Europe's Political and Economic Clouds- August 2025.pdf

(Draft Note) 1 Sept 2025
Political Clouds Over Europe: A Report
on the Polycrisis of Division and
Disruption
Executive Summary
Europe is currently navigating a complex and volatile landscape characterized by a systemic
"polycrisis"—a confluence of deeply rooted internal fragmentation and significant external
geopolitical shocks. The European Union's traditional model, built on the principles of economic
integration and "normative power" diplomacy, is facing a profound test of its resilience and
legitimacy. Internally, the continent is gripped by political polarization that transcends
conventional economic divides, a resurgent populism that threatens democratic institutions, and
a sovereign debt crisis that has become a potent political weapon. These domestic fragilities are
being compounded by external forces that are actively reshaping the global order. The
re-election of Donald Trump in the United States has accelerated a fundamental reordering of
the transatlantic alliance, forcing Europe to confront a future where it is less a partner and more
a transactional dependent. Simultaneously, the War in Ukraine has served as a catalyst for a
"geopolitical awakening," spurring unprecedented defense and energy policy shifts, while the
Gaza conflict has exposed a deep, values-based schism that has undermined the EU's global
credibility. This report posits that the EU's future trajectory hinges on its ability to transition from
a model of benign interdependence to one of robust, and yet delicate, geopolitical statecraft, all
while managing the centrifugal forces threatening its internal cohesion.
I. Europe's Internal Stress Fractures: A Diagnosis of Domestic
Political and Economic Instability
1.1 The Anatomy of Political Polarization: Beyond the Left-Right Divide
Political schisms across Europe are drawing opinions, worldviews, and political positions
increasingly apart, leading to a palpable sense of antagonism among citizens. This
phenomenon, often termed "pernicious polarization," is defined as the division of society into
two mutually antagonistic political camps and is demonstrably correlated with democratic
backsliding. An analysis of European political sentiment reveals that this polarization is not
uniform and is rooted in deeper socio-cultural divides that complement traditional economic
cleavages.
An examination of public opinion indicates that affective polarization, which measures hostility
toward people with different views, is strongest among supporters of left, far-left, and
environmental parties, who are on average significantly more polarized than their right-wing
counterparts. This emotional division is also more pronounced among people with either high or
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low levels of educational attainment, as well as those in high-income groups. A crucial finding is
that this affective polarization is not merely a proxy for the importance of an issue; respondents
who attribute little importance to a specific issue show similar levels of polarization to those who
consider it salient. This suggests that the hostility is less about a particular policy position and
more about an emotional, tribal identity. Political entrepreneurs have deliberately exploited this
by demonizing opponents and appealing to anger, a strategy that has proven to be an
electorally winning one.
This dynamic is part of a broader shift in the structure of political conflict. The rise of
socio-cultural and identity issues is increasingly structuring voter preferences, creating a new
political cleavage known as the "GAL-TAN" dimension. This cleavage contrasts those with
Green, Alternative, and Libertarian values, who favor open societies, multiculturalism, and
international governance, with those who hold Traditional, Authoritarian, and Nationalist views,
who see these values as a threat to their national identity and way of life. This cultural divide,
which has been intensified by globalization, increased migration, and the EU's struggles to
manage economic and refugee crises, has brought topics like immigration and European
integration to the forefront of political debate.
The rise of populism, which often feeds on these socio-cultural cleavages, can be interpreted as
both a symptom and a cause of democratic fragility. Populism is a symptom of a crisis in
democracy—a "mismatch between how the democratic polity operates and how citizens
conceive their own aspirations". Voters, feeling that the political system is unresponsive to their
demands, are drawn to the anti-elitist stance of populist movements. Yet, once in power, these
populist leaders actively contribute to democratic erosion by concentrating executive power and
changing rules to benefit their own parties. This creates a dangerous feedback loop where initial
discontent with democratic institutions is harnessed by leaders who, in turn, dismantle the very
accountability mechanisms—such as judicial review and independent journalism—that might
provide a check on their power. The victory of the Law and Justice (PiS)-backed candidate in
Poland's recent presidential election exemplifies this, as it poses a significant blow to the pro-EU
government's efforts to reverse the institutional damage inflicted by the previous administration.
1.2 The Sovereign Debt Sword of Damocles: A Vicious Cycle of Economics and
Politics
The economic stability of the European Union, and particularly the Euro Area, is being tested by
high and rising public debt levels, which have become a potent political issue. According to
Eurostat, the general government gross debt-to-GDP ratio for the Euro Area stood at 88.0% at
the end of the first quarter of 2025, a slight increase from 87.4% in the previous quarter. This
trend is not uniform, with several member states carrying significantly higher burdens. The
highest ratios were recorded in Greece (152.5%), Italy (137.9%), France (114.1%), Belgium
(106.8%), and Spain (103.5%).
