We have entered an era of rapid developments. This is the era of Donald Trump, as everything revolves around the intentions, plans, and decisions of the US president. A president who appears determined to fulfill all his pre-election promises – from ending the war in Ukraine to imposing heavy tariffs on trade partners he believes have “cheated” the U.S. and must now pay. He is convinced of the long-term benefits and does not seem to be deterred by market turmoil or warnings of an economic recession.
In this environment, how much will Europe “hurt,” and what will be the impact on markets? How will governments and the ECB react? And what defensive strategies can a small economy like Greece adopt?
We posed all these questions to Filippo Taddei, Senior European Economist Goldman Sachs. Taddei estimates that after the tariffs on steel and aluminum, Trump’s next move will be a 25% tariff on the automotive industry – something that will, of course, hit Europe much harder. According to Goldman Sachs, the trade war is expected to shave at least 0.5%-0.6% off the EU’s growth rate, bringing it down to 0.8% this year, with the impact being felt immediately.
On the other hand, geopolitical developments, with Europe’s “awakening” and plans to increase defense spending, could provide some boost from 2026 onwards—although much will depend on how timely and decisively the announced measures are implemented.
However, as Taddei explains, the most critical factor that will influence GDP is the amount of natural gas flowing into Europe following a ceasefire in Ukraine.
Taddei analyzes various scenarios and highlights three advantages Greece has in this constantly shifting environment, as well as one major, persistent “gap” that the country cannot afford to ignore.
Tariffs
“What we now assume as our baseline scenario in our data and forecasts is that the U.S. will target Europe by increasing tariffs on the automotive industry to 25% and on so-called critical import sectors – including all industrial, intermediate, and pharmaceutical products – by 10%. We also expect the U.S. government to impose reciprocal tariffs.
This means that whenever Europe raises tariffs, the U.S. will respond accordingly,” Taddei states.
Goldman Sachs estimates a negative impact on European growth of around 0.5%-0.6%, with Taddei noting that most of this effect will be felt by the end of the first quarter and into the second quarter.
“A critical factor with tariffs is not just their implementation but also the uncertainty they create. This uncertainty changes business investment decisions, leading to reduced spending,” he explains, recalling that this was also evident in 2018: Every time investments declined, industrial production followed, ultimately leading to lower GDP. For the U.S., Goldman Sachs also expects a negative impact, though smaller, in the range of 0.2%-0.3%.
Defense Spending
Beyond the trade war, there is, of course, an ongoing military conflict in Ukraine, where Trump, having just secured Kyiv’s approval, is now trying to convince Putin to agree to a ceasefire. The U.S. decision to completely exclude Europeans from negotiations, along with Trump’s repeated criticism of those who do not pay their fair share to NATO, is forcing Europe to realize that it must move toward greater military autonomy and take responsibility for its own security.
The European Commission has already launched a 150-billion-euro defense fund and introduced an exemption clause that will allow member states to significantly increase their defense spending. Are we, then, moving toward something resembling a “war economy”? Filippo Taddei views this development positively.
“Europe has significant excess industrial capacity, particularly in Germany and Italy, which together account for 60% of European manufacturing. The increase in defense spending will not initially focus so much on purchasing equipment but rather on strengthening the defense industry. This means more investment, research, and development, which can have a positive impact on growth. We are not saying it is perfect, but it is not as negative as some portray it,” he notes.
ECB Interest Rates
Based on these developments, the American investment giant expects the ECB to continue cutting interest rates in April and June. However, it does not anticipate a third cut in July due to shifts in fiscal policy, particularly in Germany, where spending on infrastructure and defense is set to rise.
Asked to comment on some analysts’ predictions that the ECB will be forced to return to a tighter monetary policy next year, he responds: “We estimate that the European economy will grow by 0.8% in 2025 and 1.3% in 2026. Therefore, we do not see pressure for interest rate hikes in the coming year,” according to Taddei.
Market Reactions
Naturally, these rapid and multifaceted developments also have an impact on markets. We are seeing European stocks outperforming U.S. stocks and the euro strengthening against the dollar.
Gains for European Stocks
“At the sector level, we are monitoring a portfolio of European defense companies, which is outperforming the broader market. Currently, these stocks are trading at an unprecedented P/E (price-to-earnings) ratio. The P/E for the defense industry has reached 30, whereas the average for the Eurozone stock market is around 13-14,” he says, adding that “this indicates that equity markets have already factored in the expectation of increased defense spending. It is both a sectoral investment and a broader macroeconomic trend.”
At the same time, there is a broader expectation that Europe will adopt a more expansionary fiscal policy, which supports growth. This partly explains why the European market has outperformed the U.S. market since the beginning of the year.
Bond Market Pressure
However, there are no “free lunches,” Taddei warns. “The rise in European stocks comes with movements in bond markets. We have seen markets pricing in additional fiscal support and the need for increased debt issuance in the future. This means greater financing pressure, which has already led to higher yields on long-term bonds, particularly 10-year bonds and beyond. We believe this is just the beginning. This is crucial for countries like Italy, Spain, and Greece, whose yields are higher than those of German Bunds,” he explains.
Goldman Sachs estimates that the yield on the 10-year German Bund will reach 3% by the end of the year and rise further to 3.25% by the end of 2026.
“This means that despite rising stock prices, higher yields will lead to tighter financial conditions. And this is something the ECB will take seriously, as rising yields are already creating monetary tightening conditions without the need for interest rate hikes,” he explains.
Euro / dollar
Before the Merz and von der Leyen defense announcements, Goldman Sachs “saw” the euro falling even below absolute parity against the dollar within the next three months. Now, on the contrary, it expects the euro to remain above parity for the next 12 months. And for us Europeans, who are energy importers, a stronger euro means cheaper energy prices.
Energy prices falling
How much can we see energy prices fall? The US investment bank has examined two scenarios. In the first, the flow of Russian natural gas to Europe via Ukraine resumes, returning to 2023-2024 levels.
In the second, more optimistic scenario, the natural gas flow will return to 2018-2019 levels, that is, to pre-invasion levels. “How much gas will flow into Europe after a ceasefire is the most important factor for European growth,” Filippo Taddei emphasizes. In the first scenario, he “sees” gas contracts on the TTF falling to 35 euros per megawatt-hour, while in the second it could fall to 25 euros per megawatt-hour.
Greece’s Position
“Does a small economy like Greece have defenses in such a challenging environment?” That was the final question Taddei was asked. “Unlike in the past, Greece is now better prepared,” he notes, explaining that the country has three advantages:
- Defense spending as a percentage of GDP already exceeds NATO’s target, meaning no major adjustments are needed in this area.
- Greece is the largest beneficiary of the Recovery Fund as a percentage of GDP, and these funds will continue to provide strong support through 2026.
- Political stability and a clear fiscal outlook, something that is lacking in several major European economies.
Despite improvements, Greece’s GDP remains 15-20% below 2008 levels. “The country is on a stable trajectory and, given the circumstances, is well-positioned for the future,” says Taddei.
However, he highlights one major concern: capital investment and accumulation must continue. “Greece remains a capital-deficient economy. While investment has improved, it still lags behind. If Greece wants to close the investment gap, it must continue building,” he notes.
