At the beginning of this year, many were hailing a triumphant American economy buoyed by the prospect of tax cuts, deregulation, cheap energy, and massive investments in artificial intelligence. In January, the World Economic Forum in Davos celebrated the unleashing of the “animal spirit” in the U.S. economy. U.S. companies’ stock valuations—in particular digital firms—seemed as though they could not get any higher. In panel discussions, roundtables, and closed-door meetings, analysts exalted the virtues of the United States as an investment destination and excoriated Europe as overregulated, uncompetitive, and incapable of innovating. Questions about the overheating of the American economy were brushed aside as impertinent. Concerns about the combined impact of potential tariff hikes and deportations on inflation were met with skepticism.
Almost four months later, the contrast could not be more stark. The Trump administration’s chaotic trade policy, the retaliation it has provoked, and the uncertainty generated by the U.S. president and his advisers’ contradictory statements are taking a toll on the U.S. economy. Markets and businesses overestimated the solidity of the administration’s economic plans. Even worse, Trump’s attacks on the rule of law and the judiciary, universities, law firms, and scientific institutions are undermining the foundations of what makes the United States so attractive for investment and gives it such great weight on the world stage. Neighbors and allies, threatened with territorial demands or with questions related to their defense partnerships, have lost trust in Washington.
This is a moment of reckoning for Europe. For over 80 years, Europe and the United States have benefited from the world’s largest and deepest economic and trade relationship, the most sophisticated military alliance, and the closest interpersonal exchanges. Together, the two blocs have built a rules-based international system that has provided global stability and progress. It hasn’t always been easy. There have been trade frictions and sharp divisions, particularly with respect to the U.S. invasion of Iraq in 2003 and the U.S. desire to disengage from Europe as part of a greater strategic shift toward Asia, particularly China, that began during the Obama administration.
But the events of this year mark a turning point in the transatlantic relationship; the Trump administration does not want Europe to succeed. It will try to weaken the continent through a mix of external coercion and predatory policies: claiming it needs to control Greenland for its national security, seeking rapprochement with Russia at the expense of Ukrainian and European security, weakening NATO’s deterrence, and arm-twisting on trade. And it will embolden anti-European forces within the EU. Officials across European capitals have received this message loud and clear.
The era of the post–World War II Euro-American alliance is over. Placating the United States will not work. If Europe doesn’t want to become a vassal of Washington or part of Russia’s newly dreamed-up sphere of influence, it must take its future into its own hands. The continent needs a clear strategy, collective action, and determination.
Europe has what it takes: talented people, wealth, a solid social safety net, productive power, and a growing pro-European sentiment among its citizens—a must for these countries to further integrate. But given the task ahead, it would be foolish to think that progress will be easy or linear. Major steps toward greater European integration, including building the single market or introducing the euro, have required time and political leadership, which are both in short supply today. And integration that has originated as a response to crises, such as the 2008 financial meltdown or the COVID-19 pandemic, took place only after all other options had been explored, leaving Europe economically weakened and politically exhausted.
Facing the deterioration of a long-standing transatlantic partnership and a continued war on its eastern front, Europe is at a critical moment. But the continent’s economic strength and political will to build a more capable common defense and foster growth are firm. And the steps that EU countries are already undertaking show their intent to survive the rift in transatlantic relations and come out stronger.
DOUBLING DOWN
As the third anniversary of Russia’s invasion of Ukraine approached in February of this year, U.S. Vice President JD Vance told attendants of the Munich Security Conference that the threat to Europe was not Russia, China, or any other external actor. It was a threat from within Europe itself. What Vance worried most about, in his words, was “the retreat of Europe from some of its most fundamental values—values shared with the United States.” Europe is at risk, in the vice president’s view, because it is unable to talk about democratic values and to live them. Vance promised that although free speech in Europe was “in retreat,” under Trump’s leadership the United States would “fight to defend” Europeans’ rights to offer their views “in the public square.” That same day, Vance met with the leader of the far-right Alternative for Germany party, which Germany’s domestic intelligence agency designated as an extremist organization this month (although the agency has temporarily suspended the official label in response to legal challenges). The vice president’s meeting that day with Olaf Scholz, then Germany’s chancellor, was canceled; one former U.S. official was quoted as saying, “We don’t need to see him, he won’t be chancellor long.”
Vance’s performance in Munich was part of the “shock and awe” strategy that has characterized the second Trump administration’s foreign policy to date, with cascading events that confuse partners and render a response difficult. Two days before the vice president’s Munich speech, U.S. Defense Secretary Pete Hegseth had declared at a NATO council in Brussels that two of Ukraine’s central objectives for ending the war—restoring Ukrainian territory to its pre-2014 borders and joining NATO—were not realistic. Then, after a surprise phone call between Trump and Russian President Vladimir Putin, Washington announced that negotiations to end the war in Ukraine would start immediately; that neither Ukraine nor Europe would be at the table, at least in the initial stages; and that Europe would have to provide in writing the contribution it was ready to make toward a peace settlement.
