The re-election of Donald Trump as US President could become a major headache for Europe that is already struggling to keep its head above recessionary water. Trump’s return will likely bring a nationalistic “America First” approach back to the forefront, with policies that could batter Europe’s growth prospects while amplifying security concerns, said Angel Talavera, head of Europe economics at Oxford Economics in a note on November 8.

To add to the bad news, the German governing “traffic light” coalition collapsed after Chancellor Olaf Scholz sacked finance minister Christian Lindner, who belongs to the rival Free Democratic Party, paving the way for elections in early 2025 and probably leaving Germany without a budget for part of next year.

The political firestorm hits as the latest data shows that European economies are continuing to lose ground, especially Germany.

“Data releases this week continued to paint a gloomy picture for the industrial sector, especially in Germany, where production remains depressed. Short-term prospects remain negative, and we do not expect an imminent turnaround, but we think a more positive backdrop in 2025 should help foster a modest recovery,” said Talavera.

In contrast, as bne IntelliNews reported, Russia’s economy is flourishing for now, although growth and consumption are expected to slow sharply next year as Russia’s economy is cooling as the military Keynesianism boost wears off. Russia and China are global manufacturing powerhouses. Oil sanctions are a spent cannon and technology sanctions have failed, although financial sanctions on Russia are more effective, but have yet to affect Russia’s trade. Some analysts and market participants are anticipating the possible easing of some of these sanctions under Trump as he could generally disengage from the global economy.

Tariff Fortress America

Trump’s talk of a Fortress America behind a high tariff wall could severely hurt European business already reeling from the polycrisis. In the coming years, Trump’s tariff ambitions, particularly on key trade partners like China and the EU, threaten to erode market confidence and disrupt supply chains across Europe’s open economy.

“Trump's return is bad news for Europe, given his nationalistic, America-first approach and his desire to impose widespread tariffs across the globe, something that is of particular concern to the open European economy,” said Talavera. “But the impacts of Trump's return on the economy are highly uncertain at this point. Aside from the unpredictability of his character, which makes forecasting policy changes extremely challenging, some of his proposed measures will provide a substantial fiscal boost to the US economy, which would have positive spillovers for Europe.”

Talavera reassures that if the tariffs are imposed, they would likely start to have a significant impact from 2026, rather than next year, so the impact on 2025 figures will likely be smaller than assumed.

“A new presidency by Donald Trump will put the EU under pressure in many areas. As the USA is an important trading partner for some European countries, the prospect of possible tariffs of 10% on all imports to the USA alone will have a dampening effect on growth prospects in the eurozone. This gives European companies an incentive to relocate production capacities to the USA in the medium-term,” Erste said in a note.

Security headaches

Since the end of the Cold War, Europe has sheltered under the US-led Nato security umbrella, and under invested in defence. That may have to change now as Trump has threatened to not support countries that spend less than the 2% of GDP on defence mandated by Nato.

Indeed, the recent report from former Italian Prime Minister and ex-European Central Bank boss Mario Draghi also highlighted underinvestment in defence as one of the reasons why Europe has lost its competitive edge.

Trump’s focus on increasing defence spending among Nato members will require some nations to reassess budget priorities. However, the most immediate threat to Europe lies in Trump’s approach to the conflict in Ukraine. Trump’s apparent eagerness to end the war – possibly requiring Ukraine to make territorial concessions – would mark a sharp departure from the current Western stance. His position on reducing or even ending US support could lead to substantial geopolitical and security shifts within Europe.

According to a report in the Wall Street Journal, citing senior US officials, Trump has no concrete plan to end the war in Ukraine, but amongst the ideas being floated is to freeze the front line, a 20-year ban on Ukraine joining Nato and a DMZ cutting off eastern Ukraine that will be policed by non-US forces – more or less the same 12-point Chinese peace plan suggested by Beijing on the first anniversary of the start of the war.

