The scramble for Europe has begun

Nowhere has the shock been more profound than in Europe, as illustrated by four escalating episodes. The first was the speech delivered by US Vice President Vance at the Munich Security Conference. Whereas Europeans expected a demand for greater burden sharing, the speech instead suggested that the real danger to Europe came from within and that European values themselves were a problem. This unexpected attack on European culture left many puzzled, but it clearly signalled that the Trump administration now regarded Europe very differently.

The second reckoning came with the deriding of President Zelensky in the Oval Office, which cast serious doubt on US support for Ukraine and revealed an increasingly explicit desire to extract concessions and economic rents from Kyiv. More broadly, it raised questions about US security guarantees and, by extension, the durability of the transatlantic alliance. This moment – coinciding with our work on the first edition of The Economic Consequences of the Second Trump Administration – was a genuine wake-up call. President Macron had long argued that Europe must be capable of defending itself; suddenly his message resonated widely. Germany accelerated its defence commitments, and the EU advanced the SAFE programme alongside proposals for a European Defence Union, common procurement, modernised capabilities, and expanded space and cyber autonomy.

Several chapters in our updated book outline plans for Europe’s rearmament. The principles as outlined are that Europe needs a comprehensive defence strategy that fuses security and economic goals by investing heavily in innovation – autonomous systems, AI, space and missile technologies, and other high-tech sectors – with strong anticipated spillovers into civilian competitiveness. At the same time, the war in Ukraine has shown the necessity of a ‘high–low’ mix, with Europe producing large quantities of affordable, standardised equipment and rapidly scaling industrial capacity while securing resilient supply chains and prioritising European production. Clear benchmarks for spending and R&D – such as higher research shares and a balanced allocation between platforms, autonomous systems, and consumables – are deemed essential to break path dependence and sustain innovation at wartime pace. Further, it is argued that Europe must build independent capacities by launching major technological programmes, creating a unified defence market with joint procurement, and pooling resources, including through common borrowing if needed. In the near term, significantly expanding financial and military support to Ukraine, and integrating Ukraine’s fast-moving defence industry into Europe’s, is the most cost-effective way to enhance European security and strengthen the continent’s technological base. Crucially, it is argued that all this requires a funding mechanism that enables joint procurement.

The third shock was the image of Commission President von der Leyen in Scotland attempting to smile while conceding to asymmetric US tariff demands. It was perceived by many in Europe as a humiliation. On trade – an area where Europe may have stood firm and retaliated, backed by the power of the Single Market – the EU ultimately chose to strike a deal. The likely reason: the US administration was threatening Europe not only with tariffs but with the withdrawal of security guarantees. In the context of ongoing Russian aggression, the EU risked playing a strong hand. The episode drove home the point that if Europe cannot defend itself militarily without the US, it may not be able to defend its economic interests either.

Despite growing awareness of these vulnerabilities, steps towards strategic autonomy remain halting, inconsistent, and in many areas incomplete. The EU’s diplomatic influence has eroded as internal divisions have become increasingly visible, especially over responses to US and Russian provocation, or Chinese imports. European countries now provide the largest collective share of military and financial support to Ukraine, yet they have no formal seat at the table in shaping the peace process. Washington repeatedly communicates directly with Moscow, leaving Europe to react from the sidelines and engage primarily in side conversations.

The most recent shock to Europe has come from the US National Security Strategy published in November 2025. This document codifies what Vice President Vance expressed in Munich, warning that Europe faces the prospect of “civilizational erasure” and declaring that the US welcomes and promotes “the revival of spirit, and the growing influence of patriotic European parties” with the aim of restoring “European greatness”.

The strategic danger for Europe is growing, with the US, China, and Russia all seeking to expand their influence over individual European countries rather than engaging with it as a unified bloc. A weakened, fragmented EU is far easier to pressure, bypass, and manipulate. The scramble for Europe may well have begun.

Tariffs, retaliation, and global re-routing

The “Liberation Day” tariffs ultimately proved less severe than initially announced: the effective tariff rate now stands at roughly 17% (up from about 2%). The broader process, though, is far more damaging. Each unilateral tariff shock pushes trading partners into bilateral deals that mix trade, investment, and political concessions, often under the threat of further measures.

