Trump's trade winds: Will Europe survive another round of tariffs?

President-elect Donald Trump’s imminent return to the White House is casting a long shadow over Europe’s economic prospects.

His trade policies, especially regarding tariffs, are expected to put further strain on European industries, which are already struggling, Caliber.Az reports via foreign media.

Trump, notorious for imposing hefty tariffs on European goods during his previous tenure, is likely to push for more protectionist measures, including demanding that NATO countries increase their defense spending. Such policies will further strain European finances, which are already burdened by high deficits and dwindling tax revenues.

Europe is at a crossroads, with mounting economic struggles and looming political threats exacerbating its long-standing issues. The continent, once the cradle of innovation and global leadership, is now battling stagnation, with its prosperity increasingly at risk due to both internal and external pressures. As the European Union (EU) grapples with these challenges, some fear it may be on the brink of a steep decline.

The economic troubles are compounded by a stark technological gap. Europe, which once led the world in innovation, has now become an “innovation desert,” according to European Central Bank President Christine Lagarde.

Speaking at the Collège des Bernardins in Paris, she warned that Europe’s social model—sustained by prosperity—would be at risk if the continent fails to adapt. "We are living through a period of rapid technological change, driven in particular by advances in digital innovation," Lagarde said. "Unlike in the past, Europe is no longer at the forefront of progress."

The numbers back her up. Despite a rich history of groundbreaking inventions, Europe has fallen behind, especially in the rapidly growing electric vehicle (EV) market, where no European carmaker appears among the top-selling EV brands. Mario Draghi, former Prime Minister of Italy and central banker, highlighted the growing deficit in European competitiveness, noting that only four of the world’s top 50 tech companies are European.

Germany, Europe’s largest economy, is feeling the effects most acutely. The country's auto industry, once a global leader, is in turmoil. German carmakers, like Volkswagen and BMW, were slow to invest in EV technology, ceding ground to competitors like Tesla and Chinese firms. As a result, Germany's automobile sector, which has historically been a major driver of economic growth, is now in decline. Volkswagen recently announced plant closures, a rare sign of trouble for the sector.

But the crisis runs deeper than the automotive industry. Germany, along with much of Europe, is grappling with an aging population and a shortage of skilled workers, which is only exacerbated by high energy costs, expensive labor, and heavy regulation. As Veronika Grimm, a member of Germany's Council of Economic Experts, noted, the only way to reverse the country’s decline is through “fundamental structural reforms to encourage investment.”

The problem of stagnating innovation extends beyond Germany. Europe has failed to meet its 2000 goal of making its economy the most competitive in the world, particularly in the area of research and development (R&D). According to the International Monetary Fund, European companies spend far less on R&D compared to their U.S. counterparts. This lack of investment in future technologies, combined with Europe's reliance on traditional sectors like machinery and trains, has left it vulnerable to competition from emerging economies like China.

Moreover, the EU’s venture capital market, which is a critical source of funding for startups, is significantly smaller than in the U.S. This lack of financial support has stunted the growth of European tech companies, further hindering the continent's ability to compete globally.

As Europe’s economy falters, political instability is also on the rise. In countries like France, which faces a budget deficit exceeding 6% of GDP, there is growing concern that the EU’s generous welfare systems will become unsustainable. If economic conditions do not improve, Europe may face a situation similar to Greece's 2010 debt crisis, with rising borrowing costs leading to political radicalization. Indeed, populist movements, both on the far right and left, are already gaining traction across Europe, capitalizing on economic discontent.

The situation is becoming increasingly dire, and many experts fear that Europe is heading toward a crisis. As Clemens Fuest of the Ifo Institute warns, "The failure of Europe’s leaders to draw lessons from the last Trump presidency is now coming back to haunt us."

Without swift and bold reforms, Europe risks not only losing its competitive edge but also facing a future of political and economic turmoil. The question now is whether Europe can change course before it's too late.

By Aghakazim Guliyev