3 Analysis of Why Trump’s Victory is a Nightmare for Europe?

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As the U.S. presidential election comes to a close, it is all but confirmed that a wave of Republican dominance led by Trump is imminent, driving global capital to flow heavily into the U.S. capital markets to celebrate the election’s outcome.

However, Trump’s victory appears to be a nightmare for Europe. Several ECB officials publicly stated before and after the U.S. presidential election that Trump’s win could deliver further blows to both global and European economies.

So, what impact could Trump’s victory have on Europe?

Tariffs

First and foremost, the ECB is deeply concerned about Trump’s trade policies. During the trade war, economic growth in the eurozone suffered a significant decline. Although Trump may not impose tariffs as high as 60% like those on China, Europe still faces the potential risk of a 10-20% tariff increase.

According to 2023 data from Eurostat, the United States is the EU’s largest export partner, with exports totaling over €500 billion, accounting for roughly 20% of the EU’s total exports. Among these, machinery and automotive exports are particularly vulnerable, with a combined value exceeding €200 billion, while automotive exports alone amount to approximately €40 billion. Over half of these exports come from Germany.

(Source: Eurostat)

For Germany, which continues to struggle with a manufacturing downturn, Trump’s tariff policies could further restrict the development of its automotive sector and exacerbate economic weakness across the eurozone.

According to Goldman Sachs, every 10% increase in tariffs could reduce the eurozone’s GDP growth by 1%.

Defense Spending

Beyond trade policy, Trump’s foreign policy stance may increase pressure on European countries to boost defense spending. In light of the ongoing Russia-Ukraine conflict, both the U.S. and Europe have been providing military aid to Ukraine.

Trump has repeatedly criticized NATO member states for failing to meet the 2% GDP threshold for defense spending and has threatened to withdraw from NATO to pressure member states to increase their defense budgets.

(Source: NATO)

While increased defense spending may contribute to GDP growth in European countries, the economic multiplier effect of military expenditures is typically lower, limiting its impact on broader economic activity.

Moreover, rising defense budgets could worsen fiscal deficits, elevate long-term bond yields, increase borrowing costs, and dampen economic growth.

ECB Monetary Policy

These factors add to the already fragile economic outlook in Europe, potentially prompting the ECB to adopt larger or faster rate cuts in 2025. This expectation has led to increased market bets on a weaker euro surrounding the presidential election.
As of now, the EUR has depreciated from around 1.09 against the USD on November 5 to 1.06.

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