Political scientists call Donald Trump's re-election this month a major upheaval. The shift towards nationalist and protectionist policies has reshaped the US's domestic and diplomatic agenda. This worldwide change is expected to disrupt international trade, climate policy, financial markets, and technology. The article focuses on Europe's potential aftershocks due to this political transition's significance and it examines how Trump's presidency may affect key US and European businesses like automotive, finance, and trade. The aim of this paper is to examine how these difficulties might be handled to boost EU development and cohesion.
Impact on EU-US Trade Relations and Policies
Although the European Union represents one of the most important actors in the fight for climate action, the EU representatives should make use of Trump’s motto – drill, baby, drill... Despite sounding oxymoronic, the EU should not drill for fossil fuels, but rather for better suited policies for the geopolitical environment that waits to unravel in the months to come. The experience from the last Trump administration offers EU technocrats a comprehensive understanding of how the subsequent term may unfold. A crucial element in this process is the response of EU institutions to the new strategies originating from their American counterparts. This section is dedicated to one of Donald Trump's most infamous policy stances in the international sphere - trade policy, specifically tariff policy.
Donald Trump’s first term as President was marked by an aggressive trade war with China, during which tariffs surged from an average of 3% to 21%. As he re-enters office, Trump has already proposed a new tariff regime, with plans for a 10 to 20% tariff on all imports and a potential 60% tariff on Chinese goods. This shift poses a significant threat to the German automotive industry, a sector already vulnerable with respect to the evolving trade dynamics. Hence, Trump's strategy to persuade German car manufacturers to relocate to the US with favorable incentives directly challenges the EU's economic stability. Given the pivotal role of automotive exports in the EU economy, the sector's impact will be analyzed in greater detail in the following sections.
The implications of Trump’s America First trade agenda are not confined to the automotive industry, but extend to other key sectors such as aerospace and technology. In aerospace, the long-standing subsidies dispute between Boeing and Airbus risks escalating into a tariff–driven trade war, raising costs for both sides and further straining transatlantic economic relations. Meanwhile, in the technology sector, which is crucial to economic growth and showcases great geopolitical influence, Trump’s policies could unravel years of progress made under the Biden administration. The US–EU Trade and Technology Council (TTC), established in 2021 to foster cooperation on critical issues like semiconductors and artificial intelligence standards, faces an uncertain future. In this respect, its potential dissolution would hamper coordinated efforts to counter China’s technological ascendancy and undermine transatlantic innovation ecosystems.
Despite the policy shift initiated by the new American administration resulting in a reduction of European exports to the US, a projection by Bloomberg Economics, which anticipates a more stringent tariff regime of 60% on China and 20% on other nations under Trump, describes a favourable outlook for European trade. The analysis anticipates a gain in total exports for the EU, even with a decline in trade with the US, due to expected diversification. The remainder of this section outlines a number of policies and strategies that the EU could implement in order to elevate its position as a response to Trump's actions and to pursue such trade diversification.
Although the European Union represents one of the most important actors in the fight for climate action, the EU representatives should make use of Trump’s motto – drill, baby, drill... Despite sounding oxymoronic, the EU should not drill for fossil fuels, but rather for better suited policies for the geopolitical environment that waits to unravel in the months to come. The experience from the last Trump administration offers EU technocrats a comprehensive understanding of how the subsequent term may unfold. A crucial element in this process is the response of EU institutions to the new strategies originating from their American counterparts. This section is dedicated to one of Donald Trump's most infamous policy stances in the international sphere - trade policy, specifically tariff policy.
Donald Trump’s first term as President was marked by an aggressive trade war with China, during which tariffs surged from an average of 3% to 21%. As he re-enters office, Trump has already proposed a new tariff regime, with plans for a 10 to 20% tariff on all imports and a potential 60% tariff on Chinese goods. This shift poses a significant threat to the German automotive industry, a sector already vulnerable with respect to the evolving trade dynamics. Hence, Trump's strategy to persuade German car manufacturers to relocate to the US with favorable incentives directly challenges the EU's economic stability. Given the pivotal role of automotive exports in the EU economy, the sector's impact will be analyzed in greater detail in the following sections.