At a dinner in Munich that week with members of the U.S. Congress, the mood was so somber among European participants that a U.S. representative quickly offered that Trump “would not be the Neville Chamberlain of Ukraine,” referring to the British prime minister known for appeasing Hitler by brokering the Munich Agreement of 1938, which ceded the German-speaking Czechoslovak region of Sudetenland to Nazi Germany. But as one eastern European minister at the dinner put it, the Russians were looking to get through negotiation what they couldn’t obtain on the battlefield: limiting the sovereignty of Ukraine to decide its future.
Despite the fact that Europeans’ worst fears seemed to be materializing, the 2025 Munich conference had a great virtue: Europeans understood once and for all that securing their own future requires taking decisive steps to build credible European deterrence. As a result, the weeks since have been filled with frantic efforts at both the EU level and in European capitals to massively increase the bloc’s defense spending, address critical shortfalls in its military capability, promote a more competitive defense industrial base, and build a true European defense market.
The era of the post–World War II Euro-American alliance is over.
At the EU level, officials’ primary focus has been on unlocking financing to the tune of up to 800 billion euros ($900 billion) for security and defense, as well as building an EU-wide market for military equipment. In less than two months, the EU’s existing fiscal rules have been relaxed to allow member states to deviate from the recommended net expenditures by up to 1.5 percent annually to boost defense spending. In addition, the EU will borrow up to 150 billion euros to support member states’ joint procurement of defense equipment made in the bloc and to explore contracts with partners the EU has bilateral defense agreements with, such as Japan, Norway, and South Korea, or with which the bloc could negotiate future agreements, such as Turkey or the United Kingdom. The United States is not on the list. Ukraine’s defense industry will also be more integrated into the EU’s technological and industrial defense base, and the single European market, granting Kyiv treatment very similar to that of a member state. In June, the European Commission will present a new defense omnibus package that lays out plans to further integrate defense equipment markets. EU officials are also working to mobilize private capital and the firepower of the European Investment Bank, which could prove useful in financing new entrants to this growing market.
On the eve of his party’s electoral victory in February, German Chancellor Friedrich Merz declared that his priority would be “to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the USA.” He followed by securing passage of a constitutional amendment that will allow Germany to take on an unprecedented level of debt to invest in defense, infrastructure, and climate initiatives. Any defense spending that amounts to more than one percent of Germany’s GDP will no longer be subject to a limit on borrowing. The Bundestag has also approved a special fund worth 500 billion euros over the next 12 years to back investment in infrastructure and climate resilience. For a country so historically averse to government debt, the speed and scope of these decisions demonstrate how deeply German officials believe that the change in Europe’s relationship with the United States is epochal.
Germany is not alone in the EU in its increased investment in defense. Sweden has pledged to increase defense spending from 2.4 percent to 3.5 percent of its GDP by 2030. Finland is planning to reach 3.0 percent within four years. Spain will accelerate spending to 2.0 percent in 2025, from 1.3 percent. France, for its part, has signaled a willingness to discuss expanding its nuclear umbrella beyond its own borders. The list goes on.
Europeans also plan to support the implementation of a potential peace deal between Ukraine and Russia. While waiting for negotiations to progress, much of which will depend on Trump, Europeans can begin the much-needed conversation about an inconvenient reality: the EU needs to rethink the institutional arrangements that make up its security architecture—to ensure it that is not subject to the risks posed by a U.S.-dominated NATO.
Although it will take time, the long march toward an autonomous European defense and security has started. In the words of the French founding father of the EU, Jean Monnet, “Anything is possible in exceptional moments, as long as you’re ready, as long as you have a clear project at the moment when everything is confused.”
UNDERPRICING EUROPE
The European economy has been underestimated. But this is of the continent’s own making. It is well known that European integration tends to advance only when the bloc is in crisis. In April 2024, the EU commissioned the former Italian prime minister Enrico Letta to produce a diagnostic on the state of play of the EU single market and propose measures to deepen it. The same year, the bloc tasked Mario Draghi, a former president of the European Central Bank, with presenting proposals to improve European competitiveness. Both reports documented shortcomings in capital markets, energy, and technology, all of them backbones of European economic prowess and security. The somewhat dramatic tone of both reports and the discussion that followed was meant to mobilize European capitals to act. Instead, it generated pessimism within Europe and, even worse, was read outside Europe as a signal of the continent’s decline. It became fashionable to belittle the European economy.
But with the turmoil caused by the Trump administration’s erratic announcements and the growing risk of recession, it may be a good time to look beyond the headlines. For example, comparisons between the United States’ and the EU’s economic performance tend to be distorted by the strength of the dollar. When measured in purchasing power parity, however, the gap in output growth between the two parties is smaller.
Europe also offers stability and predictability—highly precious features in today’s volatile global environment. At the macroeconomic level, inflation has slowed down, and borrowing costs are falling. Deficits and public debt are also lower in Europe than in other large economies, allowing for important margins for maneuvering in the event of an economic downturn.
The long march toward an autonomous European defense and security has started.
