Goldman Sachs has sounded the alarm on the economic frontier, forecasting that President-elect Donald Trump's protectionist policies, particularly the threat of substantial tariffs, could deal a significant blow to Europe's economic stability, with Germany finding itself in the line of fire.

In the wake of Trump's re-election, the investment bank has revised its growth predictions for the region downward, anticipating renewed trade tensions with the United States, increased pressure on Europe to bolster defense expenditures, and a dampening of business confidence due to heightened geopolitical risks.

Trump has been vocal about his belief that America's defense contributions to its European allies are disproportionate, has challenged the very foundation of NATO, and has hinted at a swift resolution to Russia's incursion into Ukraine, which could reduce American military outlay. These actions, if realized, would have far-reaching implications for Europe's economic landscape.

The eurozone's gross domestic product, representing the 20 countries that have adopted the euro, is now expected to grow by a mere 0.8% in the coming year, a substantial reduction from the previously forecasted 1.1%. The analysts at Goldman Sachs have indicated that the primary drag on growth would stem from increased uncertainty surrounding trade policies, where the threat of tariffs might be more detrimental than the tariffs themselves.

Europe's open economy is particularly susceptible to the winds of Trump's protectionist agenda, with the Republican having pledged during his campaign to impose steep tariffs on all imported goods. This combative stance towards trade not only threatens the principles of open trade and competition that have driven global economic growth for decades but also poses a direct challenge to the European Union, one of the world's largest trading blocs.

Goldman Sachs anticipates a "more limited set of tariffs" targeting primarily European auto exports, which would exacerbate the struggles of Germany's economy and its flagship manufacturer, Volkswagen. The German economy, already grappling with sluggish growth, is now projected to expand by only 0.5% next year, a sharp drop from the earlier forecast of 0.9%. The United Kingdom's growth for 2025 has also been revised downward from 1.6% to 1.4%.

Automobiles are Germany's most significant export, and the US is its largest market. The share price of Volkswagen plummeted on Wednesday, although it managed to recoup most of its losses by Thursday. Despite the US accounting for less than 10% of the group's total sales, Volkswagen sees substantial potential for growth in the country, especially in the electric vehicle sector.

Berenberg, a private bank, offers a more conservative outlook, downgrading its growth forecast for the eurozone by a modest 0.1 percentage point to 1%. It suggests that the "temporary spillover from more US domestic demand" and a stronger dollar, which makes European exports more competitively priced, could partially mitigate the effects of tariffs and trade tensions.

Holger Schmieding, Berenberg's chief economist, cautions that "for European businesses, Trump’s return to the White House implies considerable trade policy risks and geopolitical uncertainty." He posits that Trump is likely to impose selective, high-profile tariffs initially, while holding the threat of more extensive measures over China and Europe unless significant concessions are offered in negotiations.

The economic narrative unfolding across the Atlantic suggests that Europe must brace for a period of economic uncertainty and potential upheaval as it navigates the complexities of its trade relationship with the United States under the new Trump administration.