19.02.2025 12:33
The European Union (EU) economy is facing multiple challenges simultaneously, including its existing structural issues and defense policies that will raise trade and spending, which include the new tariffs imposed by the United States.
The European Union (EU) economy is facing multiple challenges simultaneously, including its existing structural problems and the defense policies of the United States that involve new tariffs, which are expected to raise trade and spending. As the EU goes through a high-risk period characterized by economic stagnation, fragmentation in trade, and geopolitical instability, the strained relations with the US and the ongoing Russia-Ukraine War, which is entering its fourth year, are putting Europe in distress.
TRUMP'S ARRIVAL HAS MADE A DIFFICULT PROCESS EVEN MORE CHALLENGING
The change in the presidential seat in the US has also significantly affected Europe. The rigidity in the style and rhetoric of US President Donald Trump has been perceived negatively in Europe, while his distant approach to the EU has led to the beginning of a difficult period in relations. In the new era, as the EU focuses on Trump's trade and defense policies, its previously close relationship with the US has eroded.
TARIFFS ARE BENDING THE EU'S BACK
Trump's implementation of protectionist economic policies with the "America First" approach, which included imposing a 25% tariff on steel and aluminum imports, has caused serious discomfort in Europe. The EU stated that there is no reasonable justification for the US's tariff imposition and that Europeans would be protected from unfair measures in this situation. Europe, which believes that the US's tariffs have increased economic uncertainty and disrupted the efficiency and integration of global markets, also reacted negatively to Trump's plan to impose tariffs based on reciprocity. The EU views the trade policy proposed by Trump, which includes mutual tariffs, as a step taken in the wrong direction and announced that it would respond immediately and firmly against unfair barriers to free and fair trade. Thus, the EU sent a message that it would retaliate against the US immediately and would not hesitate to enter into a trade war.
TRUMP DISREGARDED THE EU
The fact that US President Trump did not include EU countries in the negotiation process for starting peace talks to end the ongoing war in Ukraine with Russian President Vladimir Putin further widened the gap in relations. During a period when diplomatic negotiations between Russia and the US regarding peace in Ukraine were increasing, European countries wanted to have a seat at the table. However, this request was left unanswered by the US. Additionally, President Trump holds the view that European countries do not allocate enough resources to defense and that this needs to be increased immediately.
THE TRUST RELATIONSHIP BETWEEN THE EU AND THE US HAS BEEN SHAKEN
Currently, the average defense spending of EU countries is at 1.9% of their GDP. Trump demands that NATO members spend 5% of their GDP on defense. This issue is among the factors that increase tension between the EU and the US. EU countries will need to significantly change their budgets to meet the requested increase in defense spending. Many European countries are already struggling with high public debt and budget deficits. With slowing economic growth, a deceleration in population growth, and rising social costs, making additional military expenditures will not be an easy choice for European countries. Thus, both in commercial and military matters, the trust relationship between the EU and the US has been seriously shaken during Trump's presidency.
THE EU IS GROWING SLOWLY
The economic growth of the EU has been quite low compared to the US and China in recent years. The EU's own forecasts indicate a growth expectation of 1.5% for 2025. Some studies predict that the Eurozone will grow by only about 1% this year. The low economic growth in Europe is becoming more pronounced in the long term, widening the gap with competitors. The European economy has lagged significantly behind the US over the past 15 years. The US has rapidly advanced, especially in technology and digital transformation, establishing a leading position in these areas. During this period, the US's GDP increased by 70%, while the EU's growth was only 20%. This gap has become very pronounced recently.
COMPETITION IS HEATING UP
Europe has also experienced a significant loss in productivity and competitiveness. European countries, which have seen slow productivity growth and rapidly rising labor costs, have lost their competitive edge in industry compared to countries like the US and China. Therefore, the EU wants to focus more on the competitiveness area where it has recently fallen behind. In this area, the EU aims to reduce bureaucratic processes, increase investments in technology companies and areas like artificial intelligence, and lower energy costs. However, the US can implement much stronger measures and support packages more quickly than the EU can prepare.
DEBT LEVELS ARE VERY HIGH
Additionally, many EU countries have very high levels of public debt and budget deficits. According to Union rules, member countries' public debt should not exceed 60% of their GDP, and budget deficits should not exceed 3% of their GDP. When these limits are exceeded, measures must be reported and effective action must be taken. However, a significant portion of EU countries does not comply with EU financial rules due to various reasons and structural problems.
BUDGET DEFICIT IS A MAJOR ISSUE
The public debt ratio exceeds 100% in Greece, Italy, France, Belgium, and Spain. The public debt of 13 EU member countries is above the 60% limit. Additionally, the budget deficits of 10 EU member countries, led by Italy, Hungary, and Romania, have also exceeded the 3% limit. High public debt and budget deficits make it difficult for EU countries to take steps to revitalize their economies and allocate resources to areas such as defense that are needed.
INFLATION TARGETS ARE NOT BEING MET
On the other hand, the fight against inflation continues globally, as it does in Europe. The inflation rate remains high in Europe as well. The European Central Bank (ECB) aims for a 2% inflation rate in the medium term. However, inflation in the Eurozone, which has shown an upward trend in recent months, is hovering around 3%. Gas prices are high, and the EU is going through a very problematic period in energy. The filling level of EU gas storage is about 10% below the average of the same period in the last 5 years. Currently, the filling rate of Europe's natural gas storage has fallen below 50%. During this period, gas prices have reached their highest levels in the last 2 years due to low temperatures and the decrease in gas quantities in storage. Although this situation is among the priority issues that Europe needs to solve, it has very few options available.