Europe is increasingly vulnerable to American economic warfare. Trump has weaponised the financial dominance of the US, using its control over global financial infrastructure to enforce sanctions and export controls. European banks have already faced massive fines for violating US sanctions, and Trump’s administration could escalate these measures further.
Europe’s reliance on American financial institutions is near-total. US banks like JPMorgan dominate European wholesale banking, while American investment firms manage vast portions of European capital. Even in energy, the region has become more dependent on US liquefied natural gas (LNG) after turning away from Russian supply. The deep entanglement with US economic power makes Europe particularly vulnerable to Trump’s unpredictable economic policies.
Energy crisis – A deeper problem than just politics
Europe’s reliance on external energy sources has been a long-standing issue. The energy crisis that began in 2021, fuelled by the Ukraine war and climate change, has exposed how fragile the region’s energy infrastructure remains. Surging LNG prices, unreliable renewable energy production, and Russia’s strategic use of fossil fuels as leverage have left the continent struggling with record-high energy costs.
Renewable energy expansion is the only long-term solution, but transitioning away from fossil fuels while ensuring energy security requires massive investment — investment that the region has been slow to make. The price of inaction is dire: energy shortages, factory closures, and inflation spikes that hurt its competitiveness even further.
Geopolitical shocks and military reorientation
Perhaps the biggest shift underway is in the region’s security architecture. Trump’s scepticism of NATO and his apparent willingness to sideline EU allies in negotiations with Russia have left the continent scrambling to bolster its defence capabilities.
Germany, traditionally resistant to large-scale military spending, is now considering a historic increase in defence budget. Proposals for a €200 billion emergency defence fund and increased joint EU military spending signal a fundamental rethinking of the region’s reliance on American security guarantees. However, financing such an expansion without undermining already-strained public finances will be a major challenge.
In the midst of economic stagnation and geopolitical uncertainty, increased military spending could be the catalyst the region needs. Large-scale defence investments create high-skilled jobs, drive industrial innovation, and strengthen domestic supply chains. With plans to raise defence budgets to 3% of GDP, the continent has an opportunity to revitalise struggling industries, particularly in aerospace, cybersecurity, and advanced manufacturing.
Investments in cutting-edge military technology can spill over into civilian sectors, boosting overall economic competitiveness. If managed strategically, defence spending could provide the economic stimulus the region desperately needs while reducing its dependence on US security guarantees.
Can Europe transform itself
Eurozone now stands at a crossroads. The crises it faces are not just about Trump or any single political event — they are symptoms of a much deeper malaise. Years of weak economic growth, high internal trade barriers, and a reluctance to embrace technological disruption have left the region vulnerable to external shocks.
The Draghi report outlined a radical transformation plan, proposing nearly €900 billion in investment into key sectors such as technology and defence. While such measures could reinvigorate the region’s economy, political will remains the biggest obstacle.
With or without Trump, Europe must take bold steps toward economic integration, technological investment, and energy independence. Otherwise, the crisis it faces today will only deepen, threatening its role as a global power in the years to come.