Europe is braced for significant economic challenges under Trump’s presidency, including its car industry, energy supply, and the euro’s devaluation, alongside the potential for resurging inflation.
The European Union has spent months preparing for Donald Trump’s presidency, and the day has finally arrived. The president-elect is likely to fulfil his campaign pledges as first actions in the first 100 days, ranging from immigration, tariffs, and the Ukraine war, to cryptocurrency and energy.
The challenges faced by the EU could be significant if Trump implemented these policies with his political influence, potentially reshaping the eurozone’s economic landscape in the coming years.
Tariffs looming large
Trump has vowed to impose 60% tariffs on goods from China and 10% to 20% on imports from the rest of the world. He described tariff as “the most beautiful word in the dictionary”, posing the biggest threat to the European economy, especially to Germany, Europe’s largest economy.
The German car industry is a specific target for Trump’s pledged tariffs. He pointed out during his campaign that the US runs a trade deficit with the EU, stating: “They don’t take our cars. They don’t take our farm products. They sell millions and millions of cars in the United States. No, no, no, they are going to have to pay a big price.”
Germany’s car manufacturers, already struggling with domestic and global headwinds, could face further strain from a 10% tariff. If imposed, this could compel European car makers to relocate production to the US, potentially leading to large job losses in Europe.
In November, Trump announced additional tariffs of 25% on Canada and Mexico and 10% on China, effective from 20 January. While no specific tariffs targeting the eurozone have been confirmed, European car makers’ stocks plunged following the announcement, highlighting their vulnerability to shifts in global trade dynamics.
The EU is likely to increase oil and gas purchases from the US
The EU may have to import more oil and gas from the US as a way of mitigating the tariff threat. Following Ukraine’s halt of Russia’s gas supply to Europe, the European Commission’s president Ursula von der Leyen, proposed to replace Russia’s liquified natural gas (LNG) with the US imports.
This aligns with Trump’s “drill, baby, drill” energy strategy, although his administration is likely to face climate change and capacity challenges.
Trump posted on his Truth Social media that the EU “must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!”
Hence, the message is clear – Europe may have little choice but to increase its fossil fuel imports from the US. Already the EU’s largest LNG supplier, the US could consolidate its position further, gaining a near-monopoly on energy pricing and exerting significant influence over global crude markets.
Oil prices at crossroads amid potential Ukraine war negotiations
Trump pledged to end the war between Ukraine and Russia within 24 hours of taking office, though this plan faces delays due to difficulties in brokering a peace accord. Trump acknowledged that negotiations between Ukraine and Russia pose greater challenges than those in the Middle East, where Israel and Hamas have recently reached a ceasefire agreement.
Further sanctions on Russia’s oil exports could be a potential strategy employed by the Trump administration during peace negotiations. However, such a move would be likely to drive crude prices even higher, especially following last week’s five-month highs in benchmarks. On the opposite approach, a relaxation of sanctions on Russia might trigger a sharp decline in oil prices. In either scenario, it seems that the trajectory of EU energy prices remains heavily influenced by Trump’s decisions.
Renewed inflationary pressure on the horizon
A trade war between the US and the rest of the world will ultimately cause a resurgence in inflation. Higher import costs would be passed on to consumers, potentially triggering a fresh cost-of-living crisis.
A further devaluation of the euro against the dollar could offset some of the impact of additional tariffs but would make imported goods more expensive. Meanwhile, a potential surge in energy prices would also exacerbate inflationary pressures.