The implications of Trump’s America First trade agenda are not confined to the automotive industry, but extend to other key sectors such as aerospace and technology. In aerospace, the long-standing subsidies dispute between Boeing and Airbus risks escalating into a tariff–driven trade war, raising costs for both sides and further straining transatlantic economic relations. Meanwhile, in the technology sector, which is crucial to economic growth and showcases great geopolitical influence, Trump’s policies could unravel years of progress made under the Biden administration. The US–EU Trade and Technology Council (TTC), established in 2021 to foster cooperation on critical issues like semiconductors and artificial intelligence standards, faces an uncertain future. In this respect, its potential dissolution would hamper coordinated efforts to counter China’s technological ascendancy and undermine transatlantic innovation ecosystems.
Despite the policy shift initiated by the new American administration resulting in a reduction of European exports to the US, a projection by Bloomberg Economics, which anticipates a more stringent tariff regime of 60% on China and 20% on other nations under Trump, describes a favourable outlook for European trade. The analysis anticipates a gain in total exports for the EU, even with a decline in trade with the US, due to expected diversification. The remainder of this section outlines a number of policies and strategies that the EU could implement in order to elevate its position as a response to Trump's actions and to pursue such trade diversification.
As the Trump administration is yet to begin its second term, it is premature to determine whether it would be detrimental for European development or the exact state of a crisis that it needs to pursue further integration. This depends on the EU leaders and the policies they decide to adopt. In any case, a unified Europe that acts collectively disposes of the necessary means to face Trump’s actions. A relevant example in this direction is the Anti-Coercion Instrument (ACI) which entered into force in December 2023 and which proved to have the necessary means to deter and respond to economic coercion exercised by exterior parties, providing a structure that allows the EU to pursue retaliatory actions, restrictions on trade in services and trade-related aspects of intellectual property, as well as limitations on the access to FDI and public procurement.
Moreover, a great power–play for Europe would be to accelerate its Free–Trade Agreements (FTAs). Key areas in need of improvement include the EU's Free Trade Agreements (FTAs) with Latin American countries, particularly with Mercosur, which have encountered new challenges. Additionally, the Digital Trade Agreement currently under negotiation with South Korea represents another critical area that the EU could leverage. Along the same line of thought, Brussels should aim to strengthen and diversify trade agreements with emerging markets, whose local manufacturing sectors are disrupted by intense competition from China. This approach would allow the EU to expand its trade network while simultaneously advancing efforts to reduce economic dependence on China and establish partnerships with alternative trading nations.
Lastly, as President Trump is due to begin his new mandate in January, the EU should also seek to accelerate progress made in key sectors during Biden’s Administration. One eloquent example would be to hasten the development in the Global Arrangement on Sustainable Steel and Aluminium (GASSA), an agreement meant to increase trade and steel produced with low GHG emissions. By carrying out on-going partnerships with the US in strategic sectors like steel, LNG imports and renewables, the EU could mitigate the likelihood of a backlash from Trump by creating interlinkages between the two actors.
Automotive Sector: Navigating Tariff Pressures
As already discussed in the previous section, with the appointment of Trump the EU can expect hefty tariffs for exports in the US. This move aims at reducing the fiscal deficit of the United States. A great emphasis will be placed on the automotive sector. Historically, European car manufacturers have been exporting much of their products to the States, generating high trade imbalances, with American cars that, on the other hand, tend to be sold mostly within the country. Moreover, the US was the largest importer of German cars worldwide in 2023, accounting for around 14% of all exports. Due to the harmful implications of hefty tariffs on the European automotive sector, financial markets have reacted swiftly after the elections, with the shares of big German car manufacturers such as BMW, Porsche and Volkswagen that dropped by 4-7%.
The most straightforward implication of Trump’s fiscal policy on the EU's automotive sector will be an increased cost of exporting cars to the US, which will reduce manufacturers’ profit margins and production volumes, as part of the higher costs will likely be passed onto customers. It is in fact estimated that prices of European cars in the US will increase on average by 3.7%, resulting in a decline in sales and competitiveness. The price increases can reduce drastically demand for foreign products, giving more power to domestic car manufacturers such as Ford or Chevrolet. US automakers are better positioned across the value chain, having well-established supply chains and a greater bargaining power stemming from long-lasting relationships with domestic suppliers and distributors. Tariffs on imports would likely push EU manufacturers to shift part of the production to plants in the States, to avoid price increases that would drastically reduce demand from their American customer base. Of course, this will pose logistic and financial challenges on EU carmakers that rely on a globally-integrated and complex supply network, besides increasing competition for procurement of raw materials in the US. The effect of tariffs on costs, demand, production processes and competition could cause significant losses to companies in the European automotive sector, requiring action to counteract these challenges.
