Flags of the European Union fly outside the Berlaymont Building, the European Commission headquarters, in Brussels, Belgium, Jan. 29, 2025. [Photo/Xinhua]

On a mid-October morning, German farm machinery maker Krone Group halted production of large machines for the U.S. market. Steep U.S. tariffs have made doing business across the Atlantic too costly, and as the year draws to a close, the pressure shows little sign of easing.

Krone, which has been operating for a century, is far from alone among European manufacturers feeling the strain.

Throughout 2025, tariffs have quietly reshaped Europe's economic landscape. What began as an external shock has steadily weakened the trade standing of the region while widening internal imbalances.

Widening growth divergence seen across Europe

Eurozone momentum faded after a modest start to the year as U.S. tariffs introduced in the spring rippled through industries and supply chains. Gross domestic product (GDP) rose 0.6 percent in the first quarter from the previous three months, then slowed to 0.1 percent in the second and 0.3 percent in the third, reflecting weaker trade flows and rising uncertainty.

The impact has been most pronounced in the European Union (EU)'s largest economies. The German economy is set to grow just 0.1 percent in 2025, according to the winter forecast by the country's leading economic institutes, the weakest among major advanced economies.

These institutes cite weakening exports and eroding manufacturing competitiveness as the main drags on growth. Going into 2025, they had still expected Europe's biggest economy to grow by 0.8 percent, but they sharply revised their forecasts after Washington unveiled its tariff measures.

A domestic fiscal package has yet to lift sentiment. By year-end, the ifo Institute reported that confidence remains negative across Germany's most industrial sectors, with companies still pessimistic about the months ahead.

France and Italy show similar patterns, with subdued growth weighing on the eurozone's overall performance. By contrast, Southern and Central-Eastern Europe continue to perform more strongly, with Poland and Spain expected to grow by 3.2 percent and 2.9 percent, respectively.

Poland's expansion reflected loose fiscal policy and sizeable public investment, a recent report by consultancy EY said, while Southern Europe has benefited from solid migration inflows and a robust tourism season.

The European Commission now forecasts the eurozone economy to expand by 1.3 percent in 2025. The figure points to another year of subdued growth, with outcomes diverging sharply across member states as trade- and manufacturing-exposed economies absorb a heavier share of the tariff shock.

Tariffs add to multiple economic headwinds

Europe's economy has been among the first to feel the tariff-driven pressure. Policymakers, including the European Central Bank (ECB), warn that global trade disputes and geopolitical tensions remain key sources of uncertainty weighing on growth.

New U.S. tariffs on steel, aluminum and cars have compressed supply-chain margins and undermined competitiveness. A July trade deal between Washington and Brussels eased some levies but also locked in a higher tariff baseline, prompting firms to reconsider production locations and delay investment.

In manufacturing, long a cornerstone of the EU economy, signs of stabilization remain fragile. Weak external demand and subdued confidence continue to cap any recovery, while energy- and capital-intensive industries face the combined burden of high energy costs and tariff-related pressures.

November's eurozone manufacturing PMI remained in contraction, with output index falling to a nine-month low, highlighting the sector's continued weakness.

Macro policy constraints add further pressure. While headline inflation has cooled, helped by easing energy costs, core inflation remains sticky, driven by wages, services prices and persistent cost pressures.

The ECB has signaled caution, with analysts noting inflation is hovering near the 2-percent target while growth remains below potential. Citing deep-rooted structural constraints, ING said it does not expect any ECB rate moves in 2026 in its latest report.

Furthermore, high public debt levels and competing policy priorities have left many governments with limited fiscal space, thinning the bloc's policy buffer.

Structural challenges come into sharper focus

Economists argue the tariff shock has done more than suppress exports. By forcing manufacturers to rethink production strategies and long-term plans, it has exposed deeper structural vulnerabilities.

This assessment echoes the broader diagnosis by former ECB president Mario Draghi in his EU competitiveness report, as EU leaders reviewed progress on its recommendations in September. Draghi warned that Europe's growth model was "fading fast" and no longer sufficient for future competitiveness.

Analysts say weak political resolve and the high costs of transformation continue to weigh on the bloc's outlook.

Carsten Brzeski, global head of macro at ING, cautioned that more than a year after the Draghi report's release, tangible progress on its core recommendations remains elusive, including deeper integration, lighter regulation and reduced market and financial fragmentation.

Constraints are most visible in areas critical to long-term growth, where the EU has struggled to translate technological advances into sustained economic momentum.

Experts note that decision-making across the bloc's 27 member states is often slowed by diverging national priorities, further dampening investment and efforts to scale up innovation.

Eurostat data show EU research and development spending reached only 2.2 percent of GDP in 2024, barely above levels seen a decade earlier.

Senior officials in the bloc have warned that without significant reforms to foster innovation, streamline regulation and advance capabilities in areas such as artificial intelligence, Europe risks falling further behind global front-runners.