Trump’s Indifference to Europe Could Be an Opportunity for Its Independence

Germany has shifted to the right after the elections, and future Chancellor Friedrich Merz has announced rapid integration of Europe and a reduction of dependence on the U.S. His Christian Democrats (CDU/CSU) won 28.5 percent of the votes, but he will need at least one coalition partner for a parliamentary majority.

The far-right German party AfD achieved a historic result with 21 percent of the votes, while the liberal FDP and the leftist BSW did not cross the electoral threshold, further strengthening the larger parties, reported the FT. Merz now has the option to form a government with the Social Democrats (SPD) of outgoing Chancellor Olaf Scholz, but the parliamentary majority would still be thin, while the success of AfD and the left (Die Linke) could complicate his plans for increased investment, including a larger defense budget.

Within hours of the polls closing, Merz stated that Germany must fundamentally reshape its security arrangements and end decades of reliance on Washington, saying that U.S. President Donald Trump is ‘largely indifferent’ to the fate of Europe.

– I am in close contact with many prime ministers — heads of EU governments… And it must be an absolute priority to strengthen Europe as quickly as possible so that we can, step by step, actually achieve independence from the U.S. I did not think I would have to say something like that… But after Donald Trump’s statements, it is clear that the Americans, at least this American government, are largely indifferent to the fate of Europe – said Merz.

The future Chancellor said he wants to form a government as soon as possible given the enormous challenges facing Germany and Europe. ‘The world will not wait for us,’ he added. Macroeconomists like Peter Schaffrik from RBC Capital Markets believe that Merz’s victory should be a ‘market-acceptable outcome.’ The euro rose to a one-month high of 1.0528 dollars before falling to the last trade at 0.22 percent higher at 1.0481 dollars.

– Although it seems that Merz is determined to ease the so-called debt brake, which limits annual borrowing to 0.35 percent of GDP, this will not be simple as he will need a two-thirds majority in parliament – said Susannah Streeter, head of the money markets department at Hargreaves Lansdown, to Reuters. Meanwhile, the German stock index DAX rose 0.73 percent in early trading. The pan-European index STOXX 600 rose by 0.19 percent, although technology stocks fell.

However, for a stronger Germany (and Europe), greater effort will be needed in the future, and a good start, experts claim, is investment in the defense sector, which would undoubtedly lead to an increase in the real GDP growth rate from current low levels.

Germany is one of the few countries with relevant fiscal power

– Fiscal expansion in Germany depends on the repeal of the legal limit known as the ‘debt brake‘ that restricts borrowing capacity. This rule limits the federal deficit to 0.35 percent of GDP, and exceptions are only possible in extraordinary cases such as a pandemic. Voting to repeal this limit will be quite a complicated process since it requires two-thirds of the votes in parliament, and judging by yesterday’s elections, the likely coalition of both CDU and SPD will need more votes, specifically about 92 more votes. Germany is actually one of the few countries in the European Union that has fiscal power relevant to the frameworks needed for fiscal expansion since other countries have significant deficits like France (6.1 percent of GDP in 2024). However, it is positive that member states are united in the view that defense spending should be increased. There is talk of increasing defense spending to three percent of GDP, which would amount to 500 to 600 billion euros in investments over the next five years (2025 – 2030). Such investments at the Union level would undoubtedly lead to higher real GDP growth rates in Europe from current levels just below one percent to levels of two percent – says Niko Maričić, head of asset management at InterCapital Asset Management.

On the other hand, S&P 500 futures and Nasdaq futures strengthened by 0.6 percent. The Nasdaq fell 2.5 percent last week, marking its worst week in three months, with losses led by technology companies from the ‘magnificent seven.’ Wall Street took a hit on Friday when a services survey showed a shocking drop in activity amid concerns over tariffs and cost pressures. Can Europe leverage Trump’s leadership for its own economic growth and independence from the U.S.?

– Personally, I believe that reducing not only Germany’s but also Europe’s dependence on the U.S. is a long-term significant plus for economic growth in the EU, especially for the investment climate in Europe, as traditionally the majority of European investment capital has ended up on American exchanges, either in their stocks or bonds. With this change, a larger portion would certainly remain here, further stimulating economic growth. In the short term, certain processes would become complicated given the conditions and specifics of that process, but not drastically as these two economies are intertwined, and I am confident they will continue to cooperate, likely even better – believes Milan Horvat, CEO of FIMA Plus.

Investors have already penalized Europe

In this context, it will be crucial how Europe responds to challenges coming from both within and outside. The fiscal rules of the European Union are back in focus, and member states are trying to find a balance between the necessity of investing in future growth and maintaining financial stability. In this regard, reform processes, especially in the largest European economies, are of crucial importance for further economic momentum.

– Investors have already in some way penalized Europe due to the geopolitical and political risks it has been exposed to. We witness this through significantly poorer performance of stock markets, as well as economic growth compared to the U.S. I believe the situation is improving and that Europe is facing a period of stronger economic growth and reduced risk levels. It should be noted that the past year was a super election year in which an exceptional number of citizens went to the polls, thus political risk was present and under scrutiny. The fact is that Germany’s contribution to European growth has decreased, while service-oriented economies like those of the peripheral countries and the CEE region contribute more. Growth is more dispersed, which in itself is not bad, but a positive impulse is certainly expected from Germany, which was one of the few countries in recession last year – adds Maričić.

Considering the geopolitical challenges and political dynamics in Europe, the question arises whether current trends will destabilize the fundamental economic stability of the EU. Given the rise of populist parties and increasingly frequent political disagreements, the question is whether this could seriously threaten the investment attractiveness and economic viability of the region. Although it seems that the political scene in Europe is becoming increasingly polarized, the economic foundations of the Union remain relatively strong. The EU has gone through many turbulences in its history but has remained strong. But can it now lose that stability?

– It cannot, it is like the swaying of waves on the surface of the sea, they can be larger or smaller, but in the ‘depth,’ the economy is stable, and such things cannot seriously destabilize it. The EU, as it has been until now, has built a strong economy with relatively constant political disagreements. It would be great if it established a single capital market faster than it arms itself, which is being worked on, but too slowly. With a more developed market, its economy would develop even better, more qualitatively, and more dynamically – concludes Horvat.