Why ‘peak pessimism’ about Europe is overdone

Ursula von der Leyen had been anticipating a fast and furious first 100 days back in power in her second term as European Commission president. However, the “Trump storm” from Washington in January and February may have exceeded even her wildest expectations about what might emanate from the new US presidency.
Not only has US President Donald Trump talked up a cascade of new tariffs on Europe, including reciprocal measures and sectoral ones on steel and aluminum, he has also potentially laid claim to begin one-to-one negotiations with Russian President Vladimir Putin, apparently cutting not only Ukraine, but also wider Europe, out of negotiations to try to settle the three-year-long war.
The perceived power imbalance between the US and Europe shown in these episodes in Trump’s first three weeks back in power has fueled sentiment that the EU, in particular, faces a bleak four years ahead, economically and politically. However, this “peak pessimism” about Europe may be significantly overdone.
History highlights how sentiment about powers can change, sometimes significantly. An alternative “Resilient Europe” scenario could unfold in coming years if the region surprises on the upside, with stronger political resolve. This follows multiple key elections in 2024 and forthcoming ones in 2025, including Germany on Feb. 23, which may provide a much-needed political “window of opportunity” for reform.
What makes Europe’s future economic and political pathway hard to forecast is that the regional landscape is characterized by intense VUCA (volatility, uncertainty, complexity and ambiguity). It is full of both risk and opportunity, with the balance between the two waxing and waning.
At present, there is sometimes unmitigated gloom about Europe’s prospects, despite the region’s ongoing fundamental economic and political strengths. However, one of the many ironies about the reelection of Trump as US president is that it might strengthen rather than weaken Europe by being a driver for reform to boost economic competitiveness and strengthen security and defense.
Already, Trump’s presidential victory has been one of the key drivers of the EU’s major trade deal with the Mercosur bloc in South America in December. This agreement, which was more than 20 years in the making, may not have happened without the “Trump effect.”

There are multiple other potential factors that could realign perceptions about Europe’s future economic and political prospects. For one, potentially faster than anticipated interest rate cuts in 2025 by the European Central Bank and other national authorities in the region, including the Bank of England, could have a larger than expected economic impact.
There is also a possibility of faster paced progress on former ECB chief Mario Draghi’s competitiveness agenda than is commonly perceived. This is a major political priority for von der Leyen amid a blizzard of new economic initiatives, including a new EU Clean Industrial Deal scheduled to be launched on Feb. 26, which may become the signature issue of her second term.

The geopolitical context facing Europe is likely to be very difficult in the second half of the 2020s.

Andrew Hammond

Meanwhile, in Germany, Europe’s largest economy, the next chancellor is likely to be pro-business Friedrich Merz. His Christian Democrat Union is likely to be the largest party post-election and form a pro-growth coalition centered around his Germany 2030 reform agenda. With the current Bundesbank President Joachim Nagel supporting reform of the nation’s balanced budget amendment (or “debt brake”), looser fiscal policy may well be on the horizon. Moreover, supply side reforms could lift the economy markedly in the next four years.
Building from December’s Mercosur agreement, the EU is also negotiating further trade deals with key Global South powers, including the Gulf Cooperation Council.
Any number of such factors, collectively, may help significantly boost economic growth. In turn, this could then start reversing lost competitiveness against other world powers, and boost security and defense spending to boot, thus tackling one of the Trump administration’s key gripes about the region, as voiced at the recent Munich Security Conference.
Perhaps the central challenge with enhancing EU competitiveness centers around the EU’s three largest economies: Germany, France, and Italy. All three are stagnating, economically, while Southern European powers like Spain, Greece and Portugal, as well as much of Eastern Europe have outperformed the EU average in recent years, a trend likely to continue in the medium term.
However, we should not get carried away with positivity. While there is more potential than commonly perceived for Europe to surprise, with the region at a significant economic and political pivot point, there are less-rosy scenarios.
Failure to reform, economically, will intensify the political challenges facing Europe. Right-wing populism is gaining followers, which may yet help create an existential crisis for the EU — something Draghi highlighted the possibility of in his European competitiveness report in September.
The geopolitical context facing Europe is also likely to continue to be very difficult in the second half of the 2020s, even if Trump can deliver a sustainable deal to end the Ukraine war. Primarily, this is because of the continuing security problems posed by Russia.
Beyond Moscow there are wider challenges, including the possibility of significant migration flows from the region’s southern border, plus ongoing tensions in the Middle East, especially if the current ceasefire between Israel and Hamas breaks down.
While the 1920s became known as the prosperous “Roaring Twenties,” a century later there is a significant risk that the 2020s will be seen as the “Warring Twenties,” sending Europe’s future in a negative direction.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.