Donald Trump's victory could take away 1% of the eurozone's GDP, with Germany, Italy and Finland the hardest hit. The renewal of NATO demands and the potential end of US aid to Ukraine could lead to further tensions in Europe, says a Euronews analysis.
The potential re-election of Donald Trump as US president poses a significant threat to the eurozone economy, with economists warning of a possible €150bn hit, equivalent to around 1% of the region's GDP. This impact stems from the expected negative effects on trade and increased defence spending.
The recent attack in Butler, Pennsylvania, where former President Trump suffered an ear injury, boosted his re-election chances. Prediction markets now peg Trump's chances of victory at 71%, a significant increase from previous figures, while his opponent Joe Biden has seen a sharp decline, falling to 18% from a peak of 45% just two months ago.
Growing trade uncertainty and economic impact of tariffs
Economists James Moberly and Sven Jari Sten of Goldman Sachs have warned of growing uncertainty in global trade policies, drawing parallels with the volatility seen in 2018 and 2019. They argue that Trump's aggressive trade stance could reignite that uncertainty.
"Trump has promised to impose an across-the-board 10% tariff on all US imports, including from Europe," Goldman Sachs noted in a recent analysis.
Economists forecast that a sharp increase in trade policy uncertainty, which previously reduced eurozone industrial output by 2% in 2018-19, could now cause eurozone gross domestic product to fall by 1%.
Germany will bear the brunt, followed by Italy
Germany, Europe's industrial powerhouse, is expected to bear the brunt of this impact.
"We estimate that the negative effects of trade policy uncertainty are greater in Germany than in other parts of the euro area, reflecting its greater openness and reliance on industrial activity," Goldman Sachs explained.
The report points out that Germany's industrial sector is more vulnerable to trade disruptions than other major eurozone economies such as France.
After Germany, Italy and Finland are predicted to be the second and third most affected countries, respectively, due to the relatively greater weight of manufacturing activity in their economies.
According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion) and Ireland (€51.6 billion) are the three largest exporters from the European Union for the US in 2023.
Germany also maintains the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).
Defence, security pressures and changes in financial status
Trump's victory is also likely to lead to renewed pressure on Europe in the area of defence and security. Trump has consistently demanded that NATO members meet their defence spending commitments of 2 per cent of GDP. EU members currently spend around 1.75% of GDP on defence, which would require an increase of 0.25% to meet the target.
Trump has also indicated that he may end US military aid to Ukraine, which would force European countries to intervene. The US currently allocates around €40 billion per year (or 0.25% of EU GDP) to support Ukraine. Therefore, meeting NATO's requirement of 2% of GDP for defence spending and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.
Additional economic shocks from Trump's potential re-election include stronger foreign demand in the US due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.
However, Goldman Sachs believes the benefits of looser US fiscal policy will be modest for the European economy, boosting economic activity by just 0.1%.
"Trump's victory in the November election is likely to be accompanied by significant changes in financial markets," wrote Goldman Sachs.
After the 2016 election, long-term yields soared, stock prices rose, and the dollar appreciated significantly. Despite these moves, the Eurozone Financial Conditions Index (CIF) only tightened slightly as a weaker euro offset higher interest rates and wider spreads on government securities.
In conclusion, Trump's potential re-election could have far-reaching economic consequences for Europe, deepening trade uncertainty and imposing new financial and defense burdens on the continent. I BGNES