In this scenario, the fate of continued military and financial aid remains unknown. Kyiv is about to receive the long discussed G7 $50bn loan to Ukraine, approved on June 13 at a G7 summit in Italy, that will keep it in the game for now. On November 7, Ukraine’s Ministry of Finance (MinFin) said that it would keep part of this money in reserve for use after 2025, suggesting that Bankova (Ukraine’s equivalent of the Kremlin) is anticipating a dramatic fall in Western funding under Trump.

Trump's former national security aide says he will decide personally on a peace plan and at the last moment, so no one can predict what the president will decide.

German government collapses

To add to the problems, within hours of the release of the US election results, the German “traffic light” coalition collapsed.

“Political instability in Germany comes at a particularly tricky time for Europe. In the short term, the downside risks to growth are probably a little higher now because Germany might be without a budget for part of next year, unless the ruling SPD and Scholz's remaining coalition partner, the Green party, manage to get support from elsewhere,” says Talaverad.

The EU has always been fissiparous but the problems have become a lot worse as the boomerang effect of sanctions drags down European growth in the last two years. Hungarian Prime Minister Viktor Orban, who is currently the president of the Council of the EU, has been actively building a pro-Russia illiberal axis in the European parliament, which swung to the right in the recent EU elections.

French President Emmanuel Macron has also been significantly weakened by his own electoral debacle earlier this year. Now with the collapse of the government of German Chancellor Olaf Scholz, the EU is in even more political disarray than ever. That is good news for Russian President Vladimir Putin, but extremely bad news for Ukrainian President Volodymyr Zelenskiy.

Germany’s governing coalition collapsed Scholz dismissed Finance Minister Christian Lindner, who belongs to the Free Democratic Party. The two had clashed repeatedly over how to fix the German economy, but The Kyiv Independent reports the straw that broke the camel’s back was Lindner’s suggestion to supply Ukraine with the powerful Taurus missiles instead of economic aid – something that Scholtz has long resisted.

This fracture will likely lead to early elections in March 2025, adding another layer of political uncertainty to an already delicate situation.

The ongoing structural challenges within the German economy and its deindustrialisation after being cut off from cheap Russian gas further complicate matters. Volkswagen has announced that it will close three German plants for the first time in its 87-year history and Audi, a Volkswagen subsidiary, announced it will cut 15% of its workforce on November 8. The European car market is under increasing pressure from Chinese imports and is also intending to erect a tariff barrier to protect its own carmakers as the price crisis filters through from heavy industry and starts to impact consumption.

Recent data shows little sign of relief for the industrial sector, according to Oxford Economics, which has been contracting throughout 2023. The latest September figures show another sharp decline in German production, traditionally the engine of European growth.

Although the recent third quarter GDP figures provided a positive surprise, the broader indicators – such as the PMI data in October – are less encouraging.

“The industrial sector is mired in a slump, particularly in Germany. Although short-term prospects remain negative, we anticipate a modest recovery in 2025 if monetary easing begins to feed through,” Talavera said. However, this potential upturn could be undercut if early elections fail to yield a stable government committed to structural reforms.

Looking forward, the 2025 German elections could define the trajectory of Europe’s largest economy. If a new coalition manages to coalesce around much-needed economic reforms, particularly the controversial public debt brake, Germany might finally see a much-needed policy reset. But much will depend on whether the likely favourite Christian Democratic Union (CDU) party, currently leading in polls, will pursue reform or maintain fiscal conservatism.

The other wild card in the German vote is the FDP is unlikely to clear the 5% threshold and will not be represented in the Bundestag. The Greens are also likely to see their support fall, while the right wing AfD (Alternative für Deutschland), which recently shocked with first time wins in regional elections, could improve its hand further.

Europe’s near-term outlook remains clouded by uncertainty – Trump’s hallmark -- and shifting political landscapes on both sides of the Atlantic.

The New York Times (NYT) poignantly observed in its wrap of the US elections: “Now Americans will have to come to terms with the fact that Trump's first presidency was not a random four-year period, but the opening of a 12-year era of Trump.” The EU will have to wake up to the same reality.