Europe is poised to face ongoing economic difficulties in 2025, with domestic political uncertainties and global issues, such as potential tariffs under a second Donald Trump presidency and China’s faltering growth, continuing to weigh heavily on the region’s market performance.

European stock markets have underperformed their global counterparts in 2024, particularly when compared to Wall Street. Factors contributing to this downturn include political instability, geopolitical tensions, a lack of strong technology components, and China’s economic slowdown. These challenges are expected to persist into 2025, exacerbated by Trump’s tariff threats and the continuing struggles of the Chinese economy.

A major concern for Europe’s economic outlook is the potential for new U.S. tariffs under Trump. During his presidential campaign, Trump threatened to impose tariffs on German car manufacturers unless they relocated production to the United States. Though no tariffs targeting the Eurozone have been confirmed yet, the car manufacturing sector reacted sharply to Trump’s recent announcement of new tariffs on Canada, Mexico, and China. If implemented, these tariffs could have significant repercussions, especially for Germany, Europe’s largest economy, which relies heavily on international trade.

The European automotive industry, already suffering from the ongoing Ukraine conflict and weak demand in China, faces further strain. The Euro Stoxx Automobiles & Parts Index has dropped 13% year-to-date, one of the worst-performing sectors in European markets. Stocks of major German carmakers, including Mercedes-Benz, Porsche, Volkswagen, and BMW, have experienced declines ranging from 13% to 25%.

Another significant factor impacting Europe’s economy is weak Chinese consumer demand. Despite various stimulus measures, China’s economic recovery has faltered, and sluggish consumption has affected European luxury consumer stocks. Michael Brown, a senior research strategist at Pepperstone London, noted that unless China shifts its focus to stimulating domestic demand, any economic boost will likely remain short-lived for European markets. However, China has pledged to bolster its economy through fiscal and monetary policy adjustments, which could improve demand for European goods if effectively implemented.

In addition to global challenges, domestic political instability in France and Germany is further dampening market sentiment. France has experienced political gridlock and soaring government debt, which has put additional pressure on the banking sector. In Germany, while the DAX index has seen growth, largely driven by technology and defense sectors, a snap election set for February following a coalition breakup could introduce further uncertainty.

As a result of these ongoing risks, Eurozone assets are expected to carry a higher risk premium than other global markets, impacting borrowing costs and liquidity in 2025. The challenges facing Europe in the year ahead highlight the complex interplay of political, economic, and global factors that are likely to shape the region’s financial landscape.