The European economy recorded modest growth at the end of last year, weathering the turmoil triggered by US tariff hikes. However, it now faces a new obstacle: a strengthening euro against the US dollar, which could hamper exports. Eurostat data released on the 30th showed that in the final three months of 2025, the economy of the 21 eurozone countries grew by 0.3% quarter-on-quarter, matching the growth rate of the third quarter; compared to the fourth quarter of 2024, it grew by 1.3%. Earlier this year, US President Donald Trump threatened to raise tariffs to levels that could severely impact trade, leading to widespread market fears of a European recession. The current modest growth has defied those expectations. Subsequent negotiations finalized an agreement setting a 15% ceiling on US import tariffs for EU goods. Although tariff hikes are unfavorable for business operations, the certainty provided by this deal has at least allowed companies to continue operating and making plans. However, after the fourth quarter ended, this certainty was challenged. On January 17, Trump threatened to impose higher tariffs on EU member states for supporting Greenland's opposition to a US acquisition bid, but he subsequently withdrew the threat. S&P Global's Purchasing Managers' Index survey indicated that Europe's services sector—encompassing areas such as hairdressing and healthcare—achieved modest growth. The European export sector had previously performed poorly, and the industrial sector continued to lag, but signs of improvement emerged towards the end of 2025. Following a significant surge in inflation from 2022 to 2023, the European inflation rate fell to 1.9% in December of last year. Coupled with rising wage levels, consumers' purchasing power and willingness to spend have both increased. The latest threat facing the European economy is the significant depreciation of the US dollar against the euro. The dollar's exchange rate has fallen to its lowest point in four and a half years, reducing the price competitiveness of European goods in their key overseas markets. The dollar's weakness stems from market concerns that Trump's tariff policies could slow US economic growth, coupled with his criticism of Federal Reserve Chair Jerome Powell, which is seen as potentially undermining the Fed's role in curbing inflation and maintaining the dollar's value. Over the past 12 months, the euro has appreciated by 14.4% against the US dollar, with the exchange rate reaching 1.19 on January 30. Analysts suggest that if the dollar's weakness against the euro persists, the European Central Bank might cut interest rates later this year to stimulate economic growth. The ECB will hold its interest rate decision meeting next Thursday, but markets expect no change in rates at this meeting. Germany's economy grew by 0.3% quarter-on-quarter in the fourth quarter, its best quarterly performance in three years, but it still faces significant short-term and long-term headwinds. As the largest economy in the eurozone, Germany is awaiting the effects of infrastructure and defense spending policies promoted by Chancellor Friedrich Merz to drive further economic growth. In 2025, the German economy grew by 0.2% year-on-year, ending two consecutive years of declining output and marking a recovery. The German government revised down its 2026 growth forecast from the previous 1.3% to 1% on January 28. The German economy is grappling with a series of challenges: persistently high energy prices following the loss of Russian gas supplies due to the Russia-Ukraine conflict; a shortage of skilled workers; intensified competition from China in key German export sectors like automobiles and industrial machinery; years of underinvestment in growth-oriented infrastructure; and cumbersome bureaucratic procedures. Beyond the eurozone, the overall economy of the European Union, comprising 27 member states, grew by 0.3% quarter-on-quarter in the fourth quarter of 2025, and by 1.4% compared to the fourth quarter of 2024. Not all EU member states have joined the eurozone; Bulgaria officially joined in January of this year, bringing the number of eurozone members to 21.
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