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We have a service hosted in four regions, two in North America and two in Europe. We are using Azure Traffic Manager to provide:

  1. Performance-based routing - that is routing consumers to the service that has the lowest latency.
  2. Fail-over - if one region is down, traffic is routed elsewhere.

Traffic Manager Architecture  (Regions in Europe and North America)

As it turns out if a service goes down, then Traffic Manager will spread the load across all other endpoints to reduce the chance of a cascading failure.

For us, however, we would rather run each region with enough capacity to be able to handle the traffic of two regions than force our users to make transatlantic requests.

Is it possible to configure Traffic Manager to always route to the next-nearest region in the event an endpoint is down?

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Disclaimer: I have not setup a working example of this

I believe you are looking for Nested Traffic Managers

If you setup a main traffic manager that uses performance to select between North America and Europe child traffic managers. As long as one of the services in East or West North America is functioning the child traffic manager will report its status as available and the main traffic manager will continue to send traffic to the child based on performance

Docs: https://docs.microsoft.com/en-us/azure/traffic-manager/traffic-manager-nested-profiles

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