Even if starting at a competitive disadvantage with respect to US carmakers, one of the most effective solutions for EU car manufacturers over the long term is to invest in localizing production within the States. Besides the trivial effect of avoiding tariffs in the short term, starting to diversify geographically the manufacturing process will place them in a better position to face any future challenges. Furthermore, having a strong footprint within the US will make them more competitive against domestic automakers in a market that has enormous potential for growth. In this sense, big German car manufacturers have already taken steps in the past to establish strong roots in the US and lately they have been investing heavily to ramp up production. Volkswagen, for example, has recently been upgrading its plant in Chattanooga, Tennessee, with investments of more than $800m, improving a facility that has been present in the US since 2008. Another example is BMW’s recent opening of a production plant in Spartanburg, South Carolina, which began operations in 2022 and has been also one of the leading exporters for the group. In addition to investing to expand and improve operations in the US, EU carmakers should focus also on taking steps to increase sales outside these two continents. As shown in the graph below, which considers only exports from Germany, it is clear that most of the sales are generated in the US and in Europe. Diversifying into other economies can be beneficial in order to guarantee more stable revenues when the above regions experience economic downturns.
Moreover, a great power–play for Europe would be to accelerate its Free–Trade Agreements (FTAs). Key areas in need of improvement include the EU's Free Trade Agreements (FTAs) with Latin American countries, particularly with Mercosur, which have encountered new challenges. Additionally, the Digital Trade Agreement currently under negotiation with South Korea represents another critical area that the EU could leverage. Along the same line of thought, Brussels should aim to strengthen and diversify trade agreements with emerging markets, whose local manufacturing sectors are disrupted by intense competition from China. This approach would allow the EU to expand its trade network while simultaneously advancing efforts to reduce economic dependence on China and establish partnerships with alternative trading nations.
Lastly, as President Trump is due to begin his new mandate in January, the EU should also seek to accelerate progress made in key sectors during Biden’s Administration. One eloquent example would be to hasten the development in the Global Arrangement on Sustainable Steel and Aluminium (GASSA), an agreement meant to increase trade and steel produced with low GHG emissions. By carrying out on-going partnerships with the US in strategic sectors like steel, LNG imports and renewables, the EU could mitigate the likelihood of a backlash from Trump by creating interlinkages between the two actors.
Automotive Sector: Navigating Tariff Pressures
As already discussed in the previous section, with the appointment of Trump the EU can expect hefty tariffs for exports in the US. This move aims at reducing the fiscal deficit of the United States. A great emphasis will be placed on the automotive sector. Historically, European car manufacturers have been exporting much of their products to the States, generating high trade imbalances, with American cars that, on the other hand, tend to be sold mostly within the country. Moreover, the US was the largest importer of German cars worldwide in 2023, accounting for around 14% of all exports. Due to the harmful implications of hefty tariffs on the European automotive sector, financial markets have reacted swiftly after the elections, with the shares of big German car manufacturers such as BMW, Porsche and Volkswagen that dropped by 4-7%.
The most straightforward implication of Trump’s fiscal policy on the EU's automotive sector will be an increased cost of exporting cars to the US, which will reduce manufacturers’ profit margins and production volumes, as part of the higher costs will likely be passed onto customers. It is in fact estimated that prices of European cars in the US will increase on average by 3.7%, resulting in a decline in sales and competitiveness. The price increases can reduce drastically demand for foreign products, giving more power to domestic car manufacturers such as Ford or Chevrolet. US automakers are better positioned across the value chain, having well-established supply chains and a greater bargaining power stemming from long-lasting relationships with domestic suppliers and distributors. Tariffs on imports would likely push EU manufacturers to shift part of the production to plants in the States, to avoid price increases that would drastically reduce demand from their American customer base. Of course, this will pose logistic and financial challenges on EU carmakers that rely on a globally-integrated and complex supply network, besides increasing competition for procurement of raw materials in the US. The effect of tariffs on costs, demand, production processes and competition could cause significant losses to companies in the European automotive sector, requiring action to counteract these challenges.
