With a budget deficit of 3.1% of GDP, an inflation rate of 2%, the euro’s effective appreciation of 7% since the beginning of this year and a trade surplus of $114 billion, the European monetary union has plenty of room to offset a recessionary shock to its weak economy in case of problems with exports to the U.S.

Over the last two years, the euro area was living off the U.S. and the rest of its main trade partners. During that period, trade surpluses contributed 0.4% to its lackluster economic growth of 0.7%.

With a growth of domestic demand stagnating at a rate of 0.3 percent, the case for a stimulative policy mix in the euro area has been obvious for a long time. But, led by Germany’s traditional mercantilism, the euro area businesses were forced to look for exports to survive.

All that -- and America’s euro area trade deficit of $380 billion during the last two years – have not been lost on President Donald Trump who came back to the White House fully determined to even out the playing field for American businesses.

On current evidence, the euro area economy is facing another year of stagnation, which, quite possibly, can turn into a recession of ex ante unknowable amplitude and duration.

Germany should revive its moribund economy

Washington is looking at all this and probably concluding that euro area’s German taskmasters want to again ride out this cyclical downturn on the back of American economy.

Trump knows all about that game. He is threatening punishing trade tariffs to choke off the economy of America’s closest friends and allies.

The French, true to form, are urging retaliation even though last year they pocketed $60 billion of net trade income on American trades. Italy strongly opposes a tit-for-tat attitude toward the U.S., which last year gave them a $76 billion trade surplus. Germans are keeping quiet, but they too want to hold on to their $160 billions in annual net trade income from American markets.

So, the French loud rhetoric about the U.S. will not be followed. Sadly, however, France will find a receptive audience in the rest of the euro area urging the war on Russia to the last Ukrainian.

That’s all France can do. With a budget deficit of 5.8% of GDP and a public debt of 116.4% of GDP, there is no room for any fiscal stimulus to rev up an economy sliding toward a recession and a political turmoil of a government struggling to pass highly contested budget options.

Italy is another major euro area economy with no viable possibilities of stimulative fiscal policies. Rome’s budget deficit has been brought down over the last three years from 8% of GDP to 3.4% last year, but its public debt continued to grow, reaching 149% of GDP at the end of 2024. Italy, therefore, has no choice; it has to keep budget deficits on a declining trend to bear down on long-term interest rates and huge costs of its public debt service.

Spain, like Italy, has reduced its budget deficit considerably over the last three years to 3.2% of GDP, but its public debt is still 109% of GDP.  Fiscal consolidation must continue. Spain is now paying 0.6% more than Germany on its ten-year bonds to finance public debt.

Trump is primed for a maximum tariff pressure

Predictably, that leaves Germany – 30% of the euro area GDP -- as the only candidate for a meaningful economic stimulus. That’s a tough job ahead after an economic recession during the last two years and political problems which could delay the implementation of higher government spending in the months ahead.

Defense and infrastructure investments are now expected to drive German economy beset by structural problems, lack of qualified labor force and heavy regulatory burdens. So far, only a large military spending is under way, with soaring share prices of some government contractors. Stock market valuation of Rheinmetall, for example, has surged 243.6% since the beginning of this year.

But how much Germany alone – an export-led economy – can help a quick cyclical revival in the rest of the euro area is a moot point.

To lift that uncertainty, it would be necessary for the European Commission (the trading bloc’s executive body) to raise stimulus funds that member countries could use to finance their investment projects. The European Central Bank (ECB) should also reduce credit costs. There is ample room for that with an inflation rate of 2% and the euro’s strong appreciation.

Credible stimulus measures are needed to show Washington that the euro area is finally off its beggar-thy-neighbor policy path. An effort to strengthen the euro area’s domestic demand would also be an excellent bargaining chip because 25% of U.S. exports go to European markets.

But in the absence of such measures -- and with a red flag of a 53.5% increase of the U.S. trade deficit with the euro area in the first five months of this year -- the European monetary union is in for Trump’s fury of a maximum tariff pressure.