Eurozone Economy Posts Resilient 2025 Growth Despite Tariff Turbulence — 4th Update

By Ed Frankl

The eurozone economy last year expanded at its fastest pace since 2022 despite higher U.S. tariffs, and seems set for continued modest growth as increased government spending on defense and the repair of frayed infrastructure kicks in.

The pickup underlines the resilience of the bloc's economy, which has avoided recession in the face of a series of shocks that include Russia's full-scale invasion of Ukraine and rising tensions with the U.S.

However, even at that slightly higher rate of expansion, the eurozone continued to trail other large economies, including the U.S., and is not expected to close that growth gap as its working-age population shrinks and productivity remains sluggish.

Gross domestic product grew 1.5% compared with the prior year, accelerating from 0.9% in 2024, Eurostat data showed Friday. Nevertheless, it lags well behind the 2.1% U.S. growth expected by the International Monetary Fund.

Still, the eurozone's economy closed 2025 on a high note, by growing an annualized 1.3% in the fourth quarter, as some of the trade swings subsided and growth was faster than expected in Germany, Italy and Spain. Seasonally adjusted unemployment in December fell to a joint-record low of 6.2%.

The eurozone's resilience is set to persist in 2026, said Diego Iscaro, head of European economics at S&P Global Market Intelligence.

"German fiscal policy is likely to gradually make a positive contribution, with spillovers to the rest of the region. However, there are plenty of risks that could take the economy onto a substantially more negative path, including a volatile geopolitical environment."

President Trump has raised tariffs on imports from the European Union, with most now facing a duty of 15%, although higher rates were threatened at various points during 2025.

Europe's exports to the U.S. were boosted by front-running in the early months of the year as U.S. businesses stockpiled to get ahead of the anticipated hikes, as well as a surge in demand for weight-loss drugs.

But they weakened toward the end of 2025 as stockpiling faded and the higher tariffs started to bite. In November, exports of goods to the U.S. were 20% lower than in the same month a year earlier.

Rather than retaliate, Europe has looked elsewhere for export markets. Last week it struck a deal with India that officials hope will double trade over the five years after its implementation.

It has also signed an agreement with Mercosur, the South American trade bloc, as well as Indonesia.

Uncertainty about Europe's economic and security relationship with the U.S. remains high. President Trump's desire to acquire Greenland, and his threats to place additional tariffs on European nations that oppose him, have placed renewed strain on trans-Atlantic trade.

The European Central Bank's President Christine Lagarde has said Europe should look inward to drive domestic growth and break down internal barriers between its economies.

"I think that we policymakers are at a point where we have to look at plan B," she said at the World Economics Forum in Davos earlier in January.

"We should be talking about alternatives. We should be identifying much more so than we have probably in the past the weaknesses, the sore points, the dependencies, the autonomy," she added.

Germany in particular faced severe pressures from the Trump administration's decision to ramp up tariffs last year. Its export-oriented manufacturers were already facing more intense competition from their Chinese counterparts and a difficult shift away from combustion engines in its car industry. The dollar's fall against the euro is an added headwind for hard-pressed exporters.

President Trump's election jolted Europe's economy in the early part of 2025, pushing the traditionally frugal government into pledging more than $1 trillion in military and infrastructure investments.

The impact of that investment has started to be seen in better-than-expected industrial data coming out of Germany toward the end of the year. While there remain concerns about the sustainability of the rebound, economists generally expect Berlin's fiscal stimulus to help the country's industry and spur overall growth further throughout 2026.

However, consumer confidence remains subdued, with savings staying conspicuously high.

The eurozone's bright spots in recent years have been away from traditional northern drivers Germany and France. Southern nations like Spain continued to outperform, assisted by tourism but also healthy levels of investment from both the private sector and EU funds.

Ireland also played a big part in the 2025 pickup, thanks to a surge in U.S. demand for key ingredients used in popular weight-loss drugs. That is unlikely to be repeated in 2026, likely slowing recorded growth in the eurozone as a whole.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

January 30, 2026 05:47 ET (10:47 GMT)