Even if starting at a competitive disadvantage with respect to US carmakers, one of the most effective solutions for EU car manufacturers over the long term is to invest in localizing production within the States. Besides the trivial effect of avoiding tariffs in the short term, starting to diversify geographically the manufacturing process will place them in a better position to face any future challenges. Furthermore, having a strong footprint within the US will make them more competitive against domestic automakers in a market that has enormous potential for growth. In this sense, big German car manufacturers have already taken steps in the past to establish strong roots in the US and lately they have been investing heavily to ramp up production. Volkswagen, for example, has recently been upgrading its plant in Chattanooga, Tennessee, with investments of more than $800m, improving a facility that has been present in the US since 2008. Another example is BMW’s recent opening of a production plant in Spartanburg, South Carolina, which began operations in 2022 and has been also one of the leading exporters for the group. In addition to investing to expand and improve operations in the US, EU carmakers should focus also on taking steps to increase sales outside these two continents. As shown in the graph below, which considers only exports from Germany, it is clear that most of the sales are generated in the US and in Europe. Diversifying into other economies can be beneficial in order to guarantee more stable revenues when the above regions experience economic downturns.
In conclusion, while Trump’s tariffs create significant challenges for the European automotive sector, strategic investments in US-based production facilities and market diversification are crucial for mitigating losses and foster a resilient future. Companies like BMW and Volkswagen have already begun adapting by expanding their US presence. These efforts will ensure long-term competitiveness despite the current volatile environment. For Europe, addressing these challenges is essential to maintain global relevance after US protectionist policies, while safeguarding its domestic automotive ecosystem. Increased focus on non-US markets and accelerating innovation, particularly in electric vehicles and sustainable practices, will be useful to counter potential revenue losses. Europe must also strengthen intra-EU cooperation and trade policies to ensure its automakers can compete effectively on a global stage. These developments reinforce the need for a strategic, unified European response to global trade disruptions.
Currency Markets: Euro vs. Dollar Dynamics Post-US Election
The EUR/USD exchange rate, a barometer of economic stability between the European Union and the United States, has experienced sharp fluctuations following President Trump’s reelection in 2024. This volatility reflects market expectations of policy continuity, including fiscal stimulus, trade protectionism, and deregulation. While these developments pose challenges for European economies, they also present an opportunity for Europe to innovate and adapt in ways that could strengthen its long-term global competitiveness.
In the immediate aftermath of Trump’s victory, the EUR/USD exchange rate depreciated sharply, mirroring market behavior during the 2016 election. Historical data shows that unexpected political outcomes tend to amplify volatility, with Bollinger Bands analysis illustrating significant widening in the days surrounding both the 2016 and 2024 elections. In contrast, the 2020 election, marked by Trump’s loss, showed a strengthening Euro as market expectations shifted toward reduced protectionism. These opposing movements underscore how election outcomes fundamentally shape market dynamics and investor sentiment.
Currency Markets: Euro vs. Dollar Dynamics Post-US Election
The EUR/USD exchange rate, a barometer of economic stability between the European Union and the United States, has experienced sharp fluctuations following President Trump’s reelection in 2024. This volatility reflects market expectations of policy continuity, including fiscal stimulus, trade protectionism, and deregulation. While these developments pose challenges for European economies, they also present an opportunity for Europe to innovate and adapt in ways that could strengthen its long-term global competitiveness.
In the immediate aftermath of Trump’s victory, the EUR/USD exchange rate depreciated sharply, mirroring market behavior during the 2016 election. Historical data shows that unexpected political outcomes tend to amplify volatility, with Bollinger Bands analysis illustrating significant widening in the days surrounding both the 2016 and 2024 elections. In contrast, the 2020 election, marked by Trump’s loss, showed a strengthening Euro as market expectations shifted toward reduced protectionism. These opposing movements underscore how election outcomes fundamentally shape market dynamics and investor sentiment.