Since the beginning of 2025, the EU has been hard at work on balancing its focus on decarbonization, competitiveness, and economic security. The first concrete outcome of this effort, unveiled in January, is the “competitiveness compass,” a five-year plan that outlines specific actions for the EU to take to close its innovation gap, facilitate access to clean and affordable energy, and reduce excessive dependence on imports through partnerships and trade agreements. In late February, the European Commission in Brussels adopted an omnibus package that simplified rules on sustainability and investment, bringing an estimated six billion euros’ worth of relief from red tape to the bloc’s small and medium-sized enterprises. Given the Trump administration’s antipathy toward climate-focused policy, it’s a good moment to invest in green technologies in Europe.
Europe certainly faces economic headwinds, but its problems should not be exaggerated. The EU’s plans for growth and investment are clear. Now, it must focus on unity and speed of implementation. Despite the economic chaos wreaked by the Trump administration’s unilateral imposition of tariffs on trading partners, first unleashed on April 2, the European Union has sizable leverage on trade. Sixty-two percent of EU trade occurs among member states in the single market, and another 13 percent with European countries that are nonmembers. The bloc can reduce its exposure to unilateral U.S. tariffs by facilitating intra-EU trade through a deepening of the single market and finding new opportunities for trade in other markets. In fact, BNP Paribas’s chief economist, Isabelle Mateos y Lago, has calculated that a one percent decrease in exports to the United States would require only a 0.12 percent increase in intra-EU trade.
As for new markets, the EU has made progress on a number of fronts in just the last three months, including a new deal with Mercosur, the trading bloc comprising Argentina, Brazil, Paraguay, and Uruguay; renewed bilateral agreements with Mexico and Switzerland; and negotiations with India, the Philippines, and Thailand. As the United States isolates itself from the world economy, Europe is doubling down on creating new opportunities and building new bridges.
TEAM EFFORT
As the geopolitical outlook has darkened and countries around the world have begun attempting to “de-risk” their economies, the digital euro is gathering traction. This is partly due to a recent executive order by the Trump administration that promotes the development and growth of dollar-backed stablecoins worldwide, which will strengthen the dominance of international payments systems. As part of this wave, China has doubled down on efforts to develop the digital yuan. Countries in BRICS, the club of major non-Western economies of which China is a part, have also worked to link their central bank digital initiatives on a common platform.
In a recent speech, the former European Central Bank economist Philip Lane indicated that Europeans’ reliance on foreign payment providers—65 percent of card payments made within the euro area are processed by international card brands such as Visa and Mastercard—and on mobile app payments, which are dominated by non-EU tech firms, is a source of vulnerability to the EU. Since being unveiled in 2021, the digital euro initiative is now gathering steam. After a thorough evaluation of costs and benefits, preparations for its launch are expected to start by the end of 2025.
As work advances for designing the next EU budget, which will cover the years 2028 to 2033, there are growing calls in Europe for it to expand to cover European public goods in the broad sense; the continent’s defense and security, for example, includes areas such as energy and infrastructure. Strengthening these areas, however, will require a significant increase in spending not only at national levels, which is already taking shape, but also in the form of collective investments at the EU level. Investing together would help to better coordinate defense spending and foster economies of scale.
At the most recent informal meeting of the European Council in February 2025, EU leaders reviewed possible paths toward achieving these goals. They included expanding the EU budget; launching a new round of joint borrowing akin to that which it undertook for NextGenerationEU, the stimulus package that helped the EU cope with the COVID-19 economic downturn; or repurposing the European Stability Mechanism, a budget vehicle created in 2012 to provide access to finance for EU member states in financial difficulty after the eurozone crisis, with a maximum lending capacity of 500 billion euros. At a time when U.S. investors are looking for more stable markets, it would make sense for the EU to issue a new round of joint borrowing among member states that in addition to attracting capital would have the benefit of internationalizing the euro.
THE FUTURE IS EUROPE
The Trump administration’s antagonism toward the traditional transatlantic alliance could be the most consequential trigger of further European integration since the groundwork for the EU was laid in 1948. Europe’s commitment to the transatlantic alliance thus far is not a symbol of weakness or of the continent’s inability to summon the political energy to become more autonomous. In fact, European countries have already undertaken important efforts across the board to enhance their individual and EU-based defense and economic capabilities. The union would like to preserve relations with its longtime ally and to continue building on productive partnerships with the United States across sectors. But wary of Washington’s unpredictability and antagonistic behavior—and conscious of the opportunities that reality is creating—the EU is preparing to take its future into its own hands.
It would be dangerous to overlook the damage being done by the Trump administration to the U.S. capacity to project power. Countries around the world, particularly in Asia, are carefully watching how the United States plays its hand in Europe. They should recognize the risk in overestimating Washington’s stability and underestimating Europe’s capacity. If member states muster enough will to act on the plans and ambitions they have laid out so far, the EU will be able to preserve its unique model of pooled sovereignty and advance a more secure, prosperous, and democratic future for its citizens—a good thing for Europe and also its international partners.
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