In 2025, Europe stands at a crossroads of geopolitical and economic uncertainty. The Russian invasion of Ukraine, persistent economic dependencies and the rise of right-wing populism continue to challenge the European Union’s cohesion and stability. As the Union’s position weakens, businesses across Europe face mounting disruption to established trade networks and growing risks to their competitiveness and resilience.
Europe is Caught in the Crossfire of the Geopolitical Stand-off.
Externally, the EU faces a labyrinth of risks, with the first challenge lying in renewed volatility across global markets. In January 2025, a new era of Trumponomics introduced far-reaching tariffs affecting a large share of the global economy. China swiftly implemented retaliatory tariffs, while structural fragmentation limited EU agility in defending industrial trade interests. Following EU-US negotiations held in July 2025, EU businesses face a “stabilized […] tariff rate for the vast majority of EU exports […] including cars, semiconductors, and pharmaceuticals”.
The Trump administration has repeatedly signalled a diminishing willingness to engage with long-standing alliances and even threatened to “walk away” from traditional systems of cooperation. This shift is particularly significant against a backdrop of increasingly close relations between previously sidelined powers such as Russia and China, which may produce consequences extending beyond conventional security concerns. The upcoming expiration of the New START Treaty in February 2026, coupled with the lack of progress toward its renewal, as well as NATO members’ June 2025 decision to set a target of spending 5 percent of GDP on defence and security infrastructure by 2035, together suggest a broader move away from diplomacy-centred approaches to security. National leaders may gravitate towards more isolationist policies, constraining the operational freedoms of businesses and potentially limiting trade and investment.
The rapid expansion of technology and AI poses a new threat: the absence of robust regulation and the increased power of private sector actors have created significant vulnerabilities related to governance and accountability. Europe is increasingly aware of uncertainties related to cybersecurity and diverse private interests, particularly as gaps in AI capabilities between the EU, US and China widen. Vast decision-making powers and influence lie in the hands of a few individuals within leading tech-based companies, creating vulnerabilities across the global social, political and economic landscape.
Internally, Europe faces mounting political and social challenges. Governments across Europe find themselves increasingly pressured to respond to political pressure from the far right. Many have increasingly adopted tougher migration policies in an effort to preserve social cohesion and protect welfare systems. Tough political stances on migration are no longer confined to the traditional right. Centrist leaders, from Mette Frederiksen of Denmark’s Social Democrats to Sir Keir Starmer of Britain’s Labour Party have embraced rhetoric and policies once associated with the far right. The reinterpretation, and outright challenge, of the European Convention on Human Rights (ECHR) highlights the redrawing of the political mainstream in response to shifting voter sentiment.
The EU has also borne witness to rising security concerns amid an increasingly antagonistic Russia. The war in Ukraine has severed Europe’s remaining ties to Moscow, generating widespread insecurity both within and beyond the Union. The freezing of Russian assets and the coordination of leaders in a “Coalition of the Willing” demonstrate a firm and unified stance against Russian aggression.
There is however little to suggest that the conflict will remain confined to Ukraine’s borders. Recent incursions across Europe have amplified fears that war could spread further. Europe remains reactive amid continued Russian unpredictability and proactive measures must be implemented to ensure preparedness for conflict. Concerns surrounding territorial security have also reignited debates over the accession of former Yugoslav states—alongside Albania, Georgia, Armenia, and Ukraine—into the EU. The widening of the Union has diverse effects but most notably would broaden security commitments but also further facilitate trade and access to a wider labour force population.
The war in Ukraine has also highlighted the significant issue the EU holds in relation to dependencies related to Russian energy sources. The conflict continues to reshape the global energy system in profound ways: governments across Europe have shifted away from Russian sources of energy, although Russian revenues have remained relatively stable (see Fig.1), as green alternatives to fossil fuels become increasingly available and reliable.
The dependencies highlighted within energy market has also led to calls on the EU to diversify wider trade patterns and tendencies, away from Russia and the US. Notable initiatives include the development of partnerships in the Mercosur region. While economic benefits may be marginal, the European Union would be the first to produce a Free Trade Agreement with the Mercosur region with key benefits derived from the facilitation of investment, commitments to non-tariff barriers and the opportunities for sanitary and phytosanitary trade.
Scenarios concerning the future of the European Union
In summer 2025, the Copenhagen Institute for Futures Studies (CIFS) introduced Four Scenarios for the Next Decade, (Strategic Autonomy, MXGA, Echoes of the West and Eurovision+) outlining possible futures for global collaboration and European cohesion. The framework contrasts two key dynamics: whether the EU moves toward fragmentation or deeper integration, and whether global cooperation is guided by enduring values or pragmatic and transactional systems of global relations.