Beyond immediate fluctuations in EUR/USD, the nominal effective exchange rate (NEER) reveals a broader decline in the trade-weighted value of the Euro post-2024 election. This decrease, reflecting reduced competitiveness in global trade, poses challenges for export-driven European economies. However, it also highlights the urgency for structural reforms to address these vulnerabilities and enhance the Eurozone’s resilience in international markets.
Trump’s fiscal agenda—focused on infrastructure investment and extended corporate tax cuts—has heightened inflation expectations in the U.S., driving up Treasury yields. Over the past decade, a clear inverse relationship between U.S. Treasury yields and the EUR/USD exchange rate has emerged, with regression analysis suggesting that a 1% increase in yields corresponds to a 4.47% appreciation of the USD relative to the Euro.
This dynamic places additional pressure on the Euro as the dollar strengthens, particularly in an environment of divergent fiscal and monetary policies.
While a weaker Euro theoretically enhances export competitiveness, the benefits are often offset by increased input costs for industries reliant on dollar-priced commodities. German automakers and chemical manufacturers, for instance, face higher costs for raw materials such as metals and petroleum, limiting their ability to capitalize on currency depreciation. However, these pressures also create incentives for companies to innovate, adopt resource-efficient practices, and diversify supply chains—strategies that could yield long-term competitive advantages.
Trade Protectionism and Sectoral Challenges
Trade protectionism remains a cornerstone of Trump’s economic policy, with tariffs targeting European goods, particularly in the automotive and machinery sectors. These measures could reduce demand for European exports, as well as create uncertainty in financial markets, further weighing on the Euro.
The NEER, which reflects the Euro’s trade-weighted value, illustrates how declines in the Euro amplify challenges for industries reliant on stable international markets. Germany’s automotive sector, which already faces tariffs of up to 25%, is particularly exposed. Yet, this adversity could drive strategic investments in electric vehicles, sustainable manufacturing, and U.S.-based production facilities—areas that promise to future-proof the sector. Italy’s machinery manufacturers similarly face rising competition in alternative markets but could benefit from diversifying into emerging economies less affected by U.S. trade policies.
The Eurozone’s response to these challenges will likely determine the extent to which its industries can navigate protectionist pressures. Strengthening intra-EU trade, fostering collaboration on
innovation, and leveraging the European Green Deal to build global leadership in sustainability are essential steps in maintaining relevance in an increasingly fragmented global trade environment.
Volatility, Policy Responses, and Opportunities
Election-driven volatility has been a recurring feature of the EUR/USD exchange rate, with Bollinger Bands analysis for 2016, 2020, and 2024 elections underscoring the cyclical nature of uncertainty surrounding U.S. political events. Such fluctuations reflect investor apprehension about potential trade disputes, fiscal policies, and monetary policy divergence.
In this environment, the European Central Bank (ECB) faces critical decisions. Easing monetary policy through rate cuts or quantitative easing could stabilize the Euro’s trade-weighted value, but risks exacerbating inflation, which remains above target in the Eurozone. Conversely, maintaining current policy rates could deepen the Euro’s depreciation, increasing costs for import-reliant industries while compounding trade imbalances.
A balanced approach is essential, complemented by structural reforms within the EU. By addressing productivity gaps, enhancing digital infrastructure, and fostering innovation, Europe can mitigate the pressures of a strong dollar and turn challenges into opportunities. Initiatives such as the NextGenerationEU fund and the European Green Deal offer pathways to build a more resilient and competitive economy.
Outlook and Strategic Insights
The reelection of President Trump marks a period of heightened challenges for the EUR/USD exchange rate and European economies. However, these challenges also highlight opportunities for the EU to reassess its strategic priorities. Structural reforms aimed at improving productivity, accelerating innovation, and diversifying trade relationships could enhance Europe’s economic resilience.
For export-driven sectors like automotive and chemicals, adapting to rising input costs and protectionist barriers is imperative. Companies that invest in electric vehicles, green manufacturing, and alternative market opportunities stand to gain a competitive edge. Meanwhile, policymakers must focus on strengthening intra-EU trade and collaboration, ensuring that the Eurozone can weather external shocks while maintaining its position in global markets.
