If Donald Trump follows through on his promises and imposes tariffs on European goods imported into the US, then the continent will truly be plunged into a deep recession. Donald Trump’s victory could hurt Europe’s economy, as the proposed 10% US tariffs risk hitting European exports such as cars and chemicals, eroding Europe’s GDP by up to 1.5%, or around €260 billion.
Recession and plunge for the euro, which even ECB interest rate cuts will not stop. However, it is predicted that stock markets could fall by 15% to 20% from the imposition of tariffs.
What do the calculations show?
Donald Trump will take office on January 20, 2025, which could cause serious problems for Europe’s economy.
According to various economic analyses, there is broad agreement that Trump’s proposed 10% universal tariff on all US imports could significantly disrupt European growth, intensify divergences in monetary policy, and put pressure on key trade-dependent sectors such as cars and chemicals.
The long-term impact on Europe’s economic resilience could prove even more significant if the tariffs lead to protracted trade conflicts, prompting the European Central Bank (ECB) to respond with aggressive interest rate cuts to mitigate the impact.
Trade-dependent economies
Trump’s proposed general tariff on imports, including from Europe, could deeply affect sectors such as cars and chemicals, which are heavily dependent on US exports. European Commission figures show that the European Union exported €502.3 billion in goods to the US in 2023, accounting for a fifth of all extra-EU exports.
European exports to the US come from machinery and vehicles (€207.6 billion), chemicals (€137.4 billion) and other manufactured goods (€103.7 billion), which together account for almost 90% of the bloc’s transatlantic exports.
The tariffs would cause exports to the US to collapse, with trade-oriented economies such as Germany and the Netherlands likely to be hit hardest.
Trump’s tariffs would shave about 1.5 percentage points off European growth, translating into a potential economic loss of €260 billion based on Europe’s estimated 2024 GDP of €17.4 trillion.
If Europe’s growth falters under Trump’s tariffs, the European Central Bank (ECB) may be forced to respond aggressively, cutting interest rates to near zero by 2025.
In contrast, the US Federal Reserve may continue to raise interest rates, leading to one of the largest and most sustained monetary policy divergences between the ECB and the Fed since the euro’s inception in 1999.
Euro Weakness
The most likely outcome is a weaker euro, which could help offset some competitive disadvantages for European exporters but would also raise import costs.
Trust Economics says a 10% tariff hike could reduce GDP by about 0.5% in Germany, 0.3% in France, 0.4% in Italy and 0.2% in Spain. The eurozone could slide into recession as a result of higher tariffs.
European corporate profits and investment at risk
A broad tariff would likely erode eurozone GDP by about 1%. European economies are more exposed to trade and, crucially, more sensitive to trade policy uncertainty.
If Trump imposes higher tariffs and with European growth weaker, the ECB could respond with faster rate cuts in 2025. For individual European companies, the outlook is equally worrisome. A 1% loss in GDP translates into a 6-7 percentage point hit to earnings per share (EPS) for European companies, which would be enough to wipe out the expected EPS growth for 2025.
Also, given the lingering effects of trade policy uncertainty, European businesses may also respond by cutting back on capital spending, as they did during previous trade tensions.
Between 2018 and 2019, companies with high exposure to US tariffs reduced investment by up to 2 percentage points, a trend that is likely to be repeated with the tariffs proposed by Trump. The chemicals and automotive sectors are particularly exposed.
German carmakers, in particular, could face serious difficulties in the US market if tariffs reach the proposed 10% level.
With a blanket 10% US tariff on all imports, the cumulative impact on euro area GDP would be between 0.5% and 1%. With almost 25% of trading in the STOXX 600 coming from the US, Europe would also be vulnerable. Consumer and technology sectors would be among the most vulnerable in our view.
Trump would trigger an increase in European military spending
Trump’s foreign policy will force European economies to increase military spending. Trump has said he will stop US military aid to Ukraine, leaving it up to Europe to fill the gap.
With the US currently spending €40 billion a year (or around 0.25% of EU GDP) on supporting Ukraine, European governments will likely be forced to increase their own defence budgets.
What does a Trump victory mean for EU-China relations?
Achieving NATO’s 2% of GDP spending target, while offsetting reduced US support, could add 0.5% of GDP per year to the EU’s fiscal burden.
Higher defense spending would provide only a modest economic boost given Europe’s lower defense spending multipliers. In addition, it would put “upward pressure on long-term returns from higher deficits and negative confidence effects from increased geopolitical risk.