Even though tariffs do not typically trigger immediate recessions, they are inflationary and tend to slow growth. When the measures were first introduced, most economists questioned their purpose: tariffs were unlikely to reduce the overall trade deficit, correct bilateral imbalances, or restore industrial employment. Revenue generation, though, has been a central result: tariff proceeds have partially financed cuts to income taxes. This is regressive as tariffs fall disproportionately on lower-income households, whereas reductions in income taxes have benefited wealthier groups. Second, tariffs have become a catch-all instrument for pressuring countries that fail to align with the administration’s geopolitical preferences.

Even if the Supreme Court were eventually to rule that the bulk of these measures lack legal authority, the transactional approach to trade now appears firmly entrenched. Most governments assume that this administration will simply use other mechanisms to pursue bilateral deals and maintain pressure. For the foreseeable future, the international trading regime has changed and eroded.

Financial markets and the dollar

Despite these escalating tensions, global financial markets, at least for now, have largely absorbed the shock. After the turbulence surrounding Liberation Day, US equity and bond markets stabilised and then rallied, buoyed by AI-related optimism and expectations that the administration will avoid deliberately triggering a recession. US stock indices have reached record highs in dollar terms, although their performance is more muted when measured in euros, given the dollar’s sharp depreciation.

Indeed, the US currency temporarily lost its traditional ‘flight-to-safety’ status. Around the tariff announcement in April, the dollar behaved more like an emerging market currency, with volatility spiking. Although, in the months that followed, the dollar gradually reverted to its historical relationship with global risk indicators, the episode underscored a deeper concern: confidence in the dollar depends not only on market depth but also on institutional predictability, both now threatened.

No immediate alternative to the dollar exists, but regional settlement systems are expanding. De-dollarisation remains modest yet symbolically significant, reflected in the dollar’s depreciation, soaring gold prices, and rising holdings of non-dollar sovereign assets. Combined with widening US fiscal deficits and the extreme concentration of equity valuations, these developments raise the probability of a future repricing of US risk.

Navigating a slower, riskier world

Taken together, the evidence in the updated volume of The Economic Consequences of the Second Trump Administration depicts a global system that is becoming more inward-looking and more vulnerable to shocks emanating from Washington.

For eight decades, the US supplied essential global public goods: military protection that deterred great-power conflict, a rules-based international trading system, and financial stability anchored in US capital markets and the dollar’s international role. While this leadership served US strategic interests, the US administration argues that the US role in providing such public goods imposes too great a domestic cost, contributing to deindustrialisation and persistent trade deficits.

The result is an increasingly fragmented global economy. The administration’s early withdrawals from the Paris Agreement, the World Health Organization, and multiple treaty commitments – combined with steep cuts to development, health, and humanitarian programmes – signal an ideological shift: multilateral institutions are viewed less as providers of public goods than as constraints on national sovereignty. This retreat weakens collective action, as reduced US engagement erodes cross-border data networks, cooperation, and technological diffusion.

The cumulative effect is a widening erosion of trust in global rules and institutions. When the US treats international commitments as optional and deploys economic leverage more openly, others follow suit. Already, the consequences are visible: higher risk premiums, declining cross-border investment, slower technological diffusion, and an accelerating unravelling of the norms that have underpinned global peace and prosperity since 1945.

The challenge internationally is therefore two-fold. First, countries must adapt to a more transactional and unpredictable US partner by diversifying trade and financial links, strengthening domestic resilience, and deepening regional cooperation. Second, they must sustain elements of the rules-based order, at a time when the system’s traditional anchor is increasingly unwilling to provide global public goods.

The second edition of The Economic Consequences of the Second Trump Administration does not claim to deliver a final verdict. The administration is still young, policies are evolving, and the global economy has thus far shown remarkable resilience. But the direction of travel is unmistakable: towards a world with higher trade barriers, weaker institutions, and more fragile growth. Policymakers, firms, and households should prepare accordingly.