In conclusion, while the Euro faces near-term pressures from a strong dollar and protectionist U.S. policies, the broader outlook depends on Europe’s ability to adapt and innovate. By leveraging its strengths in sustainability and collaboration, the EU can transform today’s challenges into a foundation for long-term growth and stability.
Equity and Bond Markets: Diverging Paths
Equity markets
The post-election story regarding equity markets has been drastically different for Europe compared to the US. While American stocks hit record highs, the gap between the S&P 500 and Stoxx Europe 600 (a pan-European index) did too. The true gravity of this is shown in the graph below, with the widening gap between the two being appropriately called the ‘Trump premium’.
While a weaker Euro theoretically enhances export competitiveness, the benefits are often offset by increased input costs for industries reliant on dollar-priced commodities. German automakers and chemical manufacturers, for instance, face higher costs for raw materials such as metals and petroleum, limiting their ability to capitalize on currency depreciation. However, these pressures also create incentives for companies to innovate, adopt resource-efficient practices, and diversify supply chains—strategies that could yield long-term competitive advantages.
Trade Protectionism and Sectoral Challenges
Trade protectionism remains a cornerstone of Trump’s economic policy, with tariffs targeting European goods, particularly in the automotive and machinery sectors. These measures could reduce demand for European exports, as well as create uncertainty in financial markets, further weighing on the Euro.
The NEER, which reflects the Euro’s trade-weighted value, illustrates how declines in the Euro amplify challenges for industries reliant on stable international markets. Germany’s automotive sector, which already faces tariffs of up to 25%, is particularly exposed. Yet, this adversity could drive strategic investments in electric vehicles, sustainable manufacturing, and U.S.-based production facilities—areas that promise to future-proof the sector. Italy’s machinery manufacturers similarly face rising competition in alternative markets but could benefit from diversifying into emerging economies less affected by U.S. trade policies.
The Eurozone’s response to these challenges will likely determine the extent to which its industries can navigate protectionist pressures. Strengthening intra-EU trade, fostering collaboration on
innovation, and leveraging the European Green Deal to build global leadership in sustainability are essential steps in maintaining relevance in an increasingly fragmented global trade environment.
Volatility, Policy Responses, and Opportunities
Election-driven volatility has been a recurring feature of the EUR/USD exchange rate, with Bollinger Bands analysis for 2016, 2020, and 2024 elections underscoring the cyclical nature of uncertainty surrounding U.S. political events. Such fluctuations reflect investor apprehension about potential trade disputes, fiscal policies, and monetary policy divergence.
In this environment, the European Central Bank (ECB) faces critical decisions. Easing monetary policy through rate cuts or quantitative easing could stabilize the Euro’s trade-weighted value, but risks exacerbating inflation, which remains above target in the Eurozone. Conversely, maintaining current policy rates could deepen the Euro’s depreciation, increasing costs for import-reliant industries while compounding trade imbalances.
A balanced approach is essential, complemented by structural reforms within the EU. By addressing productivity gaps, enhancing digital infrastructure, and fostering innovation, Europe can mitigate the pressures of a strong dollar and turn challenges into opportunities. Initiatives such as the NextGenerationEU fund and the European Green Deal offer pathways to build a more resilient and competitive economy.
Outlook and Strategic Insights
The reelection of President Trump marks a period of heightened challenges for the EUR/USD exchange rate and European economies. However, these challenges also highlight opportunities for the EU to reassess its strategic priorities. Structural reforms aimed at improving productivity, accelerating innovation, and diversifying trade relationships could enhance Europe’s economic resilience.
For export-driven sectors like automotive and chemicals, adapting to rising input costs and protectionist barriers is imperative. Companies that invest in electric vehicles, green manufacturing, and alternative market opportunities stand to gain a competitive edge. Meanwhile, policymakers must focus on strengthening intra-EU trade and collaboration, ensuring that the Eurozone can weather external shocks while maintaining its position in global markets.
In conclusion, while the Euro faces near-term pressures from a strong dollar and protectionist U.S. policies, the broader outlook depends on Europe’s ability to adapt and innovate. By leveraging its strengths in sustainability and collaboration, the EU can transform today’s challenges into a foundation for long-term growth and stability.