Public debt is no longer merely a technocratic fiscal problem; it has been transformed into a
political weapon that opposition parties, especially populists, can leverage to undermine
government legitimacy. In France, where public debt reached 113% of GDP at the end of 2024,
the issue has become a flashpoint for political turmoil. The government's plan for significant
budget cuts to address a deficit of 5.8% of GDP has prompted a confidence vote, raising the
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risk of a snap parliamentary election. The main opposition parties have openly stated they will
vote against the plan, and the finance minister has warned that adopting the spending programs
of the far-right National Rally or the left-wing alliance would risk a debt crisis. This politicization
of fiscal responsibility is further supported by research indicating that populist radical right
parties in government systematically run higher public deficits because they combine lower tax
rates with the maintenance of costly social spending, such as pensions. This approach creates
a long-term fiscal vulnerability that can be blamed on the "establishment," thereby reinforcing
the populist narrative.
While the 2008-2010 financial crisis revealed a "vicious circle" or "doom loop" between banks
and sovereign debt, a new, politically charged iteration of this cycle is emerging. High public
debt levels fuel political instability, which strengthens populist parties. These parties, once in
power, pursue policies that intentionally increase deficits and debt, thereby exacerbating the
fiscal situation and creating further political uncertainty. The rising borrowing costs and market
volatility in France due to political turmoil are a clear manifestation of this cycle, as domestic
weakness in the Euro Area's second-largest economy poses a drag on broader European
growth.
The following table provides a snapshot of the fiscal landscape across key European nations.
Country Government Debt to GDP (Q1
2025)
Change from Q4 2024
Greece 152.5% +3.3%
Italy 137.9% +1.2%
France 114.1% +0.4%
Belgium 106.8% +1.7%
Spain 103.5% +1.3%
Denmark 29.9% +1.0%
Estonia 24.1% -0.1%
Bulgaria 23.9% +0.7%
Source: Eurostat
II. The Reordering of the Global Stage: External Shocks and Their
Ripple Effects
2.1 The Trump Factor: From Ally to Transactional Partner
The re-election of Donald Trump has fundamentally altered the transatlantic relationship, forcing
European leaders to reconsider their long-standing security and economic models. Recent
polling indicates a profound shift in European perception. A poll of nine EU countries showed
that only 22% of Europeans view the United States as an ally that shares interests and values, a
significant decline from 31% two years prior. A large majority (73%) view Trump as a threat to
peace and security in Europe, placing him only slightly behind Russian President Vladimir Putin.
This lack of confidence reflects a dwindling faith in the United States' multilateral commitments,
with 70% of Europeans believing the EU would have to rely on its own forces to ensure its
security and defense.
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The economic implications of Trump's "America First" policies have also been a source of
heightened uncertainty. A new trade deal with the EU establishes a 15% tariff ceiling on most
European exports to the US, a rate that is higher than what many exporters previously paid.
While the EU managed to avoid an all-out trade war, the deal is widely viewed as a capitulation
that is "deeply unequal" and betrays the bloc's commitment to multilateral rules. In return for the
new tariff regime, the EU has committed to significant purchases of American goods, including
$750 billion in US energy products over three years. The unilateral nature of this arrangement,
where the US will not face higher tariffs for its exports to the EU, further underscores the
transactional and unequal nature of the relationship.
This political and economic pressure from the US has been a key driver of the push for
European "strategic autonomy," defined as the capacity to act militarily and develop defense
capabilities without US support. The possibility of US abandonment is now as powerful a driver
for increased European defense spending as pressure from the US itself. However, this push for
autonomy is complicated by a significant paradox. While European leaders are urged to build a
more robust European defense industrial base, the need to appease Washington and maintain
its security commitment has led to a contradictory trend: European governments prioritize
purchasing ready-made US military equipment. This practice undermines the very goal of
developing a self-sufficient European defense industry, creating a cycle of strategic dependence
that is difficult to break.
The economic impact of Trump's policies extends beyond tariffs. A survey of economists
indicates that the direct effect of a 10% US tariff would be "relatively benign," reducing EU
economic growth by less than 1% over four years. The greater risk, however, is an indirect
"financial contagion". Concerns over US fiscal policies have the potential to increase risk premia
on long-term US bonds, which in turn raises financing costs across Europe, thereby affecting
public debt sustainability and investment decisions. This demonstrates a new form of
geoeconomic pressure where the US's domestic policy can have a destabilizing effect on
European financial markets.
The following table visualizes the shift in European perceptions of the United States.
