Europe sees modest growth, but the weaker US dollar looms as a threat

The European economy maintained steady growth in the final quarter of 2025, expanding by 0.3% despite ongoing trade tensions with the United States and a strengthening euro that threatens export competitiveness.

According to data released Friday by Eurostat, the EU’s statistical agency, the 21-nation eurozone matched its third-quarter performance, posting a 1.3% year-over-year increase compared to the fourth quarter of 2024.

This moderate growth defied earlier recession fears that emerged when U.S. President Donald Trump threatened punitive tariffs that could have severely disrupted transatlantic trade. The eventual settlement capped U.S. import taxes on European goods at 15% – not ideal for businesses but providing enough certainty for companies to formulate strategic plans.

However, market stability was briefly shaken after the quarter ended when Trump threatened additional tariffs against EU countries that opposed his proposed U.S. takeover of Greenland. Though he later withdrew this threat, it highlighted the ongoing unpredictability in trade relations.

The services sector has been a bright spot for European economies, showing moderate growth according to S&P Global’s purchasing managers survey. While exports have significantly declined, the manufacturing sector showed signs of improvement toward the end of 2025. Consumer spending has strengthened as inflation fell to 1.9% in December – a significant improvement following the painful price spikes of 2022-2023 – while rising wages have enhanced purchasing power.

A new challenge has emerged in the form of a weakening dollar against the euro. The European currency has reached its strongest position against the dollar in four-and-a-half years, rising 14.4% over the past 12 months to trade at $1.19 on Friday. This currency shift makes European exports more expensive and potentially less competitive in the crucial U.S. market.

“The euro’s strength could become a significant headwind for exporters across the continent, particularly in manufacturing-heavy economies like Germany,” said Marcus Heinz, chief economist at Deutsche Bank Research, in a note to clients. “We’re seeing the effects of both Trump’s rhetoric toward the Federal Reserve and market uncertainty about U.S. economic policy.”

The dollar’s weakness stems partly from Trump’s public criticism of Federal Reserve Chair Jerome Powell, raising concerns about the central bank’s independence and its ability to maintain price stability. These attacks have undermined confidence in the dollar’s long-term value.

Financial analysts suggest that if the euro continues to strengthen, the European Central Bank may implement interest rate cuts later this year to stimulate growth. While the ECB meets this Thursday, no immediate rate changes are expected.

Germany, the eurozone’s largest economy, showed encouraging signs with 0.3% growth in the quarter – its best quarterly performance in three years. However, Europe’s economic engine still faces significant challenges despite returning to growth in 2025 after two consecutive years of contraction. The German government recently reduced its 2026 growth forecast from 1.3% to 1%.

Germany continues to wrestle with multiple structural issues: elevated energy costs following the loss of Russian natural gas supplies due to the Ukraine war, skilled labor shortages, intensifying Chinese competition in key export sectors including automotive and machinery, chronic underinvestment in infrastructure, and excessive bureaucracy. Chancellor Friedrich Merz’s increased infrastructure and defense spending initiatives have yet to significantly impact economic growth.

The broader 27-country European Union also recorded 0.3% growth for the fourth quarter of 2025 and a 1.4% year-over-year increase. The eurozone expanded to 21 members in January when Bulgaria adopted the common currency, continuing the bloc’s gradual enlargement despite economic headwinds.