The Trump Effect on the Economies of the Eurozone

President elect Donald Trump has vowed once again that in the Trump-2 presidency he will put America first and is considering tariffs on imports into the Unite States. Indeed, he recently showcased what is referred to as “Economic Statecraft”* by threatening two of the United States’ major economic partners, Canada and Mexico, with higher tariffs. In this case, tariffs are being used as an economic wall to halt/curtail the flow of illegal immigrants and cross-border drug trafficking. Furthermore, China is the biggest source of the eurozone’s imports with bilateral trade reaching Euros 739 Billion in 2023. Donald Trump is considering sticking China with 60% tariffs on all exports to the USA and may use tariffs on European countries in the eurozone as a stick to curtail imports from China. 

*Economic Statecraft – Is defined as the use of economic means to achieve foreign policy goals. 

Overview

It would appear that the slogan used by the Republicans and the then ex-President Trump in the run-up to the presidential election of “Make America Great Again”, translates into using economic statecraft to the possible economic harm and certainly disadvantage of their allies. President elect Trump has threatened tariffs on China’s exports to the USA of 60%, plus 10% -20% tariffs on all other imports. Analysts suggest that if a full trade war does indeed commence, the cost to the Eurozone in a combined total of exports is valued at circa USD36. 6 Billion in 2025 and 2026. The President elect is on record as having said the 27 nation bloc will have to “pay a big price“ for not purchasing enough American exports.

Data released by the European commission shows that in 2023, the United States imported goods from the European Union to the value of Euros503.3 Billion, representing one fifth of all non-European exports. Exports from the eurozone to the United States are led by vehicles and machinery (Euros207.6 Billion), chemicals (Euros137.4 Billion) other manufactured goods (Euros103.7 Billion), which together makes up circa 90% of the unions exports to America. Economist suggest that if tariffs are indeed put in place by the Trump administration a collapse in exports would have a detrimental effect on trade-orientated economies with the Netherlands and Germany being the likely countries to be hardest hit. 

Some analysts are even suggesting that a potential upcoming trade war could push an already sluggish Eurozone economy into a potential full blown recession. Analysts are also advising that the Euro could also fall to parity with the US Dollar (first time since late 2022) if a trade war weakens an already under pressure eurozone economy. As of November 2024, the eurozone private sector slipped into contraction, with the eurozone PMI* figures (dropped below the 50 mark) being somewhat gloomy to say the very least, and is a wake-up call for eurozone policy makers that the economy is still showing signs of weakness. 

*Eurozone PMI – This is known as the Eurozone Purchasing Manager’s Index and is a monthly survey of services and manufacturing companies in the Eurozone that measure the direction of economic trends. The PMI is a weighted average of five indices, New Orders (30%), Output (25%), Employment 20%), Suppliers Delivery Times (15%), and Stocks and Purchases (10%). This index ranges from 0 to 100 and anything above 50 indicates an increase, and anything below 50 indicates a decrease. 

In other areas, the elevation of President elect Trump to his second stint in the White House will experts believe, put pressure on the eurozone countries to spend more on defence. Apart from the trade surplus the Eurozone enjoys over the United States, what also rankles with the President elect is that the combined eurozone spending on NATO is only 1/3 of what the USA spends, and noises emanating from team Trump suggest that the United States will expect an increase in defence spending.

Indeed, just USD326 Billion was budgeted by EU governments for defence spending in 2024. Back in 2017, an increase in spending on defence equipment by 35% was budgeted by the European Union, however today only 17% or just under 50% of that figure has been achieved. Furthermore, analysts suggest that the President elect will demand that the EU countries spend at least 2 – 2 ½ %, possibly as much at 3%, of GDP on defence, and it is suggested that countries such as Spain who only spend circa 1.4% of GDP are in his bad books.

Eurozone

Donald Trump’s first presidency was marked by its transactional nature, and he ranked world leaders by his perceived weaknesses and strengths, and in some case his personal taste. The European Union has 27 states and below is an overview of the Trump effect on some of their bigger economies.

