Davos hits ‘peak pessimism’ on Europe as US exuberance rises

Investors have warned of Europe’s vulnerability to Donald Trump’s “America First” policy, contrasting the continent’s economic struggles with the manifestation of animal spirits in the United States under the new president.

Trump’s plans for deregulation and tax cuts drew a burst of enthusiasm from many US executives at the World Economic Forum in Davos this week, while the S&P 500 on Wall Street finished just shy of a new record high on Wednesday.

But the mood about Europe was much darker, with one executive at a major US bank warning of “headwind pessimism” about the continent. Threats of US tariffs on Europe fueled concerns among executives and politicians at the Swiss gathering, who warned that America’s rising economic tide may fail to bolster sentiment on the other side of the Atlantic.

European Central Bank President Christine Lagarde said it was “not pessimistic” to say Europe was facing an “existential crisis”.

Europeans need to be realistic, Lagarde said at a panel discussion. “We’re getting this huge, big shock now, because another big player in the global economy is organizing things differently, and threatening some of the partners and players that used to govern the country.”

IMF forecast for this month Sharply upgraded economic prospects for the United States This year, growth is forecast at 2.7 percent, much higher than the eurozone’s forecast of 1 percent expansion.

The currency area’s largest economy, Germany, has experienced two years of contraction and is forecast to expand just 0.3 percent this year, the fund said. Meanwhile, the United States has taken Record share of cross-border greenfield investment projects In the 12 months to November, according to preliminary data from FT-owned company FDI Markets.

“It’s pretty consistent that things are going really well for America and it’s looking really negative for Europe,” said the head of a large sovereign wealth fund. “People are worried about the lack of leadership in Germany and France, the advance of the far right, the control of AI and the strength of the Union.

“The question is, is there enough of a sense of crisis to rally Europe? I don’t think so.”

The key risk in the United States is that Trump’s agenda prevents inflation from rising and the Federal Reserve from cutting interest rates. The IMF warned of the risk of price spikes if Trump overstimulates the US economy while curbing the supply side of the economy with his immigration crackdown. A “boom-bust cycle” could follow in the longer term due to its financial deregulation drive, it said last week.

But such concerns are overshadowed by bullish short-term prospects, economists said.

“There has been a great increase in animal spirits. You can see it in corporate sentiment, in consumer sentiment. The likelihood that taxes will not increase in 2026 is also increasing. It will be very good for aggregate demand,” said Mike Medeiros, macro strategist at Wellington Management.

While stronger U.S. demand will benefit countries that rely heavily on exports to the U.S., investors in Davos warned of the risk that growth in Europe could dampen an already gloomy forecast.

Stressed public finances in countries including France and the U.K. could face further jumps in long-term borrowing costs due to their U.S. tax cuts, they added.

“The sovereign debt issue is really important. You see what it is The UK did A few weeks ago and the limitations it creates,” said Qasim Koote, chief executive of Novo Holdings, the $187 billion investment arm of the Novo Nordisk Foundation.

Ursula von der Leyen, president of the European Commission, told the WEF that the EU and the US should negotiate to protect their trade relationship, with trade volume between them at 1.5tn euros and huge transatlantic investment, “so much is at stake for both sides”.

Brussels hopes that the threat of steep tariffs will be a precursor to a deal that avoids some of those obstacles, as they did during Trump’s first term. But the gulf with Brussels was evident this week as Trump announced the U.S Withdrawal from the Paris Climate AgreementA cornerstone of EU policy, and the World Health Organization.

EU Economy Commissioner Valdis Dombrovskis said the European economy has shown “resilience” in the face of shocks such as Covid-19 and rising fuel prices following Russia’s invasion of Ukraine. But he acknowledged that a deep split in the global economic system was “extremely costly for the EU, because the EU is a trading superpower”.

At the same time, a deregulation drive in the US could further reduce European competitiveness if governments fail to marshal an effective response.

One major global investor said they felt von der Leyen was underestimating how difficult it would be to harness and galvanize a group of countries with drastically changed views.

“There needs to be a much more honest discussion about EU bureaucracy, obsessive regulation and divergent views among the large number of countries,” they said.

Regulation of technology and artificial intelligence will prove to be a key test, executives said.

“The one thing that is going to guarantee that the continent is going to be reduced further to museum status is simply adopting a dogmatic, conservative approach to regulation and not being open to the fact that as technology evolves, Europe has to evolve with it,” said one technology executive.

Spain’s Economy Minister Carlos Cuerpo told the Financial Times that he came to Davos to counter the view that Europe is moribund, citing his country’s own excellent record, after it outpaced US performance last year with estimated growth of 3.1 percent and record job creation.

“We are fighting that idea, because it is important that there is a positive message coming from the EU,” he said. He stressed the need for urgency to move forward with “our own road map”, referring to former ECB president Mario Draghi’s competition report.

But European officials struggled to project that positive message to Swiss resort executives. “The feeling here is how negative European CEOs are about Europe,” said a US banking executive. “A stark contrast to the US, where it’s all about animal spirits and euphoria.”

Asked if Trump’s election represented a wake-up call for Europe, Lagarde replied: “I respectfully think that it does.”

Additional reporting by Stephen Morris and Arash Masoudi in Davos and Claire Jones in Washington

Data visualization by Stephanie Stacey, Keith Frey, Ray Douglas and Alan Smith