Donald Trump’s economic strategies could have an impact on global financial markets, with particular attention to Europe. According to an analysis by Citi Research last Friday, if he is re-elected, his administration could lead to lower inflation in Europe, leading to lower consumer demand but higher production efficiency.
With the US presidential election set for November 5, the likelihood of Donald Trump winning a second term appears to be increasing, especially after the last presidential debate and the assassination attempt, which apparently drew greater support for the former president.
Possible economic measures that Trump might take, such as imposing a flat 10% tax on all imported goods, ending the conflict in Ukraine, boosting domestic fossil fuel production and exports, and extending tax cuts, could have a number of consequences for Europe.
Europe, which has a €134 billion goods trade surplus with the US (1% of its GDP), is particularly vulnerable to US import taxes, Citi Research analysts noted. During Trump’s first term, trade disputes with China hit overseas demand for European products, and a similar approach could dampen European consumer demand again.
In contrast, an end to the conflict in Ukraine and the availability of cheaper fossil fuels from the United States could significantly improve Europe’s production capacity. Citi Research noted that cheap energy imports from the United States could help ease inflationary pressures, contributing to a downward trend in inflation.
“The combination of lower consumer demand due to import taxes and improved production due to cheap energy imports presents a complex economic landscape for Europe,” explains City Research.
While Trump’s economic strategies have the potential to lower energy costs and reduce inflation in Europe, the positive impact on inflation could be negated if the United States causes inflation to rise by strengthening the dollar.
Moreover, any retaliatory import taxes by the EU or increased costs of CO2 emissions and the implementation of a carbon border adjustment mechanism could counteract some of the effects of low inflation leading to higher prices.
Citi Research also highlighted concerns that increased US borrowing could weigh on European real interest rates. This could lead to tighter financial conditions, which would be particularly challenging for less financially sound European companies and governments.
“During Trump’s first term in office, the European Central Bank’s quantitative easing policy helped mitigate these negative effects,” Citi Research notes.
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