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.
Services are driving growth, even 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.
Low unemployment and rising wages are keeping private consumption strong. Governments are starting to spend more: Germany has begun using its special infrastructure and climate fund, while defence budgets are increasing across Europe.
“Private investment is also supported by favourable financing conditions 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.”
He said disbursements from European recovery programmes are also important growth drivers in southern Europe. Germany, he added, is finally recovering after years of stagnation.
“Across Southern Europe, a lot of recovery money is only now reaching people and businesses, and it should give the economy a real push,” De Leus said.
In Greece, Italy, Spain, and Portugal, these funds could eventually reach up to 10 per cent to 16 pr cent of GDP, although much is still waiting to be spent.
In Belgium, the effect is smaller but consumer confidence is high and consumption remains strong, 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 and extra government spending is expected to support growth next year.
Private consumption should pick up gradually, and public investment, especially in infrastructure and civil-engineering projects, may 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 similar 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.
Public spending on infrastructure and defence may provide a temporary boost but the recovery depends on whether private companies begin investing again, it said.
Peter Vanden Houte, chief economist at ING Belgium, told Brussels Signal that eurozone quarterly growth stayed positive all year despite trade tensions.
“In Germany, industrial production and orders rose in October, suggesting Q4 will also be positive. Front-loading of investment mattered mainly in Q1; After that, its effect turned negative,” he said.
But falling energy prices have given European industries, including Germany and Belgium, some breathing room, compensating for earlier tariff-related disruptions.
Apart from Germany, domestic demand was reasonably strong this year.
In Belgium, 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, Vanden Houte said.
De Leus highlighted Germany’s new measures that are expected to support growth in 2026: A lower energy-price cap for industry, 8 GW of new gas power plants, lower air-traffic-control fees saving €350 billion for aviation and a ‘Germany Fund’ combining public and private money to help small businesses innovate and scale up.
These steps reinforce the case for a stronger-than-consensus growth outlook next year, 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.
