The European Union has “adapted quicker” than expected to the US tariffs shock, according to European Central Bank (ECB) executive board member Isabel Schnabel.
She said last week that economic sentiment is at its highest level since April 2023, while surveys of companies show solid expansion.
Inside the EU, trade in services are driving economic growth, even more than goods consumption, as manufacturing remains “sluggish”. Schnabel said the euro-area economy is on course to grow above potential despite headwinds.
“Weak net exports have been more than compensated by strong domestic demand,” she added.
What keeps private consumption strong is the relatively low unemployment and rising wages. Governments are also starting to spend more: Germany has begun using its special infrastructure and climate fund, and defence budgets are increasing across Europe.
“Private investment is also supported by favourable financing conditions [ easier ECB policies] and a pick-up in AI-related activity,” she said.
Overall, the outlook has brightened, and downside risks have fallen.
Koen De Leus, chief economist at Belgian Bank BNP Paribas Fortis, told Brussels Signal today: Borrowing has become “easier for companies and households, and more loans are being taken.”
“Germany is the engine”, he said, speaking about general growth predictions in the EU. The country, he added, is finally recovering slowly from stagnation since 2019.
“Policy steps strengthen the case for a stronger-than-consensus 2026 growth outlook, highlighting excessive short-term pessimism”.
On top of the budgets that have been unlocked by Berlin, De Leus highlighted several energy measures he said contribute to the growth: a lower cap to energy prices, a subsidy for energy intensive industry from January 2026 and new gas power plants.
Moreover, coalition leaders agreed on reduction in air traffic control fees “that should generate €350bn in savings for aviation”. The Chancellor of Germany, ” is convinced German loss of competitiveness in the sector is a meaningful drag on the economy”, he said.
The Kiel Institute for the World Economy, a Berlin-based research centre, reported yesterday that Germany’s economy remains fragile — “momentum is still weak” even though business sentiment has improved.
Their conclusions is similar though: private consumption should pick up gradually, and public investment, especially in infrastructure and civil-engineering projects, should help drag the economy out of stagnation.
The Kiel report cautions, though, that exports are likely to remain flat in 2025 and firms are still cautious about new investments.
The ifo Institute, another German economic research institute, highlighted the same concerns. In its December 8 report, it said GDP is still near 2019 levels and private investment remains subdued.
An ifo survey analysis published today, though, confirmed that many manufacturing firms, particularly in automotive and chemicals, are scaling back investment plans and the overall 2026 investment outlook is negative.
The boost provided by public spending on infrastructure and defence might only be temporary, but as the Kiel institute also concluded, the recovery depends on whether private companies begin investing again.
To unlock €90bn of private sector contributions, coalition partners recently announced “a Germany Fund … with €10bn public funds … to support SMEs and help innovative ones to scale up”, said De Leus.
Although some of the new German measures still need final approvals, they “add to previous efforts to boost next year’s recovery, building on cuts to red tape, and monetary incentives for retirees to continue working”, he said.
He add that another growth factor was the disbursement of EU public money, especially in southern Europe.
He said that public recovery money from continued Next Generation EU fund would “account for up to 16% of GDP in Greece if allocation is completely disbursed and used, today only half is disbursed, and less than half is used… so still a lot in the pipeline”.
In Greece, Italy, Spain, and Portugal, these funds could eventually reach up to 10 per cent to 16 per cent of GDP. Although much is still waiting to be spent, “this has increased consumer confidence and so consumption”, De Leus said.
In Belgium, the effect is smaller but consumer confidence is high and consumption remains strong, he added.
“Southern European countries still enjoy money from recovery funds [and effects were felt recently] as these have to be spend in 2026 the latest”, added Peter Vanden Houte, chief economist at ING Belgium.
Vanden Houte told Brussels Signal that falling energy prices have given European industries, Germany but also in countries like Belgium, some breathing room, compensating for earlier tariff-related disruptions.
Apart from Germany, domestic demand was reasonably strong this year. In Belgium for instance, consumption was very strong in the first half, although fiscal policy will be tighter in 2026. “Savings measures and higher taxes may weigh on growth, even as unemployment remains low and many jobs go unfilled” he said.
“However, such growth will probably be reflected in the Eurozone average”, he said.
The global trade picture also supports Schnabel’s observation that weak exports have been partly offset by domestic activity.
The November report from US-based Peterson Institute for International Economics (PIIE) show that after the US tariffs “aimed at reducing imports, and these steps were accompanied by other policies designed to spur exports … imports surged in the first half of 2025, whereas exports declined in the same period”.
European companies adapted quickly, redirecting trade flows and finding new suppliers and markets.
According to the ECB, this resilience also comes from its diversified trade network.
Countries continue to export to the US and to each other, while new trade partners and agreements are helping stabilise flows.
“Global trade patterns are adjusting, and the euro area is benefiting from more partners and more stable trade,” Schnabel said.
This flexibility, combined with strong domestic demand and supportive fiscal and monetary policies is for now keeping the impact of the tariffs “better than expected”, she added.
