Waiting for Trump: His election victory threat gives Europe economic nightmares

Central bankers losing sleep over Europe’s souring economies have another worry looming large: how much more damage Donald Trump could cause if he returns to the White House, Bloomberg writes.

With memories of the former US president’s first stint in office still fresh, policymakers know his appetite to wage new trade wars threatens unavoidable fallout on a region whose position is far weaker than last time round. Investors are alive to the dangers too and market strategists say a win for Trump could drive down the euro toward parity with the dollar.

The most tangible concern is the Republican candidate’s pledge to impose goods tariffs of 60% on China and as much as 20% on everyone else. Such measures, if implemented, would inflict the biggest trade shock since the Smoot-Hawley Act that deepened the Great Depression of the 1930s, dwarfing the impact of his actions when in office for four years starting in 2017.

Mindful of that, several central bankers around the continent are concerned that a Trump victory at the Nov. 5 election could complicate the job of taming inflation without crashing economies, according to people familiar with the matter, who sought anonymity to cite confidential discussions.

Even sanguine officials might reconsider as they find themselves in the eye of the storm in Washington this week for the International Monetary Fund’s meetings.

The contrast with the last time Trump took charge is alarming, with Europe now far more feeble. In 2017, wars weren’t raging in Ukraine and the Middle East. The euro zone enjoyed its strongest annual growth in a decade, and the UK its best year since 2014, before a global slowdown that the IMF partly attributed to trade tensions.

Now, even expansion in the UK — which outpaced Group of Seven peers in the first half of 2024 — is cooling enough for investors to bet on faster easing. Germany is set for its second annual contraction in a row, while French companies and households face about €60 billion ($65 billion) worth of spending cuts and tax increases.

Recent business surveys were dire enough that the European Central Bank advanced plans for an interest-rate cut to this month.

“Even the threat of new tariffs would hit our business climate,” said Holger Schmieding, Berenberg’s chief economist in London. “It would probably dampen investments and — because these are very public topics — delay the recovery of household consumption.”

“Donald Trump’s presidency led to a nadir in transatlantic economic relations. A second term could bring the relationship to new lows given Trump’s ideas on trade. The European Union will be more prepared this time, at least if Washington were to adopt measures affecting most member states,” — said Antonio Barroso, senior geoeconomics analyst for Europe.

Such analysts largely agree that while a new trade war under Trump could stoke price pressures in the US, the bigger risk for the euro area is the potential hit to economic expansion.

ABN Amro economists reckon a universal 10% tariff would shrink the euro zone’s €460 billion in annual exports to the US by nearly a third, cutting output by 1.5 percentage points over three years — an impact on par to the recent energy crisis.

Central bankers have fretted about Trump all year. As early as January, ECB President Christine Lagarde was openly troubled, and officials invited Jan Hatzius, chief economist at Goldman Sachs Group Inc., to present analysis on tariffs at their retreat in Sintra, Portugal in July.

“Any restriction, any uncertainty, any obstacles to trade, matters for an economy like the European economy,” she told reporters when questioned by Bloomberg. “Any hardening of the barriers, the tariffs, the additional obstacles on that possibility to trade with the rest of the world, is obviously a downside.”

Bank of England Governor Andrew Bailey has been more guarded, saying in August that “we will obviously be interested in the outcome” and “we’ll see who wins and what their policies are.”

Such public caution is more typical of central bankers. Thedeen also added caveats, even if his comments indicated that he’s watching the result closely after a trip to the US.

“My conclusion after speaking to various analysts is that you have to be very careful about assuming that what Trump says now will become actual policy,” he said. “You have to see what the actual economic policy will be after the election.”

As he suggests, Trump’s threats may prove empty, and the Riksbank chief observed that a Kamala Harris win wouldn’t mean a benign trade environment either. She and her team have privately made clear an intention to continue the policies of Joe Biden, who kept up duties on billions of dollars in Chinese goods and even expanded them earlier this year, Bloomberg reported last week.

The political backdrop is at least as bad as in 2017, providing a further distraction. Back then, France, Germany and the Netherlands faced contentious elections, the region was reeling from Britain’s Brexit vote, and Italy was steadying itself after a government crisis.

This time, France is ruled by a shaky minority alliance, and Germany’s fractious and deeply unpopular coalition is limping toward elections next year.

Moreover, as compared with 2017, Europe’s spending in areas such as defense is noticeably higher, while big countries such as Britain and France have much more debt after the pandemic and the energy crisis. They are poorly positioned to deliver fiscal aid if a shock hits.

Trump and the Chief of European Commission Ursula von der Leyen – a difficult dialogue.
Photo: European Union

‘Fool me twice, shame on me’ — that’s the motto EU countries are going by as they prepare for a high-stakes, massive trade war with Donald Trump if he wins a second term as U.S. president next month.

European leaders learned their lesson during Trump’s first presidency and are more united and determined than ever to face him down, senior diplomats and officials from Brussels and EU capitals said in conversations with POLITICO.

“We will hit back fast and we will hit back hard,” one senior European diplomat said about the EU’s contingency plan for a Trump trade war.

A second senior diplomat from another European country confirmed that EU countries were coordinating their strategy, with the European Commission in the lead. “Brussels has a list that is ready, and they are pretty confident that they can win this trade war,” said the second diplomat.

The European Union has set up a rapid reaction force to prepare for the fallout from the U.S. elections on Nov. 5. Set up at the core of Ursula von der Leyen’s EU executive, in the Secretariat-General, the group is officially preparing for both a Democratic and a Republican victory. But EU officials refer to it colloquially as the “Trump task force.”

Brussels was caught off guard in 2018, when Trump first imposed tariffs on EU steel and aluminum, and retaliated only on part of those tariffs, hoping to de-escalate the fight.

Trump has made no secret of his plan to impose across-the-board tariffs of 10 percent or 20 percent on friends and foes alike if he wins the election. In his rally speeches, he reserves a special spite for Europe, and, in particular, for Germany’s car industry.

He has promised not just to bring down America’s trade deficit by imposing massive tariffs on European products — but also to destroy European industry in the process and force businesses to move factories to the U.S.

Just days ago, Trump also complained about EU competition investigations into American tech giants, saying he had spoken with Apple CEO Tim Cook about an EU court ruling that forced Apple to pay €13 billion in unpaid taxes to Ireland. Trump vowed to tackle those decisions if he is elected.

Companies on both sides of the Atlantic are bracing for what they believe could be a destructive process to get to such a negotiated solution.

“Brussels is making contingency plans in the event new tariffs are applied. That’s not surprising,” said Marjorie Chorlins of the U.S. Chamber of Commerce.

“The question is: If that were to happen, is there room for a negotiated resolution that’s mutually acceptable? No way to know that as of today, though it’s clearly in neither side’s interest to go down that road.”

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