Donald Trump’s odds of winning a second term are increasing, with prediction markets now giving him a 60% chance of victory in November.
Given the major economic and geopolitical shifts that Trump’s first term has seen, a potential second Trump presidency could have profound implications for Europe, according to analysts at Goldman Sachs.
One immediate impact of Trump’s re-election is the reintroduction of aggressive trade policies. Trump has pledged to impose 10% tariffs on all US imports, including those from Europe. This is likely to increase uncertainty about trade policy, similar to what happened during the 2018-19 trade war with China.
“We estimate a statistical model using monthly data since 1987 to show that rising trade policy uncertainty tends to have large and persistent negative effects on euro area activity, while the effects of actual tariff increases are more muted and more difficult to identify,” the note reads.
Specifically, the previous trade war reduced industrial production in the eurozone by about 2%, contributing to a 1% decline in GDP. If Trump imposes these new tariffs, the EU is expected to retaliate, escalating trade tensions. Analysts also point out that European economies, especially Germany, will be particularly vulnerable because of their heavy reliance on trade and manufacturing activity. Higher tariffs could slightly increase inflation, but the primary effect would be to slow economic growth.
Another important area of influence will be defence and security.
Trump has consistently urged NATO members to increase their defense spending to 2% of GDP. European countries currently spend about 1.75% of GDP on defense, so meeting Trump’s demands would require an additional 0.25% of GDP per year.
Moreover, Trump’s position on reducing US military support for Ukraine could force European countries to increase their spending by another 0.25% of GDP.
While this might provide a modest boost to growth, the high share of imports in European military spending means that much of this boost would benefit the US economy instead. Moreover, the growing deficit could put upward pressure on long-term interest rates in Europe, potentially offsetting any growth benefits.
Trump’s domestic policies, especially tax cuts and deregulation, could have spillover effects on Europe. The increased demand in the United States resulting from these policies could lift eurozone activity slightly. However, the shifts in financial markets that we saw after Trump’s election in 2016—higher long-term yields, higher stock prices, and a stronger dollar—are expected to be less pronounced this time around.
“However, the net fiscal impact is likely to be muted, as we expect the impact of higher long-term interest rates to be offset by a markedly weaker euro, consistent with the post-election moves in November 2016.”
“Taken together, we estimate that Trump’s policy agenda would reduce euro area GDP by about 1% and boost inflation by about 0.1 percentage point,” they added.
“Given its larger (and more persistent) impact on activity than inflation, we expect Trump’s election to once again strengthen the case for the ECB to continue cutting rates into 2025, with simple Taylor rules pointing to an additional 30-40bps of cuts.”