Preparations underway amongst European countries for a prospective age of international chaos

In the face of global trade tensions and geopolitical issues, Europe is witnessing a significant reconsolidation, with businesses planning to increase intra-European trade over the next two years. This shift towards a more unified European economy is a response to the fragmented and potentially dangerous global order.

A group of analysts, including Alain Durré, Bastien Aillet, Hadrien Camatte, Jesus Castillo, Sylwia Hubar, Inna Mufteeva, Benoît Gérard, Cyril Regnat, and Emilie Tetard, recently discussed the preparation of major European economies for this new landscape in a webinar.

The economic landscape of Europe is diverse, with some countries facing challenges while others are thriving. Italy, for instance, has the highest public debt (140% GDP) among European countries, a factor that could potentially hinder its growth. On the other hand, France is facing political uncertainty, a projected high deficit in 2024, and rising unemployment. However, growth in Europe, on average, is expected to be 0.6% in 2025 and 1.1% in 2026.

Germany, Europe's economic powerhouse, is undergoing a renewal. The election of Friedrich Merz as Chancellor marks a significant shift, with Germany looking to establish itself as a driver of European growth through a bold investment agenda. Germany has announced a €500bn infrastructure fund over 12 years and plans to increase new borrowing by 2029 to €850bn.

Southern Europe, particularly Spain and Portugal, are key success stories in the region. They have managed to rebound from the pandemic-induced slump, with tourism making a significant comeback. Poland, with defence spending standing at 4.2% of GDP in 2024 (Europe's highest), is expected to rise to 4.7% in 2025.

The current government of Poland, led by Prime Minister Donald Tusk from the liberal-conservative Civic Coalition, is shifting from the previous authoritarian approach to strengthen the rule of law, improve relations with the EU, and thereby secure significant EU funds. While specific military expansion plans are not detailed, this pro-European integration and reform-oriented government framework likely supports Poland’s future stability and development, including security and defense enhancements.

Economic growth in Europe is not without challenges. Effective tariffs on EU imports are approaching 50%, with each additional 10% tariff tranche reducing EU GDP growth by approximately 0.2%. International tensions, particularly those from aggressive U.S. trade policies, have negatively impacted European growth.

However, the European Union is taking steps to reinforce its role in the global economy. It currently has a total of 115 active, validating, or under-negotiation trade agreements. The UK's growth, while initially strong at 0.7% in Q1 2025, may have stagnated in Q2 with a 0.1% contraction in May. Inflation in Europe remains subdued at 1%, which promotes private consumption.

In conclusion, Europe is navigating a complex economic landscape. However, with reconsolidation efforts, bold investment strategies, and a focus on intra-European trade, the continent is poised for growth in the coming years.

Preparations underway amongst European countries for a prospective age of international chaos