Germany at (electoral) cross-roads; Southern Europe’s ‘remontada’, US tariffs, and strategies for Europe’s industrial sector

After a brief campaign focusing on illegal immigration, defense spending and the economy, Germany is only a few days away from national elections which shall determine the new Bundestag and a new Chancellor. In our What to Watch category, we analyze the cost-implications of the big promises all parties in Germany are making (including tax cuts, higher public investments and pension increases to stimulate growth), we explore the reasons behind the recovery of many economies in Southern Europe and we scrutinize the ‘reciprocal trade and tariffs’ risk. In this week’s deep-dive, we look at the pathways to a green and competitive European industry, with a particular focus on four hard-to-abate sectors: aluminum, ammonia, steel, and cement.

From hard-to-abate to decarbonized - strategies for transforming Europe's industrial sector

The complete deep-dive for you here.

Four hard-to-abate industries (aluminum, ammonia, steel, and cement) are central to Europe’s green transition, responsible for 7.7% of EU-27 energy use and 9.7% of emissions. They also supply essential materials for green industries. Decarbonizing them is critical for EU climate goals and strategic independence. Decarbonization and competitiveness go hand in hand. The EU must ensure a reliable renewable energy system and an effective Carbon Border Adjustment Mechanism to secure investment and power these industries sustainably.

Aluminum: Transitioning from coal-fired production. Aluminum, vital for transport and renewables, is highly energy-intensive, causing 2% of global GHG emissions. Green electricity is key, as 65% of emissions stem from fossil-fuel power. Inert anodes can eliminate process emissions and cut costs by 10%. With these measures, Europe can decarbonize aluminum at USD2,500 per ton—cheaper than many global markets but not the US or China.

Ammonia: From grey to green. Ammonia, crucial for fertilizers, generates 1% of EU emissions. Green hydrogen is essential for decarbonization, with a global production cost of USD370 per ton. However, Europe remains less competitive (USD412 per ton) compared to the US (USD343) and Brazil (USD292).

Steel: Reuse, recycle. Steel, key for construction (52%), machinery (16%), and automotive (12%), is responsible for 7% of GHG emissions. Scrap-based production and lower consumption reduce reliance on resource-intensive inputs. BIO-PCI, biomethane, and green hydrogen lower emissions, but electric arc furnace (EAF) technology using scrap steel is currently the most cost-effective at USD439 per ton in Europe.

Cement and concrete: Cutting clinker emissions. Cement production accounts for 7% of global CO2 emissions, with clinker responsible for 88%. Using supplementary cementitious materials (SCMs) can lower emissions and reduce costs by USD2.50–11 per ton. Fuel switching, hydrogen, and electrification help, but carbon capture, utilization, and storage (CCUS) remains essential for offsetting 35% of emissions.

Steel and ammonia face the largest green-financing gaps. Capital expenditure growth of +3% annually is insufficient. Steel and ammonia require USD2,191bn and USD1,205bn, respectively, with CAPEX needing to grow +8% and +11% annually until 2050. Aluminum’s gap is smaller (USD317bn), while cement may be closer to its targets—if investments prioritize decarbonization. Government support through grants, tax incentives, and policies is crucial. Without action, net-zero goals will become harder and costlier.

The complete deep-dive for you here.

What to Watch this week

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• Eurozone: What are the reasons behind Southern Europe's ‘remontada’. Record-high tourism activity has been a major driver of the Mediterranean recovery, while core European countries such as Germany have been more exposed to the downturn in manufacturing. Resilient labor markets saw increased employment and recovering productivity per hour worked, which contributed to the solid economic performance. In addition, our estimates suggest that NGEU funds have contributed 1.0 and 1.2pp to growth from 2021 to 2024 in Italy and Spain, respectively, and we expect a similar impact for Portugal and Greece, both of which have already received more than 50% of the funds. Interestingly, although Spain has seen a strong recovery, the positive spillovers from NGEU have not yet translated into a greater investment activity. Looking ahead, we expect the growth gap between Southern and core European economies to narrow further as the longer-term effects of the NGEU program take hold, while the initial boost from investment spending begins to fade towards the end of the program.
• German elections: The budget math is not mathing. As Germany heads to the polls on 23 February, all parties are making big promises, including tax cuts, higher public investments and pension increases to stimulate growth, but these come with hefty costs. The necessary financing gap could be covered by debt-financed funds or increased tax revenues, but relying on growth alone is insufficient. To meet the financing needs, the economy would need an additional EUR388bn-EUR616bn of growth annually, a difficult task given the projected stagnation in 2025 (+0.23% potential growth over the next decade). For the moment, none of the parties have offered a compelling budget framework for Germany. Beyond fiscal consideration, the risk of a status quo bias for the future coalition is unfortunately high, when the German economy needs bold, visionary reforms and strong alignment across parties to stimulate and secure growth.
• US reciprocal tariffs: An eye for an eye? The US “Reciprocal Trade and Tariffs” risk raising the US global effective tariff rate by another +13pps, of which +8pps are due to the differential in value-added tax rates, +3pps to make up for the imbalance in non-tariff measures and +2pps for the differential in tariff rates. This would mean further tariff hikes of +12pps on China and +13pps on the EU, bringing us closer to our “full-fledged trade war” scenario where GDP growth would be chopped by -0.7pp in China and -0.8pp in the EU by 2026. Specific products and sectors could be caught in the crossfire, such as autos, pharmaceuticals, and chips. Argentina, India, Brazil, Chile, and Kenya would be hit the hardest, with tariff hikes ranging from +23pps to +34pps. Taiwan, the UAE, Switzerland, and Singapore would be the least affected (between c.+1pp and +5pps). While some trade partners may have until April to provide concessions and try to strike deals with President Trump, others may not be so lucky and will likely retaliate against the US.

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