The European economy has demonstrated modest but steady growth at the close of 2025, navigating through significant geopolitical and economic headwinds. According to the latest data from Eurostat, the EU statistics agency, the 21 countries using the shared euro currency recorded a 0.3% expansion in the final three months of the year. This figure matches the growth rate from the previous quarter, indicating a stabilisation after periods of uncertainty.
Overcoming Tariff Turmoil
This moderate growth represents a notable achievement, defying earlier recession fears that emerged when US President Donald Trump threatened substantial tariff increases. The eventual settlement, establishing a 15% cap on US tariffs for goods from the European Union, provided businesses with crucial certainty despite the higher tax burden. This agreement allowed companies to proceed with planning and investment decisions, contributing to the quarter's positive performance.
However, this assurance was temporarily shaken in January when President Trump issued new tariff threats against EU member countries regarding Greenland. Although these threats were later withdrawn, they highlighted the ongoing vulnerability of European economies to transatlantic trade tensions.
Sector Performance and Consumer Strength
European services businesses, encompassing everything from hairdressing to medical treatment, have shown moderate expansion according to the S&P Global purchasing managers' survey. While industrial exports have faced significant challenges, there were signs of improvement toward the end of 2025.
Consumers have benefited from a more favourable economic environment, with December inflation falling to 1.9% following the painful spikes of 2022-2023. Combined with rising wages, this has increased purchasing power and willingness to spend among European households.
The Dollar Dilemma
The most pressing current concern is the dollar's steep decline against the euro, which has reached its weakest point in four and a half years. This currency dynamic makes European exports less price-competitive in crucial foreign markets, particularly the United States.
The dollar's weakness stems from multiple factors, including fears that President Trump's tariff policies will slow US growth and concerns about his attacks on Federal Reserve Chair Jerome Powell undermining the central bank's inflation-fighting credibility. Over the past twelve months, the euro has appreciated by 14.4% against the dollar, trading at $1.19 as of Friday's figures.
Policy Responses and Economic Outlook
Financial analysts suggest that continued dollar weakness against the euro could prompt the European Central Bank to consider interest rate cuts later this year to stimulate growth. While the ECB has a rate-setting meeting scheduled for Thursday, immediate changes are not anticipated.
Germany, the eurozone's largest economy, showed improved growth of 0.3% in the quarter, marking its best quarterly performance in three years. However, the nation continues to face serious challenges including higher energy prices following the loss of Russian natural gas, skilled labour shortages, increasing Chinese competition in key export sectors, and years of infrastructure underinvestment.
The German government recently revised its growth outlook downward to 1% for the current year, reflecting these persistent headwinds despite Chancellor Friedrich Merz's infrastructure and defence spending initiatives.
Broader European Performance
The wider 27-country European Union also recorded 0.3% growth for the fourth quarter of 2025, with year-on-year growth reaching 1.4%. Not all EU members have adopted the euro, which welcomed Bulgaria as its 21st member in January, expanding the currency bloc further.
Overall, while the European economy has demonstrated resilience in overcoming tariff threats and achieving modest growth, the strengthening euro presents a new challenge that could test this recovery in the coming months.
