Fallout of War Piles Economic Pain Onto Europe’s Political Stress

 

news analysis

Fallout of War Piles Economic Pain Onto Europe’s Political Stress

 

Europe is finding itself on the outs with Russia, China and the U.S., in what’s amounting to its very own “Mean Girls” moment.

 

Patricia Cohen

By Patricia Cohen

Patricia Cohen is the global economics correspondent based in London.

https://www.nytimes.com/2026/04/11/business/europe-economy-trump-trade-iran.html

April 11, 2026, 12:00 a.m. ET

 

If global geopolitics were played out in a high school cafeteria, Europe would be having a “Mean Girls” moment.

 

Once a sought-after friend and trading partner, Europe is finding itself on the outs with the world’s big powers.

 

Russia, the continent’s longtime supplier of oil, turned on its Western neighbors after invading Ukraine and has been provoking Europe with sabotage, drone flights and cyberattacks.

 

China, an important frenemy and the European Union’s second-largest trading partner for goods, has flooded the bloc’s markets with cheap goods, undermining industries in Germany, France, Italy and the rest of Europe. It has also halted or restricted the export of critical minerals, disrupting the European supply chain.

 

And the United States, its closest BFF, is repeatedly threatening to break up. President Trump launched a nasty trade war, made a power grab for Greenland and supported far-right parties that could destabilize governments.

 

Even the name calling has ramped up. Mr. Trump has slammed members of the Atlantic alliance like Germany, Britain and France as “cowards” after they put limits on aiding the American war on Iran. And he crudely mocked President Emmanuel Macron of France and his wife.

 

In Mean Girls-speak, it’s like calling Europe fat.

 

Now, the U.S.-Israeli war on Iran has further contributed to Europe’s growing slate of economic problems and made it more difficult for the region to both cope and compete.

 

For starters, the fallout from the conflict has exposed Europe to another energy shock. Europeans engineered an extremely painful and expensive transition away from piped Russian oil and gas, relying much more on deliveries of liquefied natural gas, or L.N.G.

 

Most of that L.N.G. comes from the United States, underscoring Europe’s vulnerability to American supplies. At the same time, the global price shock from the interruption of supplies from the Persian Gulf has hit Europe hard.

 

Gas prices in Europe are 60 percent higher than they were before the war’s start on Feb. 28. Britain and Italy are particularly affected because of their heavy reliance on gas in their energy mix. In Germany, Europe’s largest economy, inflation has already spiked and is expected to rise for at least the next couple of months, forecasters at Pantheon Microeconomics predicted.

 

Pricier energy also raises production costs for businesses and Europe’s energy-heavy powerhouse industries like automobiles, chemicals and machinery.

 

And that further contributes to Europe’s longstanding competitiveness crisis, which has been marked by its shrinking share of the global economy. A 2024 report commissioned by the executive arms of the 27-member European Union concluded — among other things — that the bloc must invest nearly $1 trillion in artificial intelligence, a shared energy grid, supercomputing and more if it is to compete.

 

The need for investment comes at the worst possible moment given the crushing debt load that most European countries are already facing.

 

European leaders, no longer confident that they can depend on American security guarantees, have already ramped up defense spending. The European members of the North Atlantic Treaty Organization have doubled military spending over the past decade. By 2030, they are slated to spend more than $1 trillion on defense equipment and related infrastructure.

 

At the same time, growing costs of providing social services, pensions and health care to aging populations are further squeezing public budgets.

 

With debt levels already at record levels in countries like Britain, France and Italy, borrowing costs are becoming more and more expensive.

 

Barry Eichengreen, an economic historian at the University of California, Berkeley, who has written about public debt, said research showed that countries that dealt most effectively with a giant debt problem either had robust growth or low levels of political polarization. Europe has neither.

 

At its most recent meeting, the European Central Bank revised its growth projections for this year down to 0.9 percent from 1.2 percent because of the sudden rise in energy prices provoked by the war in the Middle East.

 

As for domestic politics, far-right, anti-immigrant parties have been gaining ground over the last decade in countries like France and Germany, promoting agendas that only recently were considered frighteningly extremist.

 

Recent polls found that the far-right Alternative for Germany, or AfD, was nearly as popular as the ruling Christian Democratic Union.

 

The violence and volatility in the Middle East raise the specter of a new refugee crisis, which is likely to increase anti-immigrant sentiment, boost the far right and further sharpen divisions among voters. Friedrich Merz, the chancellor of Germany, has said: “We have a strong interest ourselves in avoiding new influxes of refugees from the region.”

 

Far-right nationalist parties also tend to be wary of the European Union itself, suspicious of ceding too much power and independence to officials in Brussels. Yet many European officials, economists, business leaders and others argue that the only way for the region to hold its own economically and politically in a more hostile world is by even closer cooperation.

 

For decades, European security and prosperity rested on military protection from the United States, cheap energy from Russia and mutually beneficial trade based on international rules. That global order has crumbled.

 

Mario Draghi, the former Italian prime minister who oversaw the European Union’s competitiveness report, recently warned in a speech that Europe “risks becoming subordinated, divided and deindustrialized — at once,” if it doesn’t take coordinated steps to deal with Chinese and American policies.

 

Mr. Draghi has gone so far as to call for the bloc to transform into a stronger union that coordinates defense, industrial policy and foreign affairs in addition to trade, economic and monetary policies.

 

“Individually, most E.U. countries are not even middle powers capable of navigating this new order by forming coalitions,” he said. “Power requires Europe to move from confederation to federation.”

 

At the moment, though, diverging priorities and polarizing politics in Europe are making coordinated policy responses more difficult than ever.

 

Patricia Cohen writes about global economics for The Times and is based in London.