With the recent U.S. election outcome and Germany’s government collapsing, Europe’s struggling economy stands at a critical juncture. Wall Street’s take is clear: A second Trump presidency is expected to challenge the export-reliant European Union, already grappling with sluggish economic growth and persistent political crises. Whether this could finally spur meaningful reform is now a key question for investors.
Since the election, the S&P 500 has gained 3.7%, while Europe’s Euro Stoxx 50 and the FTSE 100 have dropped. Companies with heavy U.S. exposure—such as clean-energy firm Vestas, automakers like BMW, and consumer brands like Nestlé and Unilever—saw significant losses in market value.
The U.S. is Europe’s largest market for goods exports, particularly for Germany, with top exports including pharmaceuticals, machinery, and vehicles. President-elect Trump has floated ideas like a 60% tariff on Chinese imports and a 10%-20% tariff on other imports, a move that could shrink Germany’s economy by up to 1.4% by 2028, according to the German Economic Institute. Europe’s export engine has also been strained by the end of cheap Russian energy, delays in the electric vehicle (EV) transition, and dependence on the Chinese market.
Volkswagen, for instance, recently announced it would close three plants in Germany. The automaker relies on American consumers for 18% of its sales, similar to its German market share. At a recent rally in Georgia, Trump remarked, “I want German car companies to become American car companies,” emphasizing the need for tariffs on imports to encourage domestic production.
German carmakers with U.S. plants may have some insulation from potential tariffs. BMW’s chairman, Oliver Zipse, pointed out on a Wednesday call that the company already manufactures its most popular U.S. models in South Carolina. Volkswagen and Mercedes-Benz also produce vehicles in Tennessee and Alabama, while manufacturers like Airbus, Siemens, and BASF operate U.S.-based facilities. However, producing all American-demanded goods domestically would be challenging. Airbus’s Alabama plant, for instance, assembles narrow-body jets, but its wide-body jets are built in France. Similarly, Volkswagen’s U.S. production line focuses on certain models, while others are made in Mexico, which could face tariffs as high as 200%.
EU leaders have taken a conciliatory approach with Trump, hinting that a trade compromise similar to the 2018 U.S.-Canada-Mexico agreement might be achievable. But Europe risks seeing an influx of cheap Chinese goods if Trump’s administration intensifies its trade conflict with China. Although China often re-routes exports through third countries, even minor shifts could have major economic impacts.
For the past 15 years, the 27-nation EU has navigated crises—such as the debt turmoil of the 2010s and the 2020 pandemic—by adopting minimal reforms to prevent fragmentation, without fully revitalizing its economy. Recent efforts by French President Emmanuel Macron and former German Chancellor Olaf Scholz to stimulate domestic industries through public spending were stalled by coalition disagreements, leading to the recent collapse of Germany’s government.
Nonetheless, Trump’s first term did spur some initial support for a coordinated industrial strategy in Europe. European Central Bank President Mario Draghi recently proposed easing regulatory barriers, offering state aid to critical sectors, and implementing selective tariffs, steps with broad support in Brussels. This vision for a cohesive industrial strategy is already taking root in some sectors. European defense firms like BAE Systems, Rheinmetall, and Thales have seen rising stock prices as expectations grow for Europe to reduce reliance on U.S. military support. By 2030, the EU hopes to direct more than 50% of its defense procurement budgets toward European suppliers.
Shifting away from foreign markets to cultivate domestic demand remains challenging. However, targeted incentives for electric vehicle adoption have succeeded in places like Norway, where EVs now outnumber gasoline-powered cars.
Europe now finds itself squeezed between the U.S. and China, and its economic strategy faces its toughest test since the eurozone crisis. Investor caution is understandable, as Europe’s sink-or-swim moment has arrived.
Corrections & Amplifications
Volkswagen assembled the Passat sedan at its Chattanooga plant until 2021. An earlier version of this article incorrectly stated that Passats are currently manufactured there. (Corrected on Nov. 12)
