Ready to “protect” against the possible effects of the policy Trump in the European economy the European Central Bank. Since, unlike 2016, his victory was something that had been priced in, so it was not a surprise or a shock, the calculations have been done and the ECB will not hesitate to step forward to support him the economy through more interest rate cuts. , effectively bringing the final deposit rate to 1.75% or even 1.50% by the third quarter of 2025, as Market circles point to “K”.
The US election result prompted ECB officials to warn of significant negative consequences for Europe and the global economy from Donald Trump’s tariff proposals and rising protectionism. In the run-up to the election, he declared that Europe would “pay the price” for not buying enough American goods, promising to impose 10% to 20% tariffs on imports from all countries, including Europe, and 60% from. China. THE Vice President of the ECB Luis de Guidos spoke of “potentially damaging shocks to growth and inflation” around the world. For his part, Mr the governor of the Bank of France, Francois Villeroy de Gallowarned that Trump’s election will increase risks and uncertainty for the global economy, and that his policies will increase deficits and raise long-term borrowing costs.
As indicated by Governor of the Bank of Greece, Yiannis Stournarasif Donald Trump implements his promises regarding tariffs and trade barriers, it will have a negative impact on the European economy and will also affect the exchange rate, so this has some implications for monetary policy, he added that the ECB is waiting to see what steps the US will take and until then it will continue with its current policy. This essentially means that the ECB’s interest rate decisions will remain data dependent for the time being. As the growth news improved, with a 0.4% increase from the second quarter recorded in the third quarter, and inflation figures are in line with the ECB’s forecasts, which indicated that an increase could be registered in the short term – as which he did i. October, with inflation strengthening to 2%, from 1.7% in September - the “line” for the December meeting remains unchanged. So, while the case for an aggressive cut of around 50 basis points is still on the table, if there is any significant deterioration in the data within the next month, the ECB will most likely go ahead with another one on the December 12. , the fourth since June, a decrease of about 25 bps, with the deposit rate set at 3% at the end of 2024.
The final deposit rate may drop to 1.75% or even 1.50%.
According to “K” sources.the ECB’s strategy so far has been gradual cuts in interest rates of 25 bps. until the summer of 2025, until the interest rate is set at 2%, ie the level that is estimated to be “neutral”, ie the level that neither strengthens nor limits the growth rate.
It will all depend on Trump’s announcements once he takes office in January, as he has proven to be quite unpredictable and volatile, so his final decisions remain to be seen. The assessment is that the ECB’s position is not expected to change until spring 2025, although early elections in Germany during that period add another factor of volatility. The March 2025 meeting will therefore be crucial for the course of monetary policy, when the Board will be on board with Trump’s decisions. the central bank is also available on the new forecasts of experts for the path of growth and inflation.
According to Goldman Sachs, if Trump imposes 10% tariffs on Europe, the economic output of the Eurozone could be hit by 0.5% in terms of real GDP, with Germany facing a contraction of 0.6% and Italy 0. 3 %
In the event that Trump implements his tariff promises, the ECB will continue to cut interest rates after June 2025 (when the rate is expected to be 2%), with one or two additional 25bp cuts. each until September 2025, bringing the final rate to 1.75% or 1.50%.
They do not “see” retreat, Germany more vulnerable
As for the impact that Trump’s tariffs will have on Eurozone growth, although they will certainly have a negative impact, they are not expected to push the economy into recession, which is why the ECB, initially, does not see its least, the need to. aggressive cuts in interest rates. The ECB’s current forecast is for growth to average 1.5% in 2025-2026, and the implementation of Trump’s pledges is expected to reduce the pace to just below 1%. The reasoning is that the tariffs will be quite negative for the manufacturing sector, so manufacturing economies such as Germany will be hit harder, but overall the Eurozone has now turned into a service economy, where tariffs will not have a significant impact . In terms of inflation, Trump’s policies are considered to be overall deflationary for the Eurozone for two main reasons. Firstly, slower economic growth will lead to low inflation, and tariffs in China will put pressure on China to increase its share of Europe, so this means downward pressure on consumer prices. Of course there are risks to inflation if Europe decides to go against the US tariffs and if the dollar strengthens strongly, but the “net” result of the positive and negative effects is considered to be a drop in inflation.
An opportunity for Europe to be more competitive
The outcome of the US election removed much uncertainty, but brought with it many new ones, as well as risks for the global economy and of course for Europe. Economists warn that with Donald Trump’s second term, marked by a return to protectionist policies such as new tariffs on European exports, as well as a push to increase defense spending, economic growth in the already subdued Eurozone could take a nosedive. himself.
