The impact of a Trump presidency on the European economy

Markets have increasingly been betting in recent weeks that Donald Trump will win the presidential election, with economists at Goldman Sachs saying that if the former US president serves another term it could have “significant implications” for the euro zone economy.

“Our baseline estimate is that GDP is expected to be substantial. [gross domestic product] A modest impact of 0.1 percentage points would result in a hit of about 1% [percentage point] “This will lead to higher inflation,” Goldman Sachs’ Jari Steen and James Moberly said in a memo published on Friday, before Saturday’s assassination attempt.

“Thus, Trump’s reelection would pose a significant downside risk to our constructive growth forecasts for the euro area.”

He explained that trade policy uncertainty, increasing defense and security pressures, and ripple effects of U.S. domestic policies on tax systems and other areas could have an impact on Europe.

Trump said he was grazed by a bullet during an assassination attempt at a rally in Pennsylvania on Saturday that left one protester and the gunman dead and two other protesters in critical but stable condition.

Some analysts have said these events could increase the chances of President Trump retaking the White House in the US presidential election later this year, and markets are pricing in that possibility, with some assets already rising on Monday.

Before Saturday, President Trump’s chances of reelection had already risen following President Joe Biden’s poor performance in the presidential debates a few weeks ago. Goldman Sachs said in a note on Friday that betting markets were estimating the odds of a Trump victory in November at about 60%, with some reports suggesting that figure had risen again over the weekend.

Analysts Stehn and Moberly said Trump’s trade policies and the uncertainty surrounding them could be one of the factors affecting the European economy, just as they were under the previous president.

Trade tensions between the United States and the European Union escalated during the final term of the Trump administration, when the United States imposed tariffs on European steel and aluminum, and the EU retaliated with tariffs on American goods. Fears raged for months that tariffs could be raised on other sectors, such as autos, rattling market sentiment.

“President Trump has promised to impose a flat 10% tariff on all U.S. imports, including those from Europe, which could lead to a sudden rise in trade policy uncertainty similar to that seen in 2018-19,” the Wall Street bank said in a research note.

Such uncertainty has historically had a significant and lasting impact on economic activity in the euro area, the economists explained: In 2018 and 2019, they estimated that trade policy uncertainty reduced euro area industrial production by about 2%.

Some countries, such as Germany, are expected to be more affected because of their high reliance on industrial production, according to Steen and Moberly.

Economists say trade tensions could hit the euro zone’s gross domestic product, and that uncertainty over trade policy could drive prices down just as higher tariffs could send prices rising again.

Trump is also expected to reduce or completely cut off US aid to Ukraine and has suggested he will not provide aid to NATO military allies that do not meet a 2% defense spending requirement.

Meeting the 2 percent requirement and being able to cover at least part of U.S. financial aid to Ukraine could have an impact on the European economy, according to Goldman Sachs.

“European countries may therefore need to shoulder an additional 0.5 percent of GDP in defense spending each year during President Trump’s second term,” the study said, adding that any increases from additional military spending would be modest.

Sten and Moberly explained that geopolitical uncertainties and risks could also emerge as a result of President Trump’s European defence policy and stance towards NATO, particularly if US commitment to NATO is called into question.

The third way that President Trump’s policies will affect the eurozone economy is through domestic U.S. programs such as tax cuts and deregulation.

“The shift in U.S. macro policy during the Trump administration’s first term had significant spillover effects on Europe through increased U.S. demand and tighter financial conditions,” Goldman Sachs economists said.

Sten and Moberly said expected tax cuts in the United States could stimulate economic activity in Europe, but combined with other expected market changes the overall impact is likely to be limited.

“However, net monetary contagion effects will likely be subdued as the impact of higher long-term interest rates is expected to be offset by significantly weaker interest rates. EUR“This is consistent with activity following the November 2016 election,” they said.