Why Trump’s re-election could affect the European economy by at least 150 billion euros

The possible Donald Trump’s re-election As President of the United States, it is a Major threat to the eurozone economyand economists warn of a potential impact of 150 billion euros, equivalent to around 1% of the region’s gross domestic product. This impact stems from the expected negative trade repercussions and increased defence spending.

The recent attempt in Butler, Pennsylvania, where former President Trump suffered a gunshot wound to the left ear fired by a sniper, has relaunched his chances of re-election. Prediction markets now put Trump’s chances of victory at 71%, a significant increase compared to previous figureswhile his opponent, Joe Bidenhas experienced a sharp declinewith its chances falling to 18% from a high of 45% just two months ago.

Increased trade uncertainty and economic impact of tariffs

Economists James Moberly and Sven Jari Stehnof Goldman Sachshave raised the alarm about the uncertainty looming in global trade policy, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has promised to impose a widespread 10% tariff “on all US imports, including those from Europe,” Goldman Sachs outlined in a recent note.

Economists predict that the increasing uncertainty in trade policywhich previously reduced eurozone industrial output by 2% in 2018-19, could now result in a 1% decline in gross domestic product of the euro zone.

Germany will bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are higher in Germany than in the rest of the euro zonereflecting its greater openness and dependence on industrial activity,” Goldman Sachs explained.

The report highlights that the German industrial sector is most vulnerable to trade disruptions than other major eurozone economies, such as France.

After Germany, it is expected that Italy and Finland are the second and third most affected countries, respectively, due to the relatively greater weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (157.7 billion euros), Italy (67.3 billion euros) and Ireland (51.6 billion euros) were the three largest exporters from the European Union to the United States in 2023.

Germany also maintained the largest trade surplus (85.8 billion euros), followed by Italy (42.1 billion euros).

Defense, security pressures and changes in the financial situation

A Trump victory, which brings with it his vice president JD Vance, could also mean New pressures on Europe in matters of Defense and security. Trump has constantly pushed for members of the NATO fulfill their Defense spending commitments of 2% of GDP. Currently, EU members spend around 1.75% of GDP on defence, so it would be necessary an increase of 0.25% to meet the objective.

In addition, Trump has indicated that he could put End US military aid to Ukraineforcing European countries to intervene. The US currently spends around €40 billion annually (or 0.25% of EU GDP) on supporting Ukraine. As a result, meeting NATO’s 2% of GDP defence spending requirement and offsetting a possible reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

The risk for Europe of a “stronger” dollar

Additional economic disruptions from a possible Trump re-election include increased U.S. foreign demand due to tax cuts and the risk of tightening of financial conditions driven by a stronger dollar.

However, Goldman Sachs believes the benefits of a looser US fiscal policy would be marginal for the European economy, with a boost to economic activity of just 0.1%.

“A Trump victory in the November election would likely be accompanied by significant changes in financial markets“, Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields soared, equity prices soared and the dollar appreciated significantly. Despite these moves, the Eurozone Financial Conditions Index only saw a slight tightening, as a weaker euro offset rising interest rates and widening sovereign spreads.

In conclusion, Trump’s possible re-election could have Far-reaching economic implications for Europeexacerbating the uncertainties commercials and imposing new financial and defense burdens to the continent.