1. Germany

In Q3 of 2024, the German economy narrowly avoided a recession, and with ex-President Donald Trump being re-elected to the White House the current outlook for the German economy is unfavourable to say the least. The incumbent Chancellor of Germany Olaf Scholz made it quite clear that he was supporting Kamala Harris’s bid for the White House, so it will come as no surprise that President elect Trump will have him and Germany in his sights when it comes to tariffs.

Experts are suggesting that the election of Donald Trump to the White House marks the start of what is possible the most difficult economic moment in the history the Federal Republic. Recently Chancellor Scholz fired his Finance Minister Christian Lindner, (leader of the Free Democratic Party, FDP) his coalition partner, and in one fell swoop bringing to an end the ruling coalition, rendering the government a lame duck. This should help Donald Trump once he is inaugurated on 20^th January 2025 as German elections are slated for March later that year so the imposition of tariffs may be difficult to fight or get agreement on other issues favouring the United States.

The Germany economy could be in for a bit of a bruising come 2025. If Donald Trump does implement his tariffs, experts suggest the cost to economic output could be circa 1%, and with the German economy predicted to grow by zero percent in 2025, this is bad news all round. Furthermore, some experts are predicting that the German economy (dependent on exports) could shrink by as much as 1.5% in 2027 and 2028. 

Total exports to the United States from Germany in 2023 were valued at USD171.65 Billion, the most important of which were:

1. Vehicles: USD36.76 Billion
2. Machinery, Nuclear Reactors and Boilers: USD34.4 Billion
3. Pharmaceutical Products: USD USD27.51 Billion
4. Electronic Equipment: USD17.1 Billion
5. Optical. Photo, Medical Apparatus, Technical: USD12. 67 Billion.

Germanys trade surplus with the United States has been rising since 2020, and data released showed it reached record levels in 2023 of €63.3 Billion. However, analysts have advised that if tariffs are levied between 10% – 20%, exports to the USA could drop by as much as 15%, and Donald Trump with his slogan “America First” will definitely have Germany in sights.

2. France

Ironically, the re-election of Donal Trump as the 47^th President of the United States of America, will strengthen French President Macron’s resolve to build a more autonomous Europe. President Macron is also perceived out of all the European leaders to have at least a half decent relationship with President elect Trump (apart from Premier Victor Orban of Hungary who is deemed to be closer). However, France is in both political and economic turmoil, with Marine Le Pen having brought down Prime Minister Barnier’s government and possibly pushing President Macron into resigning, plus a budget deficit of 6% of GDP and a Debt to GDP Ratio* of 112%.

*Debt to GDP Ratio – This is a metric that compares a country’s public debt to it Gross Domestic Product (GDP). It is a reliable indicator of a country’s ability to repay its debts by comparing what the country owes with what it produces. 

Total exports by France to the USA in 2023 was USD45.54 Billion, (just under 25% of what Germany exports to the USA) the most important of which are:

1. Machinery Nuclear Reactors and Boilers: USD8.3 Billion
2. Beverages Spirits and Vinegar: USD4.11 Billion (wine circa USD2.25 Billion/ Euros2.14 Billion)
3. Pharmaceutical products: USD4.04 Billion
4. Aircraft and Spacecraft: USD3.97 Billion.

Estimates vary, but one thing is certain, a Trump tariff imposed on French exports to the USA will be particularly damaging to the economy at this time. In 2019, the scope of tariffs were limited to France Germany and Spain, as they were the three counties involved in the Airbus consortium and was part of a dispute on aviation between the European Union and the United States. 

Elsewhere, the French wine industry is still scarred from the harsh 25% tariff imposed between October 2019 to March 2021, and producers are wondering what minefields lay ahead in the export arena to the United States. Interestingly, Trump himself is a wine producer, so the industry may well expect a tariff of a minimum of 10%. 

In light of the present economic and political debacles, plus the fact that France is spending under 2% on defence (expected to exceed 2% by 2029), President Macron can only hope he will retain sufficient authority to negotiate an equable deal with President elect Donald Trump.

