Europe has many woes: a long economic funk, now worsened by Trump’s tariff war, compounded by a rising anti-incumbent populism that makes economic reform difficult. To that list can be added a strengthening euro.

Since the start of the year, the euro value vis-à-vis the dollar has risen by nearly 10%. Making matters worse for the European economy is that its currency is strengthening not just against the dollar, but against most currencies: up 3% against the pound, 6% against the Canadian and Australian dollars, and 9% against the Chinese yuan.

Given how trade-dependent the European economy is, with over half the revenues of companies in the Stoxx600 index coming from overseas sales, anything which makes its exports more expensive is going to depress profits and growth. Worse, because imports are getting cheaper, it will mean that other countries knocked backwards by Trump’s tariffs — and which are seeking new markets for their exports — will gain a further advantage over their European rivals. The continent’s fear of being swamped by cheap Chinese imports rises with each tick upwards in the euro’s strength.

It’s an unexpected problem. Normally, a tariff-hit economy should see its currency weaken, given the reduced demand from its export partner for its goods. But currency markets have not been acting normally of late. Instead of strengthening — as the dollar was expected to do, since US tariffs should depress American demand for the currencies of trading partners from which the country will now buy less — it has been weakening. Against a weighted basket of currencies, the greenback has lost nearly a tenth of its value since the start of the year.

This reflects rising doubts among global investors about the security of dollar assets, and the dollar as a safe haven. Given the mercurial behaviour of the American President, Europe has come to be seen as a more reliable and stable location for foreign investors looking for a safe haven to park their money.

Were Europe to create a single market for government paper through, for instance, common bond issuance, one could foresee the euro posing a serious challenge to the dollar reserve-currency status. That’s highly unlikely to happen, though, given how jealously European governments protect their own financial markets. Nevertheless, demand for euros looks set to remain strong unless a steady and predictable policy regime emerges from the US administration. Further adding to the demand for European assets is the recently announced massive expansion in German stimulus and defence spending, which has driven up demand for German government bonds.

Still, if a strengthening euro makes life more difficult for the continent’s exporters, there are a couple of silver linings to this cloud. To the extent the euro’s rise reflects the confidence of foreign investors in the continent, it may augur well for future investment, strengthening the supply of capital Europe will need for its revival.

It will also make it less expensive for European firms to invest abroad. For example, given that one way the German car industry may revitalise itself is through strengthening partnerships with Chinese firms, which are well ahead in EV technology, European firms seeking to move abroad will benefit from the reduced cost of investing there.

Finally, there’s some consolation in the fact that if things are bad in Europe, they’re worse elsewhere — namely America, where economists increasingly expect the relatively fast-moving economy to slow so quickly it will sink into recession. Though Europe too is headed that way, at least its stimulus programme will soften the blow. Post-DOGE America may not be so lucky.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

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China is trying to catch up with America on artificial intelligence. The Wall Street Journal has reported that Zhipu AI — one of China’s six “AI tiger” LLMs — has released a new model that can rival leading US systems, including Anthropic’s Mythos, in cybersecurity tasks such as pinpointing security bugs. While this marks a milestone in China’s drive to catch up with Western AI capabilities, strong performance on a single benchmark does not mean it has taken the lead. Chinese models still lag behind their Western counterparts in broader capabilities, such as autonomous operation. Skepticism is therefore warranted before resorting to hysterical conclusions, but complacency about the geopolitical implications of China’s AI advances would be an even greater mistake.

On the infrastructure side, Chinese AI is still constrained by access to advanced chips, with American labs way ahead in computing capacity as well as investment. Analysis from earlier this year suggests that Chinese models are likely to be at least a few months behind those in the US. But they are still continuing to make progress, or that the geopolitical importance of AI will be decided only by whose LLM has ventured deeper into the technological frontier. The practical applications of AI, countries’ to capture foreign markets, and the application of AI into the real economy will matter just as much.

Here, China may hold an advantage. As with its dominance across many critical supply chains, Beijing may not need to produce the most advanced AI systems — only those that are affordable and widely deployable. In doing so, it could consolidate global influence by supplying functional, low-cost AI at scale.

Beijing seems to be pursuing exactly that path, developing an AI “open-source” strategy that offers affordable, widely available AI models for companies and individuals to use and modify as they wish. The production of the DeepSeek AI model, which matched the performance of Silicon Valley tools such as ChatGPT at a fraction of the cost for users, created goodwill among Chinese models with developers.

The four most popular models on OpenRouter, an AI hardware platform for developers, are now all Chinese. The goal for China is not only to win the frontier-model race, but to make its systems the default layer of AI adoption across industries and global markets. For most economies, the choice is increasingly between an affordable tool they can deploy now and a more robust one that may be out of reach.

And while the countries adopting Chinese models may be exposed to political pressure and cyber threats from Beijing, safer and more capable alternatives matter little if they are unaffordable. American AI companies are already under pressure to monetize products whose operating costs are rising. If Chinese open-source models become the cheap default for startups, universities, governments and businesses across the developing world, then America’s AI lead will be eroded from below.

Perhaps more concerning for America in the long run is how AI can give Chinese manufacturing even more strength, through the ongoing integration of AI as a general-purpose technology. China’s new Five-Year Plan mentioned AI more than 50 times and includes an “AI+” action plan aimed at spreading AI across the economy.

Beijing has been pioneering automation of its critical infrastructure for years, with promising recent results in increasing warplane production capacity. In that regard, China’s open-model strategy and manufacturing dominance will reinforce each other. Cheap, adaptable models accelerate deployment across the real economy while those deployments generate real-world data and use cases that can feed back into further model improvement.

The United States should not dismiss the importance of its lead in the AI race. That lead worries Beijing, not least because a more automated Chinese economy would also become more vulnerable to AI-generated cyber threats. But nor should Washington assume that China cannot catch up with American capabilities over time.

This AI competition represents part of a broader struggle over tech supply chains and geopolitical influence. Decisions over whether to adopt US or Chinese models could produce a more fragmented global reality, with different regions relying on different cloud providers, chips and security structures. The result will likely be a global economy which is divided into competing spheres, rather than one which produces a single winner.

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Miquel Vila is a political and geopolitical risk consultant focusing on industrial strategy, critical infrastructure and global supply chains.

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