Equity and Bond Markets: Diverging Paths
Equity markets
The post-election story regarding equity markets has been drastically different for Europe compared to the US. While American stocks hit record highs, the gap between the S&P 500 and Stoxx Europe 600 (a pan-European index) did too. The true gravity of this is shown in the graph below, with the widening gap between the two being appropriately called the ‘Trump premium’.
As discussed earlier, a key driver for this has been the imminent trade war, driven by Trump’s clear protectionist aims, with hefty tariffs on European exporters to be expected. Tariffs spell demand-side trouble for European companies, as most companies listed on the STOXX 600 obtain only around 40% of their revenues domestically and a large portion (around 20%) of European exports go to the US.
Though this notion holds true for the general European stock market, some industries are impacted more directly than others. With Trump’s less-than-positive view of renewable energy, exemplified by his plan to scrap offshore wind projects entirely, clean energy stocks took a substantial hit. Orsted, a Danish renewable energy company, and Vestas, a Danish wind turbine manufacturer, both experienced a 12.8% fall in share price. The broader utilities sector experienced a 2.6% decrease.
On the other hand, Trump’s military agenda has been positive for European aerospace and defence companies, with a representative index jumping 2.1% to a record high. Trump’s unapologetic view that NATO free-rides on the U.S. military, cemented by warnings to reduce U.S. military support in the region and force NATO members to spend 2%+ of GDP on defence, means it is likely that defence companies will play an increasingly important role within the European economy.
Another aspect to consider is Trump’s promise to implement substantial tax cuts and significant deregulation, giving US-based companies an advantage over their European counterparts, which continue to grapple with stricter regulations and reduced income retention for reinvestment. This disparity could lead to European firms further losing competitiveness in global markets, particularly in industries where margins are narrow or regulatory costs are high. Moreover, as we have already seen with the post-election crypto jump, the expectation is that Trump will support the industries backed by those around him, with significant influence from Elon Musk. This means that, within the US, it is likely that policies will favour sectors like blockchain, technology and AI, aerospace and defence, and electric vehicles (EVs). For Europe, this could deepen challenges in attracting investment to similar sectors, especially as US firms leverage the aforementioned corporate incentives to outpace European innovation.
Despite these factors, there is (as always) another side to the story. If Trump enacts policies such as mass deportations as we expect, the resulting labour shortages in the US could slow productivity growth and reduce returns on investment, indirectly making Europe a relatively more stable environment for long-term investments. Additionally, there are concerns about the sustainability of Trump’s tax cuts, given the expected rise in the US federal deficit.
Either way, it would be wise for European policymakers to look to strategies such as reducing regulatory barriers, increasing subsidies for key industries, and enhancing market integration and investment networks within the EU to retain capital and boost investment.
And Bond markets?
The impact on the bond market is less straightforward, with much of the conversation surrounding the direction of ECB and BoE rate cuts. On one side is the expectation of greater rate cuts, countering an economic slowdown (as shown below) and boosting demand amidst growth-minimising tariffs. Supporting this, Nick Hayes (AXA Investment Managers), favouring European bonds, stated that ‘The bond market in Europe has responded by saying we should see lower growth, which can be offset by rate cuts from the ECB [...not going to be aggressive enough that it's going to push us into a nasty recession]’.
Though this notion holds true for the general European stock market, some industries are impacted more directly than others. With Trump’s less-than-positive view of renewable energy, exemplified by his plan to scrap offshore wind projects entirely, clean energy stocks took a substantial hit. Orsted, a Danish renewable energy company, and Vestas, a Danish wind turbine manufacturer, both experienced a 12.8% fall in share price. The broader utilities sector experienced a 2.6% decrease.
On the other hand, Trump’s military agenda has been positive for European aerospace and defence companies, with a representative index jumping 2.1% to a record high. Trump’s unapologetic view that NATO free-rides on the U.S. military, cemented by warnings to reduce U.S. military support in the region and force NATO members to spend 2%+ of GDP on defence, means it is likely that defence companies will play an increasingly important role within the European economy.