3. Spain

Experts are suggesting that a Trump administration could have both positive and negative effects on the Spanish economy. In many eurozone countries, vehicles, machinery, pharmaceutical goods expect to be at the top of a Trump administration tariff hit list. However, Spain is fearful for its olive oil industry as it may take a significant hit as it did in Donald’s Trump’s first administration. In 2017, the Trump administration levied tariffs on Spanish olives, the reason being subsidies directed at Spanish olive producers through CAP (Common Agricultural Policy) would cause harm to American producers of the same. The tariffs were between 30% and 44% on Spanish black olives being anti-subsidy and anti-dumping duties. 

Spain is the largest olive oil producer in the world and currently their largest export market is the United States, which as of 2023 accounted for 15.7% of Spain’s total olive oil exports. Over the last five years, data released shows that Spanish table olives resulted in a loss of Euros260 Million (USD273 Million) due to tariffs being imposed in President Trump’s first administration, so a second set of tariffs could be a financial disaster for the industry. Elsewhere, the three top exports from Spain to the USA are:

1. Machinery Nuclear Reactors and Boilers: USD2.96 Billion
2. Mineral Fuels, Oils Distillation Products: USD1.96 Billion
3. Electrical and Electronic Equipment: USD1.82 Billion.

On the positive side, Donald Trump’s policies have encouraged capital outflow and foreign investment in foreign countries, with a stable real estate market. Spain is ideal due to its rich culture, a desirable location and attractive property prices, and this could definitely interest US investors looking to diversify their portfolios. A strengthening dollar could see a surge in US tourism with Spain already being a favoured destination for American tourists. 

Donald Trump’s mantra of ‘America First’ means he is always open to deals that favour the USA, so Spain could renegotiate trade deals, but there is one blip on the horizon apart from tariffs. Spain only spends 1.24% of GDP on defence and this, everyone knows, presses all of Trump’s buttons. Spain may well be forced to up their defence expenditure in order to gain concessions on tariffs.

4. Hungary

Hungary is mentioned on this list as their Premier Victor Orban enjoys a cordial relationship with Donald Trump, and whilst Orban voices his approval of Russian leader President Putin, Donald Trump is certainly fascinated by him. Indeed, when many of the leaders in the European Union were condemning Orban for his pro-Russian stance Donald Trump was heaping praise on him.

However, when it comes to the economy on Hungary,  experts suggest that Trump-2 administration could spell bad news, where his economic policies could add to inflationary risks due to a weak currency (Forint). The economy of Hungary is very “open” economy and is particularly linked to the European auto sector which, in the event of tariffs, could put the Forint under renewed pressure, thereby precluding future rate cuts. Hungary also has very close ties to China, and back in April 2024 borrowed €1 Billion from Chinese Banks to finance energy and infrastructure projects. On top of that, in September 2024 Premier Orban announced that Chinese firms had pledged €9 Million of investment in Hungary.

How the China link will play out with President elect Donald Trump, who is an obvious supporter of Orban, time will only tell. There are many imponderables with Hungary, but due to their personal relationships these problems may well be sorted out on a person to person basis.       

Final thoughts

There are, as mentioned previously, 27 member states in the European Union, and their President Ursula von der Leyen, who is in her second term, must keep the union unified in the face of the policies which will be emanating from the White House post 20^th January 2025. The President may well find this difficult because, as in President elect Donald Trump’s first administration, many Eurozone countries beat a path to the door of the US administration hoping to find favour with President Trump and do their own bilateral deals. It is felt the same will happen the second time around. 

Whilst the European Commission has sole responsibility for trade deals for all members, there are smaller options that countries can negotiate with Washington. Furthermore, Trump may pick out Germany and France for special tariff consideration as they are the two biggest economies in the eurozone (and therefore have the biggest influence within the union), plus they both have their own current economic and political problems. Imposing or threatening to impose tariffs on these two countries could be the economic dark cloud that brings the EU in line regarding defence spending. The leaders of the European Union, and their prime ministers and presidents, will be waiting with bated breath as to what President Trump will decide come his ascension to the White House for the second time.