Source Date US Viewed as an
Ally
US Viewed as a
Necessary Partner
US Viewed as an
Enemy of Europe
Poll of 9 EU
countries
Nov 2024 22% 51% N/A
Poll of 9 EU
countries
2 years prior 31% 41% N/A
Le Grand
Continent/Cluster
17
Mar 2025 N/A N/A 51%
Source: Le Grand Continent, Cluster 17, and an unnamed poll of nine EU countries
2.2 The War in Ukraine: A Geopolitical Awakening and Its Unresolved Questions
Russia's 2022 invasion of Ukraine has been widely described as a "geopolitical awakening" for
the EU, forcing security and defense issues from the periphery to the center of European
politics. This marked a profound departure from the post-Cold War era, which had been
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characterized by a "peace dividend" and a non-geopolitical approach to foreign policy. The EU's
response has been unprecedented, encompassing a wide range of financial, military, and
humanitarian assistance that totals close to $186 billion, with 65% provided as grants or in-kind
support.
The war has spurred a historic ramp-up in military spending across the continent. NATO leaders
have agreed to increase defense spending up to 5% of each country's GDP by 2035, and EU
member states hope to mobilize up to 800 billion euros under the ReArm Europe plan. This
mobilization is aimed at encouraging Europe to spend "better," not just more, by investing in
areas like air and missile defense, artillery systems, and drones to close critical capability gaps.
The EU is playing a significant role as a "resource enabler," utilizing financial instruments like
the European Peace Facility and the European Defence Fund to help fund and acquire the
technologies and capabilities needed for deterrence and territorial defense. However, the EU
explicitly acknowledges NATO's primacy in these areas, suggesting a division of labor where the
EU leverages its economic power while NATO remains the primary military deterrent.
The conflict has also acted as a catalyst for a fundamental shift in European energy policy.
Russia's decision to weaponize its energy supplies by cutting off gas flows to Germany in 2022
served as a wake-up call for European policymakers. This has led to the EU’s REPowerEU
Plan, which aims to phase out all Russian fossil fuel imports and has successfully banned all
imports of Russian coal. The plan has not only reduced dependency on Russia but has also
accelerated the green transition, with the EU producing more electricity from solar and wind
than from gas for the first time in 2022. A key element of this strategic shift has been the EU's
decision to pursue common gas procurement, which has allowed member states to buy gas
together rather than competing for scarce supplies, thereby stabilizing prices and safeguarding
businesses.
However, this collective action is built on an uneven foundation. The EU’s struggles to address
recent shocks have revealed the vulnerability of the single market and the extent to which its
competitiveness relies on a well-functioning internal market. The EU’s response framework also
faces the challenge of "highly uneven financial resources" among member states to provide
economic support to companies, which could lead to new internal tensions and undermine the
cohesion of the single market.
The following table quantifies the unprecedented scale of the EU's collective support for
Ukraine.
Type of Assistance Total Amount Grants/In-Kind Support Concessional Loans
Total Assistance ~$186B ~65% ~35%
Financial & Budgetary ~$92B ~$16.4B in grants ~$36B in financial aid,
$34.4B from the
Ukraine Facility, $3B in
EIB/EBRD loans
Military ~$65B $6.6B from the
European Peace
Facility, plus bilateral
contributions
N/A
Refugee ~$18B N/A N/A
5

Type of Assistance Total Amount Grants/In-Kind Support Concessional Loans
Humanitarian/Emergen
cy
~$4.8B All as grants N/A
Source: Delegation of the European Union to the United States
III. The Crises of Values and Cohesion: The Gaza Conflict as a Litmus
Test
3.1 The Failure of Normative Power and the Fracturing of a Common Front
While the War in Ukraine served as a unifying external threat for the EU, the Gaza conflict has
been a far more divisive force, exposing a profound values-based schism that has fractured the
bloc's foreign policy and undermined its global credibility. The initial response from EU member
states was one of unanimous condemnation of the Hamas attacks on October 7, 2023, with
Israeli flags raised outside EU headquarters in Brussels. However, this unity quickly unraveled
as the Israeli military operation intensified. A clear division emerged, with Germany standing
close to Israel while other members, such as Ireland, Slovenia, and Spain, became increasingly
vocal critics.
This "cacophony" of competing national interests and distinct relationships with both sides has
"imploded" the EU's credibility as a "coherent actor" in the Middle East. The bloc's reputation as
a "normative and value-based" actor has been "shredded" by its failure to present a united front
and its long hesitation to call for a ceasefire. The EU's continued arms sales to Israel, even after
the International Court of Justice warned of a "plausible genocide," have been viewed as
hypocritical by the Global South and the Arab world. This cautious approach, in stark contrast to
its decisive response to the invasion of Ukraine, reveals the EU's institutional limitations when
faced with a complex, values-based conflict that does not have a clear-cut common enemy.
