Europe Faces Economic Challenges from Euro Appreciation and Global Trade Pressures

The European economy is grappling with significant challenges arising from the recent substantial appreciation of the euro alongside mounting international trade pressures, according to recent reports. Since 2022, the euro has strengthened markedly against major currencies — soaring from $0.97 in October 2022 to $1.16 by January 2026, with similar rises against the yen, Chinese renminbi, and British pound. This has led to a 16% increase in the euro’s nominal effective exchange rate from mid-2022 to the end of 2025.

This currency appreciation is negatively impacting the Eurozone’s external trade and industrial production. Although the Eurozone's goods trade surplus remains positive at €153 billion in 2025, it has decreased slightly from €157 billion in 2024. Manufacturing production has seen a nearly 6% decline from its peak in late 2022 through to November 2025, with the Manufacturing Purchasing Manager’s Index (PMI) dropping below the 50-point threshold, signaling contraction in activity.

The euro’s strength partly reflects investor concerns about fiscal and policy uncertainties in the United States and the United Kingdom, exacerbated by unpredictable actions from the Trump administration. In parallel, the European Central Bank (ECB) faces a complex dilemma: despite the euro’s appreciation, rising inflation in the services sector limits its ability to reduce interest rates to stimulate growth, currently set at 2%, which remains lower than rates in the US and UK.

According to François Villeroy de Galhau, Governor of the Banque de France, Europe must bolster its economic sovereignty amidst tensions with the US and China. He highlighted that, while recent US tariffs have mostly been absorbed by American consumers and businesses, the political uncertainty costs the French economy approximately 0.5% of growth. France's economy remains resilient, growing 0.9% in 2025 with an anticipated 1% growth in 2026, but stronger measures are needed to offset external pressures.

Villeroy urged Europe to "wake up" and leverage its internal strengths — including its substantial savings, market size, and talent pool — to foster innovation and investment, particularly in strategic sectors such as artificial intelligence, decarbonized energy, and defense. Furthermore, he emphasized the importance of accelerating European market integration and pursuing trade agreements like the new EU-Mercosur deal, despite ongoing legal challenges within the bloc.

In this context, non-monetary policy responses may be essential to address currency manipulations by China and Japan and to prevent further deindustrialization. The ECB’s limited scope for monetary easing, alongside geopolitical uncertainties, signal a crucial juncture for European economic strategies moving forward.