Europe’s financial markets are currently facing significant turbulence, with the Frankfurt Stock Exchange Index (DAX) down by 2% despite the recent large massive investments inflow into European defense stocks, which made Rheinmetall valued higher than the car giant Volkswagen.
This shift is a direct consequence of NATO members preparing for a potential expansion of trade conflicts. European investors are closely monitoring the U.S. administration’s next steps regarding tariff policies. Recent discussions in the U.S. Congress have sparked concerns about the potential consequences if these tensions escalate further.
Challenges for Major European Economies
It is still too early to determine whether the Eurozone is facing a full-scale crisis. The HCOB Eurozone Composite PMI, a key indicator of EU business activity, is hovering at 50.2 points as of February 2025. This reading, which ranges from 0 to 100, is just above the critical 50 threshold, suggesting minimal growth.
In response to economic uncertainty, Germany is planning to inject €500 billion into an infrastructure fund, which will primarily support defense spending. Additionally, the German government has raised bond yields by 40 basis points to approximately 2.9%, with the potential to reach 3% in the coming days.
Meanwhile, France’s 10-year bond yields have risen by 23 basis points to 2.73%. At the same time, the French service sector is projected to shrink by 0.8% in 2025, signaling a further slowdown in economic activity.
These measures taken by some of the largest European economies highlight that the EU is struggling to balance growing defense spending amid President Donald Trump’s threats to withdraw U.S. troops from their allies on the continent.
The decline in Brent oil prices adds complexity. Falling by 12.5%, from $80 to $70 since the beginning of the year, countries including the Netherlands, Norway, and the UK are dealing with hurdles as major oil extractors.
Analysts are already calling this situation a “toxic cocktail” of stagnant growth, persistent inflation, and rising trade risks. Geopolitical uncertainty and policy shifts continue to raise critical questions for investors trying to navigate this volatile environment.
However, the recent drop in the DXY by 5.67%, from its recent high of 110.170, suggests that the U.S. dollar is not performing as well as many might expect. Although the trade balance may be shifting, the overall impact appears to be a loss for all parties involved, with no clear winner emerging from these ongoing tensions.