The Gaza conflict has also exposed a widening and dangerous gap between European
governments and their citizens. Large-scale pro-Palestine protests have occurred across the
continent, with hundreds of thousands demonstrating in cities like London, Paris, Stockholm,
Madrid, and Geneva to demand a ceasefire and denounce government complicity in Israeli
actions. In some instances, these protests stand in direct opposition to the official stances of
their national governments, which have chosen to align more closely with Israel.
In response to this surge in public activism, a number of European countries, including France,
Germany, the United Kingdom, and Hungary, have moved to restrict pro-Palestinian political
speech and activism through the "securitisation of protests" and the "weaponisation of laws". In
Germany, for example, authorities have banned demonstrations and labeled the Boycott,
Divestment and Sanctions (BDS) movement as an "extremist group" under suspicion of being
an "extremist group". France has criminalized pro-Palestinian speech, and protesters in Spain
and Switzerland have been met with police crackdowns. This pattern of suppression, which
reflects a deep alignment of European states with Israeli policies, risks alienating a significant
portion of the populace and eroding fundamental democratic rights at home, thereby creating a
new internal schism between citizens and the state.
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IV. Geoeconomics and the Challenge to Cohesion
4.1 The Weaponization of Interdependence and the End of an Era
The dual shocks of the COVID-19 pandemic and Russia's invasion of Ukraine have accelerated
a fundamental shift in the EU's political economic model, forcing it to embrace a more
geopolitical approach to economic statecraft. For decades, the EU's international policies were
predominantly guided by commercial interests and a liberal, rules-based approach. The new
reality, however, has forced the union to jettison the "neat distinction between economic and
security affairs" and to use economic means for foreign policy ends, or "geoeconomics".
While this new approach is designed to build resilience and enhance the EU's strategic
autonomy, it is not without its challenges. The EU's narrative has become increasingly focused
on "making interdependence safe for the EU" rather than promoting "mutually beneficial global
reforms". This risks a global backlash from other states, particularly in the Global South, who
may view the EU's new measures as self-serving and a risk to the very liberal order the union
claims to defend.
A critical consequence of this new geopolitical environment is the reduced effectiveness of one
of the EU's core internal policies: cohesion funds. Research indicates that the impact of EU
funds designed to reduce regional disparities and promote growth is significantly diminished by
global political tensions. Specifically, the effectiveness of funds allocated to the manufacturing
sector is reduced by an average of 13% when geopolitical risks originating from the US are
factored into the analysis, and by a more substantial 30% when risks from China are
considered. This finding is particularly concerning because it reveals a direct, quantifiable cost
of external instability on the EU’s internal mechanisms for economic and social cohesion. It
demonstrates that the EU's new geopolitical reality literally drains the power of the instruments
designed to hold the union together, underscoring the urgent need for better coordination
between structural and other EU-wide policies.
V. Conclusion and Outlook: Navigating an Era of Polycrisis
The analysis presented in this report reveals that Europe is contending with a multifaceted crisis
driven by the compounding effects of internal fragmentation and external disruption.
Domestically, deep-seated political polarization, fueled by populist movements and
socio-cultural cleavages, is weakening democratic institutions and creating new forms of social
and political antagonism. This is compounded by a precarious fiscal situation in several core
member states, where public debt has become a tool for political opposition, creating a vicious
cycle of economic and political instability.
Externally, three major shocks have fundamentally altered Europe's place in the world. The
return of a transactional US under Donald Trump has forced a re-evaluation of the transatlantic
alliance, exposing a strategic dependence that is difficult to overcome and pushing Europe
toward an uncertain, if necessary, path of strategic autonomy. The War in Ukraine, while a
unifying force, has also highlighted the uneven capacity of member states to bear the economic
burden of collective action. Finally, the Gaza conflict has served as a critical litmus test,
exposing the EU's failure to act as a coherent, values-based global actor and revealing a
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dangerous schism between the foreign policy of European governments and the sentiments of
their citizens.
The central dilemma for Europe is that it is not yet powerful enough to defend itself without the
United States, yet it is forced to act as if it is. This reality necessitates a strategy of "strategic
patience" to buy time to "rebuild and refund" European defense capabilities. Navigating this era
of polycrisis will require a bold and unified response. The EU must move beyond its traditional
model of economic integration to embrace a more decisive form of geoeconomic statecraft. This
will require not only addressing the immediate challenges but also tackling the underlying
drivers of discontent, such as economic insecurity, that fuel populist sentiment. The path forward
demands a commitment to strengthening internal governance, accelerating the push for a
common defense capability, and bridging the gap between its stated values and its actions on
the world stage to re-establish its credibility. Only through a combination of pragmatism and
ambition can Europe hope to navigate the treacherous geopolitical waters ahead.
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