Germany’s economic confidence has surged to its strongest level since mid-2021, shrugging off renewed tariff threats from the US and signalling growing optimism that 2026 could mark a turning point for Europe’s largest economy.
The ZEW Economic Sentiment Index jumped to 59.6 points in January, up from 45.8 in December and well above market expectations of 50. This marks its highest reading since July 2021.
The gauge of current conditions, while still deeply negative, also improved to -72.7 points, from -81 the previous month.
“The ZEW Index is rising strongly. 2026 could mark a turning point,” ZEW President Achim Wambach said, while cautioning that reforms are still needed to secure sustainable growth.
Germany’s upbeat sentiment was mirrored across the wider eurozone.
The ZEW index for the euro area rose to 40.8 points in January, up from 33.7 in December, beating consensus expectations and reaching its highest level since July 2024. The assessment of the current situation also showed signs of improvement, climbing to -18.1 from -28.5.
German economic sentiment rebounds despite tariff shock
Export-oriented sectors are leading the rebound in expectations. Balances in mechanical engineering and steel and metals rose by more than 20 points, while the automotive sector improved sharply, even though its balance remains slightly negative.
Chemicals, pharmaceuticals and electrical engineering also recorded solid gains.
ZEW noted that the upbeat sentiment aligns with better-than-expected industrial production and orders in November 2025, as well as optimism linked to the EU-Mercosur trade agreement, which could open new markets for German exporters.
The survey, compiled by the ZEW on Tuesday, comes just days after US President Donald Trump threatened fresh tariffs on European exports, including Germany.
Trump threatened to impose an additional 10% tariff from 1 February on imports from Germany and several other European countries unless a deal is reached involving Greenland, with the rate potentially rising again to 25% in June.
If the EU retaliates, Washington could expand its tariffs to the entire bloc. Brussels has already prepared countermeasures covering about €93 billion of US imports, roughly 28% of total US imports in 2024 and could also activate its anti-coercion instrument.
Greenland tariff risks loom large
According to Oxford Economics, a blanket 25% US tariff on Europe, combined with like-for-like retaliation, would cut both US and eurozone GDP by around 1% at peak impact, with the eurozone hit being more prolonged.
The firm also warns that such a move would fundamentally reshape global trade, leaving Europe facing higher effective US tariff rates than China or India. Global GDP growth would slow to 2.6% in the 2026–27 period, below the 2.8–2.9% range seen in recent years and the weakest pace since the financial crisis, excluding the pandemic.
Crucially, Europe would face higher effective US tariff rates than China or India, pushing global GDP growth down to about 2.6% or its weakest outcome since the global financial crisis, excluding the pandemic year.
Von der Leyen: ‘A deal is a deal’ as EU defends Arctic sovereignty
Speaking at the World Economic Forum in Davos on Tuesday, European Commission President Ursula von der Leyen framed the current geopolitical turbulence as a moment of reckoning for the continent and an opportunity for strategic transformation.
“Geopolitical shocks can and must serve as an opportunity for Europe,” von der Leyen said.
“It is time to seize this opportunity and build a new independent Europe.”
Addressing the US tariff threat directly, von der Leyen reiterated Europe’s commitment to Arctic security and its strategic alignment with Washington.
However, she cautioned that Arctic security “can only be achieved together” and described the proposed tariff escalation between long-standing allies as misguided.
“In politics, as in business, a deal is a deal. When friends shake hands, it must mean something,” she said, referring to the transatlantic trade agreement reached late July of last year.
A cycle of retaliation, von der Leyen warned, would only serve the interests of adversaries seeking to exploit Western divisions.
The Commission President laid out three guiding principles for the EU’s response. First, she affirmed “full solidarity” with Greenland and the Kingdom of Denmark, stating unequivocally that sovereignty and territorial integrity are “non-negotiable”.
Second, she unveiled plans for a major European investment initiative in Greenland, in collaboration with Danish authorities, to support local economic development and infrastructure.
Third, von der Leyen committed to strengthening Arctic cooperation with the US and other partners, including a potential European icebreaker capability, supported by increased defence spending.
Markets remain cautious
Despite the upbeat data, European equity indices extended losses on Tuesday, reflecting investor unease over the deteriorating trade outlook.
The pan-European STOXX 50 fell over 1%, adding to Monday’s 1.3% decline. The broader STOXX 600 was down 1.3%. Major indices including Germany’s DAX, France’s CAC 40 and Italy’s FTSE MIB each slipped by 1.3%.
High-profile companies such as LVMH, Siemens, and Novo Nordisk dropped by around 3%.
