By Craig Mellow

With the U.S. and China battling for economic and geopolitical supremacy, it's fashionable to cast Europe as the global sick man.

The European Union's trade deficit with China has nearly doubled since before the pandemic, reflecting eroding competitiveness in advanced industrial goods. The Old World is all but shut out of the artificial-intelligence revolution. Not to mention President Donald Trump threatening to seize Greenland from NATO ally Denmark.

"The Chinese have caught up in manufacturing, and we've been overtaken in AI," says Carsten Brzeski, Frankfurt-based global head of macro at ING Research.

The EU took a small step toward battling back on Jan. 9, when enough member states backed a free-trade agreement with the Mercosur bloc of South America, including Brazil, Argentina, Bolivia, Paraguay, and Uruguay. Small is the operative word for the moment. The EU's two-way trade with Brazil, the Mercosur giant, was less than 5% of its combined volumes with the U.S. and China last year.

"This is as much a political message as an economic agreement," says Eoin Drea, senior researcher at the Wilfried Martens Centre for European Studies.

Protests by European farmers nearly sunk the Mercosur pact after 25 years of negotiation. A last-minute switch to "Yes" by Italian Prime Minister Giorgia Meloni pushed it over the statutory line of approval by states comprising at least 65% of the EU population.

But the EU, whose collective gross domestic product still rivals China's as the global No. 2, has it eyes on a bigger role: anchor for a rest-of-the-world seeking alternatives to two increasingly heavy-handed superpowers. German Chancellor Friedrich Merz, on a Jan. 12 visit to India, floated a Delhi-Brussels trade pact within a month. The EU and Japan last year upgraded their 2019 "economic partnership agreement" to a "competitive alliance" meant to "promote bilateral investment and simplify rules for business," according to an EU press release.

The EU-Mercosur pact could also boost a few stocks, though immediate market reaction was tepid. European auto makers Stellantis and Volkswagen have the four top-selling models in Brazil, which should become more affordable with tariffs plunging.

Winners on the South American side could include JBS, the Brazilian company that is the world's biggest meat packager, smaller rival Marfrig Global Foods, and paper giant Suzano Papel e Celulose. "Paper mills in Europe have been closing down," notes Michael Field, European equity strategist at Morningstar.

The EU pursues its trade counteroffensive with some economic wind at its back. The bloc has stuck the soft landing from postpandemic inflation that so far eludes the U.S. European Central Bank interest rates are at 2%, with inflation holding steady around that level.

Growth chugs along above 1% annually with Germany's long-awaited fiscal stimulus starting to materialize. Power prices have substantially recovered from their shock after Russia invaded Ukraine nearly four years ago. "We're in a Goldilocks period," Brzeski says.

Most of that good news is already in stock prices after the iShares Europe exchange-traded fund climbed 35% over the past year, Morningstar's Field thinks. "The easy gains are over," he says. ING looks for a 6% return on European stocks this year, Brzeski says.

Europe needs to use the benign macro backdrop, and a political breather before French presidential elections in 2027, to rebuild competitive muscle. "The next two years will really show if we are able to turn things around," Brzeski says.

EU-Mercosur is an encouraging step.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

January 15, 2026 12:00 ET (17:00 GMT)

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