How will Trump’s election as US president affect Europe’s economy?

How will Trump’s election as US president affect Europe’s economy?

As markets have increasingly bet on a Donald Trump victory in the presidential election in recent weeks, economists at Goldman Sachs say another term for the former US president might have “profound implications” for the eurozone economy.

“Our base case estimates are for a negative impact on euro area GDP of around 1%, with a modest 0.1% increase in inflation, meaning that Trump’s re-election would pose a significant risk to our positive euro area growth outlook,” Goldman Sachs’ Gary Stein and James Moberly said in a note published on Friday, before Saturday’s failed assassination attempt on Trump. They said Trump’s expected policies, trade policy uncertainty, additional defense and security pressures, and spillovers from U.S. domestic policies, such as tax increases, might affect Europe.

Trump was shot in the ear on Saturday in a failed assassination attempt at a rally in Pennsylvania. The shooting left one person dead and the gunman in critical but stable condition, and two others remain in critical but stable condition. Some analysts have suggested the incident might boost Trump’s chances of retaking the White House in the U.S. election later this year, and some assets were already higher on Monday as markets priced in the possibility.

Before Saturday, Trump’s odds of winning a second term had risen following President Joe Biden’s poor performance in a presidential debate a few weeks ago. Goldman Sachs said in a note on Friday that markets were betting on a roughly 60% chance of Trump winning the November election, with some reports over the weekend that that number had risen once more.

Trump and Trade Tensions

Trump’s trade policy, and the uncertainty surrounding it, might be one of the factors weighing on the European economy, just as it did during his last term, analysts Stein and Moberly said. Trade tensions between the US administration and the EU escalated during Trump’s last term, with the US imposing tariffs on European steel and aluminium, prompting the EU to retaliate with retaliatory tariffs on US goods. There have been concerns for months regarding whether other sectors such as autos would see higher tariffs, which clearly rattled markets at the time.

“Trump has pledged to impose a 10% tariff across the board on all US imports, including those from Europe, which is likely to lead to a sharp increase in trade policy uncertainty, as happened in 2018-19,” the research note said. Uncertainty has previously had a large and persistent impact on economic activity in the euro area, the economists said. In 2018 and 2019, trade policy uncertainty reduced industrial production in the euro area by regarding 2%.

Some countries, such as Germany, are likely to be hit harder than others because they rely more on industrial production, according to the investment bank’s economists, who also said trade tensions might hurt eurozone GDP. While uncertainty over trade policy might push prices down, higher tariffs might push them up once more, the economists said.

Defense and security pressures

Trump is also expected to reduce or cut U.S. aid to Ukraine, and has indicated that he will not help NATO members that do not meet the 2% defense spending requirement. Goldman Sachs believes that meeting the 2% requirement and the potential reduction of U.S. financial support for Ukraine might have a negative impact on Europe’s economy.

“European countries might therefore be asked to fund an additional 0.5% of GDP in defense spending annually during Trump’s second term,” the research note said, adding that additional military spending growth is expected to be modest. Stein and Moberly explained that uncertainty and geopolitical risks might arise from Trump’s hostile policy toward Europe and his stance on NATO, especially if he raises questions regarding the extent of the United States’ commitment to the military alliance.

Implications of US domestic policy on Europe

The third way Trump’s policies might affect the eurozone economy is through domestic U.S. plans, such as tax cuts and deregulation. The Goldman Sachs economists said the macro policy shifts during Trump’s first term had significant implications for Europe through strong U.S. demand and tighter U.S. financial conditions.

The expected tax cuts in the US might boost economic activity in Europe, but if combined with other expected market shifts, the overall impact is likely to be limited, according to Stein and Moberly. “However, the net fiscal spillover is likely to be muted, as we expect the impact of higher long-term interest rates to be offset by a significantly weaker euro,” they said, in line with the post-election moves in November 2016.

With markets increasingly betting on a Donald Trump victory in the US presidential election, economists at Goldman Sachs suggest that another term for the former president might have “profound implications” for the eurozone economy.

“Our base case estimates are for a negative impact on euro area GDP of around 1%, with a modest 0.1% increase in inflation, meaning that Trump’s re-election would pose a significant risk to our positive euro area growth outlook,” Goldman Sachs’ Gary Stein and James Moberly said in a note published on Friday, before Saturday’s failed assassination attempt on Trump. They suggested that Trump’s expected policies, trade policy uncertainty, additional defense and security pressures, and spillovers from US domestic policies might affect Europe.

Trump and Trade Tensions

One of the key factors weighing on the European economy, much like during Trump’s previous term, might be his trade policy and the uncertainty surrounding it. Trade tensions between the US administration and the EU escalated during Trump’s first term, leading to tariffs on European steel and aluminium by the US, and retaliatory tariffs on US goods by the EU. Concerns have been raised for months regarding potential higher tariffs on other sectors like autos, which previously rattled markets.

“Trump has pledged to impose a 10% tariff across the board on all US imports, including those from Europe, which is likely to lead to a sharp increase in trade policy uncertainty, as happened in 2018-19,” the research note stated. The economists point out that uncertainty has consistently had a significant impact on economic activity in the euro area, causing a decline in industrial production in the euro area by regarding 2% due to trade policy uncertainty in 2018 and 2019.

According to the investment bank’s economists, countries like Germany, heavily reliant on industrial production, are likely to be affected more severely than others. They suggest that trade tensions might negatively impact eurozone GDP. While trade policy uncertainty might lead to price drops, higher tariffs might push prices back up.

Defense and Security Pressures

Trump is expected to reduce or cut US aid to Ukraine, and his approach to NATO suggests that he will not support members that do not meet the 2% defense spending requirement. Goldman Sachs believes that meeting this requirement and the potential reduction of US financial support for Ukraine might negatively affect Europe’s economy.

“European countries might therefore be asked to fund an additional 0.5% of GDP in defense spending annually during Trump’s second term,” the research note stated, adding that additional military spending growth is expected to be modest. Stein and Moberly explain that uncertainty and geopolitical risks might emerge from Trump’s hostile policy toward Europe and his stance on NATO, especially if he raises questions regarding the United States’ commitment to the military alliance.

Implications of US Domestic Policy on Europe

The third potential impact of Trump’s policies on the eurozone economy stems from US domestic plans, such as tax cuts and deregulation. The Goldman Sachs economists point out that the macro policy shifts during Trump’s first term had significant implications for Europe through strong US demand and tighter US financial conditions.

Expected tax cuts in the US might lead to heightened economic activity in Europe. However, the overall impact might be limited, particularly when combined with other anticipated market shifts, according to Stein and Moberly. “However, the net fiscal spillover is likely to be muted, as we expect the impact of higher long-term interest rates to be offset by a significantly weaker euro,” they said, echoing the post-election moves in November 2016.

Key Takeaways

• A potential Trump victory in the 2020 US presidential election might pose significant risks to the eurozone economy.
• Trade policy uncertainty and potential tariff rises might negatively impact European businesses, particularly those in industrial production.
• Increased defense spending requirements and potential cuts to US aid for Ukraine might put strain on European economies.
• While US domestic policies like tax cuts might have a positive effect, the overall impact remains uncertain.

It is crucial to note that these are just some of the potential impacts of a Trump presidency on the European economy. The actual effects might vary significantly based on specific policy decisions and broader global economic conditions. As the 2020 US presidential election approaches, monitoring these potential economic consequences is vital for both European businesses and policymakers.