Trump’s second term has resulted in the European economy being much less … convenient than the first term. In 2016-2017 Europe was relatively strong with growth rates of 2%-2.8%. In fact, the Eurozone in 2017 recorded the fastest growth rate since 2007, at 2.5%. This time he is suffering from anemic growth and struggling with the lost competitiveness. “A looming new trade war with 10% to 20% tariffs on European goods could push the Eurozone economy out of slow growth and even into recession,” notes Carsten Brzeski, Chief Economist at ING. In addition, the uncertainty about Trump’s position on the Ukraine and the NATO could undermine recent stabilization indicators of economic confidence across the Eurozone. Deregulation of both the technology and financial sectors in the US will “regulate” the already uneven playing field. “Trump’s economic policies could further enable European competitiveness”, as Brzeski emphasizes.
The external environment facing the Eurozone is extremely difficult. The US is the EU’s main export market. accounting for about 16% of exports. According to Commission data, exports of goods to the US in 2023 amounted to 502.3 billion euros, with machinery and vehicles accounting for nearly 207.6 billion of the total. Car exports alone amounted to around €40 billion, with the lion’s share coming from Germany.
The effects
According to her Goldman Sachsif Trump imposes 10% tariffs on Europe, the Eurozone’s economic output could take a 0.5% hit in real GDP terms, with Germany facing a 0.6% contraction and Italy 0.3%. Their predictions are similar UniCreditalthough the ABN Amra the total hit to growth is estimated to be around 1.5% of GDP.
Higher tariffs are likely to reduce Eurozone exports, not only to the US but also, indirectly, to other trading partners adversely affected by Trump’s policies. The 60% tariffs on imports from China could create some trade-distorting effects, but as UniCredit notes, any positive effect on European exports from this will be more than offset by the effects of a weaker Chinese currency and GDP growth slower in China. China accounts for around 10% of EU exports.
The decline in global trade will put pressure on consumer and business sentiment, particularly in the manufacturing sector, while at the same time putting pressure on the profit margins of European companies.
The supply chain can also be disrupted. With exports to the US accounting for nearly 4% of GDP, Germany would be the worst-hit mainland in the Eurozone. According to the German institute ifo, the economic damage in Germany from the total impact of the imposition of tariffs of 20% on all trading partners and 60% on imports from China is estimated at 33 billion euros.
European exports to the US in 2023 amounted to €502.3 billion, while machinery and vehicles accounted for almost €207.6 billion.
At the same time, weak external demand and increased uncertainty at a time when profit margins are shrinking will hurt investment and cloud job prospects.
Defense spending
In addition to the economic impact of higher tariffs, Trump’s outcome could put renewed pressure on defense spending in Europe. Should the EU need to compensate for reduced US military support for Ukraine and meet NATO’s defense spending target of 2% of GDP, it could face a significant financial burden. Goldman Sachs estimates that these costs could cost the EU an additional 0.5% of GDP each year.
The “crisis” caused by Trump in Europe, however, could be a unique opportunity for the region to “unite” more and be stronger.
During Trump’s first term, Mr Emmanuel Macron and the Angela Merkel they were a powerful political axis. France has a fragile government today and the German government has just collapsed. There is no strong “bulwark” and this casts doubt on Europe’s ability to find adequate responses to Trump.
The problem, however, is not getting those answers. They already exist i Draghi’s reportthrough which the former head of the ECB emphasized the need for reform, deregulation, cross-border activities and large-scale investment to improve Europe’s growth, productivity and competitiveness.
Mario Draghi even urged EU leaders on Friday to speed up structural reforms, warning that further delays would worsen Europe’s economic stagnation. “The recommendations from the competitiveness report are already urgent because of the current economic situation. They have become even more urgent after the recent elections in the United States,” he said at the European Council meeting. “Trump’s presidency will make a big difference in the relationship between the USA and Europe, but not everything is in a negative direction. Europe must recognize this new reality and act accordingly,” he said.
“It’s certainly easier said than done, but the … ‘if not now, then when?’ it is again the big question for Europe,” emphasizes ING’s Brzeski.
Sis” surrounding defense spending will force European nations to reassess their budgets, potentially leading to increased taxes or reallocation of funds from social programs, which may further strain domestic economies. As European countries strive to meet NATO commitments while grappling with the implications of Trump’s protectionist trade policies, maintaining economic stability will be a significant challenge.
the interconnectedness of trade relations, defense spending, and monetary policy decisions will continue to shape the economic landscape of the Eurozone. The ECB’s gradual approach to rate cuts reflects a cautious optimism, albeit amidst considerable volatility driven by external factors such as U.S. economic policies. As Europe navigates these challenging waters, flexibility in both fiscal and monetary policy will be essential to adapt to rapidly changing circumstances.
Economists and policymakers alike will need to monitor the situation closely, particularly in light of potential new tariffs and shifts in global market dynamics. The focus should be on strengthening the Eurozone’s resilience against external shocks while fostering an environment conducive to sustainable growth and competitiveness in an increasingly protectionist world.