The probability of a second Donald Trump presidency is growing, with prediction markets now assigning a 60% likelihood of his victory in November.
Given the numerous financial and geopolitical shifts witnessed throughout Trump’s first time period, a possible Trump 2.0 presidency may have profound implications for Europe, in accordance with analysts at Goldman Sachs.
One of the vital quick impacts of a Trump re-election could be the reintroduction of aggressive commerce insurance policies. Trump has pledged to impose a ten% tariff on all U.S. imports, together with these from Europe. This might possible result in heightened commerce coverage uncertainty, much like what was skilled in the course of the 2018-2019 commerce battle with China.
“We estimate a statistical model using monthly data since 1987 to show that higher trade policy uncertainty tends to have large and persistently negative effects on Euro area activity, while the repercussions of actual tariff increases are more muted and more difficult to identify,” the observe states.
Particularly, the earlier commerce battle lowered Euro space industrial manufacturing by round 2%, contributing to a 1% GDP decline. If Trump imposes these new tariffs, the EU is anticipated to retaliate, escalating the commerce tensions. Analysts additionally observe that European economies, particularly Germany, could be significantly weak as a result of their excessive reliance on commerce and industrial exercise. The elevated tariffs may enhance inflation barely, however the major impact could be a slowdown in financial progress.
One other vital space of impression could be protection and safety.
Trump has persistently pushed for NATO members to extend their protection spending to 2% of GDP. European nations at the moment spend about 1.75% of GDP on protection, so assembly Trump’s calls for would require a further 0.25% of GDP yearly.
Moreover, Trump’s stance on lowering U.S. navy assist to Ukraine may power European nations to extend their spending by one other 0.25% of GDP.
Whereas it may present a modest enhance to progress, the excessive import share of European navy spending signifies that a lot of this enhance would profit the U.S. economic system as a substitute. Furthermore, elevated deficits may put upward strain on long-term rates of interest in Europe, doubtlessly offsetting any progress advantages.
Trump’s home insurance policies, significantly tax cuts and deregulation, may even have spillover results on Europe. Elevated U.S. demand ensuing from these insurance policies would possibly barely carry Euro space exercise. Nevertheless, the monetary market shifts seen after Trump’s 2016 election—larger long-term yields, rising fairness costs, and a stronger greenback—are anticipated to be much less impactful this time.
“The net financial spillover, however, would likely be muted as we would expect the effect of higher long-term rates to be offset by a notably weaker Euro, consistent with the post-election moves in November 2016.”
“Taken together, our estimates suggest that Trump’s policy agenda would lower Euro area GDP by around 1% and boost inflation by 0.1pp,” they added.
“Given a bigger (and extra persistent) impact on exercise than on inflation, we’d count on Trump’s re-election to strengthen the case for continued ECB fee cuts in 2025, with easy Taylor guidelines pointing to further cuts value 30-40bp.”
