Europe faces an escalating storm of political fragmentation, economic headwinds, and external challenges as 2025 begins, compounded by the incoming Trump administration’s potential to disrupt the global order.
Bill Campbell, bond portfolio manager, global sovereign debt, at American investment management firm Doubleline Capital - 91 billion dollars under management, warns that Europe must brace for two sharply contrasting policy approaches from the United States under Donald Trump’s second term.
«Which Trump are we going to see?» he asks, framing a critical question for global markets.
Reflecting on president-elect Trump’s possible policies, Campbell outlined two potential scenarios: a transactional Trump focused on short-term deals to boost U.S. exports or a structural Trump determined to fundamentally rewire global supply chains. The latter could bring significantly more lasting headwinds to global growth, he said in a conversation with Investment Officer.
Transactional or structural?
Campbell’s scenarios hinge on Trump’s focus. A transactional Trump might revisit strategies from his first administration, including procurement agreements prioritising U.S. goods like soybeans and energy. This approach would disrupt European industries but remain manageable in the short term.
“Trump would make quick deals on headline points that can be easily articulated: ‘They’re buying more of our goods. They’re buying more of our agriculture,’” Campbell said in the interview.
However, the structural Trump scenario is far more daunting. A shift toward reshoring American manufacturing would fundamentally alter global supply chains.
“Such a development would create much longer-lasting headwinds to growth in countries targeted by tariffs or trade restrictions,” Campbell said, noting the potential for durable pressure on industries in France and Germany, from aerospace to pharmaceuticals and automotive manufacturing.
‘Terrible Trifecta’
Campbell, in a note to clients, referred to this convergence of three challenges as the «Terrible Trifecta,» highlighting the interplay of domestic political instability, economic stagnation, and external pressures from the United States under the incoming Trump administration. Europe’s internal vulnerabilities are compounded by the Trump administration’s proposed structural trade policies. Together, these crises leave Europe navigating a prolonged period of uncertainty with few clear solutions, hel warned.
France enters 2025 in a precarious position. The collapse of Michel Barnier’s government has left President Emmanuel Macron navigating a fragmented parliament. François Bayrou, the newly appointed prime minister, faces the daunting task of passing a 2025 budget amid deep divisions. “Given the very differing interests among the blocs, the likelihood of putting together a coalition that can address France’s immediate macro and fiscal challenges looks difficult,” Campbell said.
These divisions exacerbate structural challenges, including a ballooning deficit of 6.1 percent of GDP and public debt exceeding 112 percent of GDP. Campbell highlights the underfunding of critical infrastructure and public services, which further weakens investor confidence. “Higher borrowing costs impede the government’s ability to invest and raise France’s anemic growth profile,” Campbell explained.
German anemia
Germany, too, faces mounting political and economic uncertainty. The February federal election, triggered by Chancellor Olaf Scholz’s sacking of Finance Minister Christian Lindner, has fractured the political landscape. Polling suggests a fragmented outcome, with no single party likely to achieve a clear mandate. «The political turmoil in Germany could not come at a worse time,» Campbell remarks, pointing to anemic growth, demographic challenges, and diminished manufacturing competitiveness.
Germany’s industrial economy, already strained by high energy costs and weak global demand, faces additional threats from U.S. trade policy. Universal tariffs of 10 to 20 percent, as proposed by Trump, could further damage Germany’s auto sector and other key export industries.
A unified response?
The Trump administration’s aggressive stance on trade and defence is set to challenge European unity. Proposals for baseline tariffs and potential security guarantees tied to NATO spending targets underscore the administration’s structural focus. Campbell cautions, “Europe will need to mount a unified response in confronting the threats from the incoming Trump administration,” he said.
Efforts like the proposed 500 billion euro EU defence fund and trade agreements such as the Mercosur deal offer potential pathways to unity. However, Campbell highlights internal discord, including France’s opposition to the Mercosur agreement, as emblematic of Europe’s struggle to act cohesively.
In terms of investments, Campbell expects the fiscal risk premium to persist, keeping French government spreads elevated, while a weaker growth outlook for Europe will keep downward pressure on the euro. «Our outlook for European assets remains challenged,» he said. «Political solutions needed to help address the external threats will be difficult to meet.»