Another aspect to consider is Trump’s promise to implement substantial tax cuts and significant deregulation, giving US-based companies an advantage over their European counterparts, which continue to grapple with stricter regulations and reduced income retention for reinvestment. This disparity could lead to European firms further losing competitiveness in global markets, particularly in industries where margins are narrow or regulatory costs are high. Moreover, as we have already seen with the post-election crypto jump, the expectation is that Trump will support the industries backed by those around him, with significant influence from Elon Musk. This means that, within the US, it is likely that policies will favour sectors like blockchain, technology and AI, aerospace and defence, and electric vehicles (EVs). For Europe, this could deepen challenges in attracting investment to similar sectors, especially as US firms leverage the aforementioned corporate incentives to outpace European innovation.
Despite these factors, there is (as always) another side to the story. If Trump enacts policies such as mass deportations as we expect, the resulting labour shortages in the US could slow productivity growth and reduce returns on investment, indirectly making Europe a relatively more stable environment for long-term investments. Additionally, there are concerns about the sustainability of Trump’s tax cuts, given the expected rise in the US federal deficit.
Either way, it would be wise for European policymakers to look to strategies such as reducing regulatory barriers, increasing subsidies for key industries, and enhancing market integration and investment networks within the EU to retain capital and boost investment.
And Bond markets?
The impact on the bond market is less straightforward, with much of the conversation surrounding the direction of ECB and BoE rate cuts. On one side is the expectation of greater rate cuts, countering an economic slowdown (as shown below) and boosting demand amidst growth-minimising tariffs. Supporting this, Nick Hayes (AXA Investment Managers), favouring European bonds, stated that ‘The bond market in Europe has responded by saying we should see lower growth, which can be offset by rate cuts from the ECB [...not going to be aggressive enough that it's going to push us into a nasty recession]’.
A key factor to consider, however, is the inflationary impact of Trump’s policies. Considering first the US specifically, investors expect to experience a high-growth, high-inflation environment under Trump, requiring that rates stay relatively high to combat this. If this is the case, it is likely that Europe will be pressured to follow suit. There are also a number of compounding factors that could lead to an inflationary environment within Europe that is not suitable for rate cuts and may warrant a more hawkish approach. Firstly, the proposed increased tariffs will increase trade deficits within Europe, while a US-China trade war will more than likely cause significant supply chain issues, raising costs. Moreover, if NATO members meet Trump’s military spending demand, we could see a significant increase in government spending. This, combined with the downward pressure on the Euro that we are already seeing, gives the ECB little freedom to cut rates. In fact, according to Reuters, analysts expect global yields to rise.
Conclusion
Although the economic future of Europe may seem bleak at first glance, the true outlook goes far beyond the tariff headlines and stock market numbers. The reality is that the true extent of Trump’s policies is yet to be known; his guns-blazing tariff threats may well end up being just that – threats. At the end of the day, only time will tell. We believe that the challenges posed present Europe with an opportunity for unity, resilience, and growth. Diversifying trade, fostering innovation, and strengthening intra-European cooperation could be Europe’s path to emerging stronger than before.
Written by Victor Blanc, Maya Doyle, Pierluca Panza, Rares Rosulescu.
Conclusion
Although the economic future of Europe may seem bleak at first glance, the true outlook goes far beyond the tariff headlines and stock market numbers. The reality is that the true extent of Trump’s policies is yet to be known; his guns-blazing tariff threats may well end up being just that – threats. At the end of the day, only time will tell. We believe that the challenges posed present Europe with an opportunity for unity, resilience, and growth. Diversifying trade, fostering innovation, and strengthening intra-European cooperation could be Europe’s path to emerging stronger than before.
Written by Victor Blanc, Maya Doyle, Pierluca Panza, Rares Rosulescu.
Sources
- Albori, M., Moro, A., & Nispi Landi, V. (2024, July). US election risks and the impact of Trump’s re-election odds on financial markets.
- BMW Blog
- Bloomberg
- European Central Bank (ECB)
- European Commission
- European Council on Foreign Relations
- Euronews
- Federal Reserve Economic Data (FRED)
- Financial Times
- Organisation for Economic Co-operation and Development (OECD)
- Politico
- Reuters
- The Guardian
- TradingView
- TwentyFour Asset Management
- United Nations Conference on Trade and Development (UNCTAD)
- United States International Trade Commission (USITC)
- Volkswagen Newsroom
- World Integrated Trade Solution (WITS) - World Bank