“Strategic Autonomy”, reflects the EU’s current trajectory: an institution maintaining internal unity and credibility amid global uncertainty. This scenario envisions renewed cooperation with the United Kingdom, greater alignment in defence and health policy, and stronger partnerships with democratic allies such as Japan, Canada, and ASEAN. While the EU would remain less influential than the United States or China, its adherence to shared values would enhance the competitiveness and appeal of the European model.
“MXGA” represents perhaps the most plausible challenge to the European status quo, depicting a more fragmented order, marked by rising nationalist movements, eroding trust in EU institutions, and weakened multilateralism. Regional blocs, such as Nordic or Baltic alliances, might form to safeguard trade and security as global supply chains contract and economies reorganize around regional resilience.
The “Echoes of the West” scenario describes a fragmented Europe within a renewed transatlantic alliance. External pressure from the United States or Russia drives temporary unity, yet internal rifts over migration and environmental standards persist. Diverging national priorities undermine regulatory coherence and reduce the EU’s capacity for coordinated action. Meanwhile, “Eurovision+” envisions a highly integrated Union supported by a revitalised U.S. partnership. Deep collaboration in innovation, defence, and mobility fosters growth and investment, though continued dependence on American power limits Europe’s strategic autonomy.
Such scenarios have far-reaching impacts across diverse markets, most notably in relation to international trade. Geo-economic and political pressures will have diverse impacts on competition, industrial policy and climate change. There are notable impacts that may affect a wide range of actors. Within such volatile scenario changes, financial crises may emerge unpredictably, as resentment will emerge parallel with global trade fragmentation.
Widespread domestic and multilateral reform is required in order to ensure the long-term stability of the global trade system and ensure a long-term level playing field.
The EU remains heavily affected by the dynamics within the world’s strongest trade leaders, however in the current state of instability offers the EU a strong opportunity in forwarding its position in the global economy. This was explicitly highlighted in the Draghi report (2024) calling for greater coordination and unification within the EU. The report calls on the Union to secure competitive and reliable renewable energy sources, boost innovation to close the gap with the US and China and reduce dependencies that threaten stability.
Europe’s Regional and Business Landscape Going Forward
The implications of geopolitical tensions are increasingly felt across smaller and regionally distinct economies, such as Denmark or the Basque Country. In increasingly globalised economies, business strategies cannot be disassociated from geopolitical realities. Smaller economies must consider the policies forwarded in the Draghi report and adopt new objectives in targeted regional strategies. Such regional entities are able to leverage governmental autonomy to implement and pursue their own strategies driving local advancement. Both Danish and Basque actors have launched initiatives encouraging strategic investment in green sectors and wider R&D: while in the Basque country this research is centred around the manufacturing sector and automation capacities, in Denmark this is principally surrounded in agriculture.
These plans enable businesses across European regions must continue to take initiative and assume a leading role in diverse sectors against their global counterparts, harnessing strategic autonomy. EU-based businesses must commit substantial investment towards sustainable domestic energy sources, balancing technological innovation and sustainability-oriented responsibilities. Investment in localized and greener energy sources offers diverse opportunities for regional enterprises: reducing price dependencies on external suppliers, allowing for consistent competitiveness in global markets.
Firms would be able to mitigate fluctuations and shocks from the global energy market, as the Basque industrial sector’s contraction demonstrated in the first two quarters of 2025 following the restabilization of energy prices (see Fig.2).
Meanwhile, innovation in technology within the manufacturing sector could prove essential in maintaining competitiveness in the global industrial market. Increases in productivity will reduce production costs, while initial fixed costs may be high. Long-term increases in returns may enhance firms’ abilities to access new markets and ensure long-lasting competitiveness across global trade markets. This dynamic is particularly relevant in the Basque industrial base, where sustained investment in advanced manufacturing and innovation has become a cornerstone of its global competitiveness.
Increasingly volatile economic policy and trade relations, particularly with doubts surrounding future freedom of movement within the EU, pose concerns for global trade flows. Supply chains with reduced integration and diversification pose widespread risks. Stockouts, high transportation costs and the delayed creation and shipping of products pose key challenges to manufacturing based firms within production and delivery.
Regions like the Basque Country are heavily affected by such risks, with export of goods accounts for 37% of GDP and thus holding significant influence on the local economy. In ensuring consistent patterns of supply and demand the region will benefit either from more localized production or redefined and insulated trading partnerships and supply chains.
Looking forward, the European Union faces a period of considerable turbulence. Geopolitical uncertainty and economic risk are at their highest levels since the Second World War, with direct implications for international trade. Global supply chains are being reshaped by conflict, strategic competition, and shifting alliances, challenging Europe’s traditional trading patterns.
Yet these same dynamics present opportunities: by strengthening its position as a global leader in innovation, sustainability, and regulatory standards, the EU can reinforce its economic resilience and secure a more autonomous and competitive role in global trade.
Escrito por Anton Alfonsin Larsen, Junior Advisor at Copenhagen Institute for Future Studies
