- The risks to Europe from another protectionist Trump presidency look higher than in 2016 given the starting point of weak euro area growth, secular challenges for manufacturing and a decidedly more unstable geopolitical backdrop.
- The open, trade-intensive European economy would be vulnerable to a further increase in global protectionism. The static impact of the mooted 10% across-the-board US tariffs would be relatively small, but uncertainty around future shifts would weigh heavily on sentiment and risk second-round effects. Another Trump term could be the trigger for more lay-offs in the beleaguered German manufacturing sector where firms have so far resisted pushing ahead with redundancies despite persistently weak demand.
- On defence and security, Trump has pledged to negotiate a swift end to the Ukraine war. That would be positive for the European economy provided that any settlement seemed credible and durable – which is far from guaranteed. Otherwise it would be hard for Europe to fill the gap left by any decrease in US military aid due to supply issues and tight fiscal constraints.
- All told, a plausible worst-case scenario for Europe would be high tariffs between the US, China and EU, a weakened US commitment to NATO and a failed Ukraine-Russia deal which emboldens Putin to act more aggressively. Such a scenario would likely entail a substantial and enduring GDP shock.
- Taking a wider (and more positive) view, there is a clear sense now that Europe is at a crossroads at a time when the global landscape is shifting rapidly. Trump 2.0 might just be the driver for European policymakers to take more decisive action on issues such as defence, energy independence, digitalisation, deregulation and more active industrial policy. Even a “soft” Trump scenario for Europe (e.g. no tariffs, continued military support for Ukraine, calmer rhetoric on NATO) might provide some catalyst for change given heightened uncertainty.
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