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The Threat of Trump’s Re-election on Eurozone Economy
Explore the potential impact of Donald Trump’s re-election on the Eurozone economy, including implications for trade, financial markets, and global economic stability. Stay informed on the latest developments and 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 €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defense expenditures.
Rising Trade Uncertainty and Economic Impact from Tariffs
Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.
Germany to bear the brunt, followed by Italy
- Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.
- Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.
Defence, Security Pressures, and Financial Condition Shifts
A Trump victory would also be likely to bring renewed defense and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defense spending commitments.
Additional economic shocks from Trump’s potential re-election include:
- Heightened US foreign demand due to tax cuts
- Risk of tighter financial conditions driven by a stronger dollar
Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.
Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.
In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defense burdens on the continent.