CHATHAM HOUSE
Europe must forge a new role in the global economy
Only Europe can begin to fill the void left by the US’s withdrawal from its post-war global economic leadership role. The EU and UK should make this goal a shared priority.
Expert comment
Published 27 March 2025 4 minute READ
Creon Butler
Director, Global Economy and Finance Programme
President Donald Trump has fundamentally reshaped the US role in the global economy. He has shown readiness to impose significant tariffs on the bulk of US trade unconstrained by any international rules and with a legally questionable domestic basis. He has put core US security alliances in doubt and threatened the territorial integrity of close allies while withdrawing the US from global efforts to fight climate change, disease and poverty.
Instead of being a force for international stability and problem solving, the US is now a key source of global economic uncertainty. US policy appears to be driven by narrowly defined national interests and a transactional approach, with no place for values, principles, rules and long-term alliances.
To date, Trump seems undeterred by the negative impact these policies have had on the US economic outlook, with the US Fed’s latest growth projection for 2025 revised down by 0.4 percentage points to 1.7 per cent and the S&P 500 down 7 per cent from its February peak. On 26 March he announced a new set of 25 per cent tariffs on all imported cars and car components to take effect on 2 April together with a range of other ‘reciprocal’ tariffs. These may be followed by official constraints on the way foreign governments can use the US dollar and invest in US government securities. The US could withdraw from further areas of the international economic architecture and may seek to force other countries to change domestic tax and tech regulation policies.
The US has sometimes changed or ignored international economic rules when convenient in previous eras. But the nature and extent of the current change goes far beyond anything seen since the Bretton Woods system was established 80 years ago.
The EU should begin to articulate a vision of what the new international economic order should look like.
How other countries should respond
Other countries need to plan on the basis that the shift in the US approach will be permanent and look beyond the immediate requirement of managing their individual relationships with the Trump administration.
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They could simply accept the short-term ’narrow national interest’ model pursued by Trump and copy US behaviour. Or they could seek to preserve a rules-based system, devising ‘work arounds’ for a disengaged or overtly disruptive US.
This choice is most critical for Europe, and especially the EU. This is partly because of President Trump’s evident deep hostility towards the very idea of the EU. But it is also because the EU is built on the same fundamental principles for international cooperation as the wider post-war economic order – albeit going much further in developing common policies, institutions and legal frameworks.
The EU needs to build trust and collaboration with other countries in support of a new global order.
A fracturing of this economic order poses an existential threat to the EU. The EU therefore has a strong interest in responding to Trump’s actions by leading an effort to preserve an international economic system based on values, principles and rules.
Moreover, only the EU has the economic size (18 per cent of global GDP by market value vs 26 per cent for the US), fully convertible currencies, economic and scientific capabilities, regulatory competence, law-based system of governance, and suite of international economic alliances that are needed to take on such a role.
The EU must deal with numerous internal political differences among member states. But it may also be able to use the crisis triggered by Trump to galvanise what was previously viewed as unthinkable change.
Practical steps for the EU and UK
So far, the EU has taken decisive steps in three areas. First, the European Commission announced robust retaliation against US tariffs on steel and aluminium, while maintaining the offer to negotiate. Second, the Commission moved quickly to put forward proposals for the collective EU financing needed to underpin a European defence system independent of the US. Third, the EU’s leading economy, Germany, is lifting constitutional borrowing constraints allowing it to fund €500 billion of domestic infrastructure spending and as yet undetermined, but substantial, additional defence spending. Some forecasts suggest this could raise current anaemic German growth rates by as much as 0.5 percentage points in 2026.
All three of these steps are consistent with an initiative to preserve an international economic order. But they are just the beginning. The EU should now take three further steps.
20%
of global foreign exchange reserves are in euros.
First, it should begin to articulate a vision of what the new international economic order should look like and the role the EU will play in it. This cannot be – and need not be – the same as that underpinned by the US over the past eighty years. But it needs to address both the new challenge of dealing with the US as well as issues that pre-dated Trump’s second term, including developing countries’ unhappiness over the global role of the dollar and their desire for greater participation in decision making.
The EU … may also be able to use the crisis triggered by Trump to galvanise what was previously viewed as unthinkable change.
Second, the EU should prioritise implementation of the Draghi and Letta reports’ recommendations on deepening and broadening European financial markets and match this by reinvigorating efforts to promote the euro’s global reserve currency status. The euro accounts for some 20 per cent of global foreign exchange reserves (against 58 per cent for the dollar) and is a far more attractive long-term reserve asset than either gold or crypto currency. European capital markets are already benefiting from the partial unwinding of ‘US exceptionalism’, and geopolitical divergence between the US and EU makes the euro a genuine alternative to the dollar. The euro will also be an effective safe haven from the kind of dollar interventions advisers around Trump appear to be considering.
Image — View of the euro currency sign in front of the former European Central Bank (ECB) building on December 11, 2024. (Photo by KIRILL KUDRYAVTSEV/AFP via Getty.)
Topics
European Union (EU) International trade America’s international role International finance system
Regions
Eurozone United Kingdom
Departments
Global Economy and Finance Programme
Third, the EU needs to build trust and collaboration with other countries in support of a new global order. Key partners will include other advanced economies spurned by the US (notably Canada, but potentially also Japan, South Korea and Australia) as well as the major emerging economies, including China, who may have competing visions of how the global economic order should evolve.
But most important for the EU is its relationship with the UK, both on economic grounds and because the UK shares, arguably more than any other major economy, the same fundamental interest in preserving a rules-based international economic system and an enhanced leadership role for a broadly defined Europe within it.
Many of the key priorities have already been identified, including agreeing a security pact (which would allow the UK to be a partner in efforts to strengthen the European defence industry), collaboration to sustain Ukraine’s ability to defend itself, economic agreements on food safety standards, emissions trading and UK dynamic regulatory alignment with the EU in specific economic sectors.
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But there are two major threats to successful negotiations. First is the possibility that the UK will try and duck the inevitable hard choices between cooperation with President Trump and providing whole-hearted support to a pan-European effort to address the global governance gap. And second is the possibility that the EU will not be flexible enough on, for example, the indivisibility of the single market, which would frustrate mutually beneficial cooperation in such critical areas as deepening and broadening European financial markets.
It is to be hoped that both sides see their strong common interest in overcoming these and other obstacles.
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