The specter of a Donald Trump-instigated trade war is looming over the eurozone, threatening to push the region’s already fragile economy over the edge into a full-blown recession. In the wake of Trump’s shock US election victory, economists at ING are sounding the alarm that the president-elect’s protectionist policies spell trouble for Europe.
“The already struggling German economy, which heavily relies on trade with the US, would be particularly hard hit by tariffs on European automotive,” ING analysts cautioned in a research note. “Additionally, uncertainty about Trump’s stance on Ukraine and NATO could undermine the recently stabilized economic confidence indicators across the eurozone.”
The dire predictions come as central banks on both sides of the Atlantic are poised to reduce interest rates in a bid to insulate their economies from the fallout of the US election. Investors widely expect the Bank of England and the Federal Reserve to announce quarter-point rate cuts today.
Recession Fears Rise as Trade Tensions Escalate
According to ING, even the mere threat of a transatlantic trade spat could be enough to tip the eurozone into recession in the coming months, well before any US tariffs take effect. The bank noted that “renewed uncertainty and trade war fears could drive the eurozone economy into recession at the turn of the year.”
The automotive sector is seen as especially vulnerable, given Trump’s repeated threats to slap taxes on car imports. Shares of major German carmakers Volkswagen, BMW and Daimler have already taken a beating on fears they will be targeted.
“The German auto industry is very, very exposed to trade barriers being erected by the U.S. A trump victory is a severe threat to the business model of the German export-driven industry.”
– Thomas Gitzel, economist at VP Bank
But it’s not just about trade. Trump’s vow to adopt a more confrontational stance towards Iran, combined with his lukewarm support for NATO, threatens to ratchet up geopolitical tensions across the region. That’s the last thing the eurozone needs as it grapples with weak growth, high unemployment and a persistent lack of inflationary pressure.
Central Banks Prepare to Step In
Faced with the growing risks to their outlooks, the Bank of England and the European Central Bank look poised to loosen monetary policy in a bid to shore up economic growth and stave off deflationary threats.
The BoE is widely expected to reduce its benchmark interest rate from 0.5% to a fresh record low of 0.25% when it announces its latest policy decision at noon London time. It would mark the first rate cut since the aftermath of the Brexit referendum in 2016.
The ECB may not be far behind. ING predicted “a 50 basis point rate cut at the ECB’s December meeting has become more probable, with expectations of the deposit rate dropping to at least -0.75% by early summer, possibly followed by further easing towards the end of 2025.”
The Federal Reserve, which has already lowered rates twice this year, is also tipped to cut borrowing costs by another 25 basis points to a range of 1.50-1.75% at the conclusion of its two-day policy meeting today.
Europe Braces for Economic Turbulence
- Fears are mounting that Trump’s “America First” agenda will spur a tit-for-tat tariff battle that drags down global trade
- Germany’s export-reliant economy looks particularly exposed to fallout from rising protectionism
- Heightened uncertainty over US foreign policy and commitment to European security also risk undermining economic sentiment
- ECB faces pressure to expand stimulus but is constrained by already negative interest rates and limits to bond purchases
With the threat of a Trump trade war looming large, the eurozone finds itself in an uncomfortably familiar position – on the brink of another potential crisis, and reliant on the ECB to do the heavy lifting to keep the economy afloat. But after years of ultra-loose policy, the central bank’s monetary arsenal is severely depleted, leaving it with limited firepower to counter the next downturn.
Much will depend on whether Trump’s bark turns out to be worse than his bite when it comes to trade. If the president-elect dials back his protectionist rhetoric and pursues a less confrontational approach to international relations, it would go a long way towards easing the current anxiety.
But as recent history has shown, trying to predict the actions of Donald Trump is a fool’s errand. And that lingering uncertainty could be corrosive enough on its own to help tip a teetering eurozone into recession, Trumponomics or not.
