The Eurozone economy is stuck in a rut. Growth forecasts have been downgraded again, and even the revised numbers don’t inspire much confidence.

The European Commission, the EU’s executive arm, now predicts that the 20 countries using the euro will expand their collective GDP by just 1.3% in 2025. That’s down from its earlier projection of 1.4%. This year, the picture looks worse: a dismal growth rate of 0.8%.

Compare that to the United States, which expects steady growth of around 2% annually through 2026. The difference isn’t just numbers — it’s a warning sign.

While the U.S. economy keeps moving forward, the Eurozone seems stuck in reverse. If President-elect Donald Trump follows through on his threat to slap 10% tariffs on European imports, things could spiral further.

Spain is the only Eurozone economy showing real strength, projected to grow 3% this year and 2.3% in 2025. Germany, on the other hand, is bracing for economic contraction, and France is struggling with budget deficits and political challenges.

“After a prolonged period of stagnation, the EU economy is returning to modest growth,” the European Commission said in its autumn forecasts. Modest, indeed.

Tariffs could wreak havoc on trade

Trade wars are the last thing the Eurozone needs right now. Trump’s proposed 10% tariffs on European goods could gut the bloc’s export-heavy economies.

Germany, the region’s industrial heart, could lose 1% of its GDP if these tariffs are implemented, according to Bundesbank President Joachim Nagel. The damage wouldn’t stop at Germany’s borders. Projections from insurer Allianz estimate that €25 billion worth of German exports could be at risk.

Smaller suppliers across the Eurozone, from French wineries to Italian machinery manufacturers, would feel the heat. For an economy already battered by an energy crisis and sluggish post-pandemic recovery, this would be catastrophic.

Economists are divided over whether Europe’s exporters could recover. Some argue that a stronger U.S. dollar might make European goods cheaper and offset the impact of tariffs.

Others point out that the region’s manufacturing sector is already struggling. The data backs them up: Eurozone industrial production has fallen 6% since January 2022, and it keeps shrinking.

Russia’s invasion of Ukraine, which drove energy prices to record highs, dealt a massive blow to Europe’s manufacturing base.

Inflation and budgets: Double trouble

Inflation might be cooling off, but it’s far from over. The European Commission forecasts inflation will average 2.4% in 2024 before easing to 2.1% in 2025. That’s slightly better than earlier peaks, but it’s not much comfort for governments already dealing with budget shortfalls.

Lower growth means less tax revenue, and higher interest rates are making it more expensive for governments to borrow. 

France, in particular, faces an uphill battle. Its budget deficit is expected to fall from 6.4% of GDP this year to 5.2% in 2024, but temporary tax breaks are set to expire in 2026, which will likely push the deficit back up.

The European Commission warns that the debt-to-GDP ratio is climbing across the bloc, putting even more pressure on governments to tighten their belts.

Meanwhile, the European Central Bank (ECB) is trying to thread the needle. After raising interest rates to 4% last year to combat inflation, the ECB has started cutting them again.

The deposit rate now stands at 3.25%, and the bank plans further reductions. The goal is to make borrowing cheaper and encourage investment, but progress is slow.

Climate change is adding complexity. Recent flooding in Spain killed hundreds and caused widespread infrastructure damage. The European Commission warned that disasters like this could disrupt supply chains, hurt food production, and reignite inflation.

The manufacturing sector can’t catch a break

Manufacturing has always been the backbone of the Eurozone, but right now, it’s in crisis. The sector was already struggling to recover from the pandemic when Russia’s war in Ukraine sent energy prices soaring. 

Now, it faces a new threat: U.S. tariffs. Germany, often called the “engine” of Europe, is sputtering. Industrial output has fallen sharply, and the country’s reliance on energy-intensive industries like chemicals and steel has made it especially vulnerable. France and Italy, while less reliant on heavy manufacturing, aren’t immune.

“A further increase in protectionist measures by trading partners could upend global trade,” it warned. For an economy as open as the Eurozone’s, that’s a disaster waiting to happen. 

Global context: The U.S. outpaces Europe

While the Eurozone stumbles, the U.S. keeps pulling ahead. Goldman Sachs projects U.S. GDP growth of 2.5% in 2025, compared to just 0.8% for the Eurozone. Labor productivity in the U.S. has risen at an annualized rate of 1.7% since 2019, while Europe has managed a measly 0.2%. 

Trump’s expected trade policies, including tariffs on China and Europe, could widen the gap even further. Goldman Sachs predicts that these measures will hurt global growth but have a relatively minor impact on the U.S., thanks to tax cuts and a business-friendly regulatory environment.

In Europe, the story is different. The region’s dependence on exports makes it highly vulnerable to trade disruptions. 

Central banks are also responding differently. America’s Federal Reserve plans to cut rates aggressively, aiming for a range of 3.25% to 3.5% by early 2025.

The ECB, by contrast, is moving cautiously, with a target of 1.75% by the end of 2025. Emerging markets, meanwhile, have room to ease monetary policy, but that’s little consolation for Europe.