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Himani Pant
5 April 2026 |
Amid worsening global turmoil, several internal and foreign policy developments occurred in Europe during the first quarter of 2026. Following the ongoing war in Ukraine and the shifting transatlantic relations, Europe has to increase its defence expenditure. There has been a call for strategic autonomy within Europe following Trump’s new approach to Europe. In the economy and trade sphere, the first quarter saw countries diversifying their trade and the EU signing FTAs with India and Australia.
1. Increased defence spending and expanded defence partnerships
Europe is going through its ‘Zeitenwende’ moment following the onset of the Ukraine war in 2022. Europe’s defence expenditure continued to increase in the first quarter of 2026, given its continued military support to Ukraine even as the United States reversed its Ukraine policy. The policy shift vis-à-vis defence expenditure was triggered by the Russia-Ukraine war, which began in March 2022, when Europe was forced to take greater responsibility for European security amid a shifting transatlantic alliance. With the Ukraine peace deal in limbo and the new conflicts in the Middle East in place, Europe’s ‘geopolitical awakening’ was even more pronounced in the first quarter of 2026.
The push for strategic autonomy continued as reflected in Europe’s endeavours to boost defence capabilities and energy security while reducing external dependencies. This included capability coalitions, joint procurement pushes, and national plans. Meanwhile, the EU continued its drive to expand defence partnerships under its strategic compass for security and defence. On the sidelines of the 16th India-EU Summit (January 27), where the historic FTA was concluded, the EU also entered into a pact on a security and defence partnership to strengthen cooperation in maritime security, counterterrorism, and cyber defence. This is the EU’s third such agreement with an Asian country after Japan and South Korea.
2. Increased momentum in trade diversification as a de-risking strategy
Amid rising global turmoil, tariff uncertainties, and a reduction in overreliance on a single partner, Europe continued its de-risking strategy by pushing for diversification in its trade ties with emerging economies in the first quarter of 2026. The EU–Mercosur (South American trading bloc comprising Argentina, Brazil, Paraguay, and Uruguay) FTA was signed on January 17. It is notable that the negotiations for this trade deal first began in 1999. The EU-Mercosur agreement creates one of the largest free trade areas in the world, spanning 31 countries with 700 million citizens.
The EU-India FTA, the ‘mother of all deals,’ was signed on January 27. Hailed as ‘a blueprint for shared prosperity’, the deal links two of the largest economies of the world to create a free trade zone which would span approximately a quarter of global GDP with 2 billion consumers, accounting for a quarter of the world's GDP. Negotiations for this deal began almost two decades ago, in 2007, but stalled in 2013 over divergences on ‘market access’ and ‘regulatory controls', and were relaunched in 2022.
The EU also concluded an FTA with Australia on March 24, after eight years of negotiations. The deal would improve the EU's access to critical mineral supplies from Australia. All these deals are seen as the EU’s attempts to hedge against US and Chinese risks, as well as against growing global turmoil.
3. Stricter measures on irregular immigration
The European Parliament approved a proposed reform enabling member states to deport migrants whose asylum applications have been rejected to offshore deportation centres outside the EU. The reform also includes stricter penalties, such as detention and entry bans for migrants who refuse to comply. The European Parliament approved the package with support from right-wing and far-right groups. The bill was supported by 389 MEPs, with 206 lawmakers against and 32 abstentions.
4. Greater drive for industrial protectionism
The EU’s Carbon Border Adjustment Mechanism (CBAM) entered into force on 01 January 2026. The carbon tax has been launched as a climate policy tool and imposes costs on imports like steel, cement, aluminium, and fertilizers based on their carbon emissions. On February 26, the European Commission proposed an Omnibus Simplification Package to streamline its implementation and reduce administrative procedures. The tax has been a source of friction between the EU and its trading partners.
On 04 March, the European Commission proposed the EU Industrial Accelerator Act (IAA), which aims to strengthen the bloc’s industrial capacity in line with the 2025 Clean Industrial Deal. It introduced four key measures: “Made in EU” procurement preferences; new foreign direct investment (FDI) conditions for strategic sectors; and member-state-designated fast-tracked “Industrial Acceleration Areas”. The Act targets energy-intensive industries, electric vehicles, and net-zero technologies.
5. Economic slowdown and growing concerns over the spillover effects of the Middle East crisis
According to the European Central Bank, the worsening situation in the Middle East in the first quarter of 2026 disrupted European commodity markets and adversely affected real incomes and confidence. This led to downward revisions to consumption and investment in the baseline staff projections, especially for 2026. The baseline projections foresee annual real GDP growth of 0.9 per cent in 2026 amid energy shocks from Middle East conflicts
The deteriorating situation in Iran in the first quarter of 2026 posed new challenges for the European economy, particularly for Germany, the region's largest economy and an energy-intensive economy. Blocked shipping routes and supply chain disruptions pushed up commodity and energy prices worldwide, with direct consequences for Germany's energy-intensive industry.
To conclude: Europe in Jan-Mar 2026
During the first quarter, Europe implemented several policy decisions to diversify its trade and defence. The push to increase defence spending to achieve strategic autonomy continued. Defence partnerships also expanded, culminating in a defence pact with India. Trade diversification saw unprecedented momentum, with pending trade deals with Latin America, India and Australia being finalised. Simultaneously, an inward-looking, protectionist approach intensified, as evidenced by stricter controls on irregular migration and industry regulations. Amidst these developments, concerns over an economic slowdown and the spillover effects of Middle East crises grew.
Overall, in response to heightened geopolitical tensions, uncertainties surrounding Trump policies, and concerns over regional crisis spillover, Europe took concrete steps to shift from reactive to proactive economic security.
