European nations prepare for a new era of global disorder

In Natixis CIB’s latest webinar, Alain Durré, Ph.D, Head of Europe Macro Research, Bastien Aillet, Economist for Germany, Hadrien Camatte, Economist for France and Belgium, Jesus Castillo, Economist for Southern Europe, Sylwia Hubar, Economist for the UK, Inna Mufteeva, CFA, Economist CEEMEA, Benoît Gérard, Rates Strategist, Cyril Regnat, Head of Markets Research and Emilie Tetard, Cross Assets Strategist, analyse how major European economies are preparing for this new landscape.

International tensions, particularly those stemming from aggressive U.S. trade policies under Trump's administration, have already dented European growth. Effective tariffs on EU imports now approach close to 50%, with each additional 10% tariff tranche slicing approximately 0.2% off EU GDP growth.

In response, a European reconsolidation is taking place. Businesses are adapting and reshaping supply chains, with 68% of surveyed firms planning to increase intra-European trade over the next two years. The EU’s assertive trade diplomacy – boasting 79 active trade agreements, 26 in validation and 8 under negotiation – is helping Europe reinforce its role in the global economy.

It has been a year of renewal for Germany, with the CDU/CSU victory in February and Friedrich Merz's election as Chancellor in May. Now, with more solid political foundations, Germany is looking to establish itself as a driver of European growth, shaking off years of stagnation for bold investment and leadership.

The reform of the constitutional debt brake was pivotal, unlocking a bold new investment agenda: a €500bn infrastructure fund over 12 years, bolstered by €850bn in new borrowing by 2029 – equivalent to 18% of GDP. This ambitious fiscal programme will support defence spending, targeted at 5% GDP by 2029 and raise the minimum wage by 8.4% in 2026 to encourage household spending.

The outlook is positive, with innovation and investment as the antidote for years of stagnation and a counterbalance to present trade disruption. At a moment when Europe seeks revitalisation, a resurgent Germany is timely.

France faces near-term challenges: political uncertainty since the snap elections, a projected 5.8% deficit in 2024 (the EU’s highest aside from Romania), and rising unemployment (7.8% by year-end).

However, the outlook isn't entirely gloomy. Growth is weak but positive, averaging 0.6% in 2025, rising to 1.1% in 2026, and inflation is subdued at 1% (lowest in the eurozone), promoting private consumption. A rebound in tourism following the Olympics and a gradual recovery in business investment are signs of underlying strength.

But France’s most strategic asset may be its defence sector. As the second-largest global weapons exporter, with a €4.7 billion trade surplus in 2024, France is well-positioned to meet growing European demand, especially since most of its exports are still outside the continent. Defence, therefore, presents both a geopolitical role and an economic opportunity.

The UK is aligning with France to spearhead European armament against mounting global threats, but internal challenges threaten progress. Despite a strong Q1 2025 (0.7% growth), economic momentum has likely stagnated in Q2 (0.1% contraction in May). The UK-US trade deal was a positive indicator, but exposure to global volatility remains high.

On the political front, fiscal uncertainties and government struggles to enact reform – evidenced most recently by infighting on the welfare bill – are weighing on investor confidence. Meanwhile, the rise in National Insurance contributions for employers has hiked labour costs and dampened business sentiment.

The UK is looking to reach a 5% defence spending target and lead the Europe-wide rearmament effort. However, with public finances under strain and a party divided, the government needs to find innovative solutions.

Poland has been a prominent advocate for Europe’s military spending boost, spurred in no small part by the country’s proximity to Russia and Ukraine. Defence spending stood at 4.2% of GDP in 2024 – Europe’s highest – and is expected to rise to 4.7% this year, with plans to grow the army personnel from around 200,000 in 2024 to 300,000 by 2032.

However, near-term ambitions face longer-term headwinds. The recent presidential victory of Karol Nawrocki, backed by the Eurosceptic Law & Justice party, raises concerns over continued alignment with pro-European values – notably as Prime Minister Donald Tusk's centrist government faces a decline in popularity ahead of the 2027 elections, despite the generalised support of the defence boost.

In addition, demographic constraints pose major roadblocks. The population has been declining for years, and anti-immigration sentiment is strengthening. It's thus unclear how Poland can achieve long-term military personnel expansion let alone boost the potential growth of its economy in the context of scarce labour supply.

Economically, the situation is equally perilous. Public finances are strained with a 6.6% fiscal deficit in 2024 (up from around 5% in 2023). With growing public debt, lower real GDP growth since 2022 amid higher inflation and interest rates and decelerating FDI inflows, funding Poland's defence ambitions seems more challenging.

Southern Europe (Italy, Spain, Greece, Portugal and France) has been the economic outlier compared to Northern European counterparts (Germany, Belgium, Finland, Netherlands and Austria) in recent years. Between 2022-2024, growth averaged 1.4% for the South versus -0.1% for the North, and looking ahead, growth prospects are 0.9% for the South compared to 0.5% for the North.

Spain and Portugal are key success stories. Rebounding tourism since the pandemic and a relative lack of interdependence on the European grid have insulated them from recent price shocks and underpinned consistent growth.

Italy, however, tells a different story. With the highest public debt (140% GDP) and heavy reliance on NGEU funds (€192 billion - 9% of GDP), which expire after 2026, long-term risks remain. Industrial exposure makes Italy particularly vulnerable to both European stagnation and global trade dislocations.

The European response to US-led trade fragmentation has been broadly encouraging. A pivot towards intra-European trade, boosting investment, and targeted defence initiatives demonstrates long-term strategic planning that will help spur growth across the continent.

Still, challenges remain: Italy’s structural vulnerability, Britain’s fiscal limbo and Poland’s demographic concerns all temper the outlook. Yet the trajectory is clear. Europe is not retreating – it is recalibrating. In an era defined by uncertainty, that adaptability may prove to be its greatest strength. Encouraging progress across the EU, most notably in Germany, France and Iberia, indicates that with geopolitical unity and fiscal reform, Europe has a great opportunity to reassert itself on the global stage.