FRANKFURT – The European economy managed to achieve modest growth at the close of last year, successfully navigating challenges posed by increased U.S. tariffs. However, it now faces a fresh obstacle: a strengthening euro against the dollar, which could hamper export activities.
According to the EU statistics agency Eurostat, the 21 countries utilizing the euro collectively experienced a growth rate of 0.3% in the final quarter of 2025, maintaining the same pace as the third quarter. When compared to the same period in 2024, this growth represents a 1.3% increase.
This moderate expansion has allayed earlier recession fears, which arose when U.S. President Donald Trump threatened to escalate tariffs to potentially damaging levels. Ultimately, a deal was struck, capping U.S. tariffs on European Union goods at 15%. Although the elevated tariffs pose challenges, the deal provided businesses with enough certainty to proceed with their plans.
The sense of security, however, was briefly shaken after the quarter ended. On January 17, Trump threatened to impose higher tariffs on EU countries in retaliation for their support of Greenland amid his controversial proposal for a U.S. acquisition. He later retracted this threat.
European service industries, encompassing a wide range from hair salons to healthcare, have shown moderate growth, as reported by the S&P Global survey of purchasing managers. Despite a slump in exports and a lagging industrial sector, there were signs of improvement towards the end of 2025. Additionally, inflation eased to 1.9% in December, following a challenging surge in 2022-2023, while rising wages have boosted consumer purchasing power and spending confidence.
The rising euro poses a new challenge as it reaches its strongest level against the dollar in four and a half years, potentially diminishing the competitiveness of European exports in crucial overseas markets.
The dollar has weakened due to fears that Trump’s tariffs will slow growth and that his attacks on U.S. Federal Reserve Chair Jerome Powell will undermine the U.S. central bank’s role as an inflation fighter and protector of the dollar’s worth. The euro has risen 14.4% against the dollar in the past 12 months and traded at $1.19 on Friday.
Analysts are saying that if the dollar’s weakness against the euro continues, the European Central Bank may cut interest rates later this year to stimulate growth. The ECB holds a rate-setting meeting on Thursday but is not expected to change rates then.
Germany showed improved growth at 0.3% in the quarter, its best quarterly performance in three years, but still faces serious short- and long-term headwinds. The eurozone’s largest economy is still waiting for infrastructure and defense spending set in motion by Chancellor Friedrich Merz to show its effects through increased growth. Germany grew 0.2% last year, its first year of growth after two years of declining output. The government on Wednesday cut its growth outlook for this year to 1% from 1.3% previously.
Germany has struggled with a raft of troubles: higher energy prices after the loss of Russian natural gas due to the war against Ukraine, a shortage of skilled labor, increasing Chinese competition in key export sectors such as autos and industrial machinery, years of underinvestment in growth-promoting infrastructure, and too much red tape.
Growth for the broader 27-country European Union also came in at 0.3% for the fourth quarter of 2025 and 1.4% compared with the year-earlier quarter. Not all EU members have moved to join the euro, which gained its 21st member in January when Bulgaria joined.
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