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Writer's pictureThe San Juan Daily Star

‘Worst economic nightmare has come true’: Europe braces for Trump



People celebrate the results of the second round of legislative elections in France, which took months to form a government after the vote, at Place de la Republic in Paris, July 7, 2024. As a new Trump era begins, internal political squabbles and the fallout from a global backlash to inflation, immigration and ruling elites are hobbling Germany and France. (Dmitry Kostyukov/The New York Times)

By Patricia Cohen


The outlook for Europe’s economy has been disappointing.


Last week — after Donald Trump’s victory in the presidential election — it got worse.


Deep uncertainty about the Trump administration’s policies on trade, technology, Ukraine, climate change and more is expected to chill investment and hamstring growth. The launch of a possible tariff war by the United States, the biggest trading partner and closest ally of the European Union and Britain, would hammer major industries such as automobiles, pharmaceuticals and machinery.


And the need to raise military spending because of doubts about the United States’ guarantees in Europe would further strain national budgets and increase deficits.


In addition, Trump’s more confrontational attitude toward China could pressure Europe to pick sides or face retribution.


“Europe’s worst economic nightmare has come true,” said Carsten Brzeski, chief economist at the Dutch bank ING. The developments, he warned, could push the eurozone into “a full-blown recession” next year.


With political turmoil in Germany and France, Europe’s two largest economies, this latest blow could hardly come at a worse time.


The same day that Trump’s victory was announced, German Chancellor Olaf Scholz effectively disbanded his coalition government over deep differences about spending priorities and deficits.


For Germany, which is already weathering a second year of recession, the economic challenges posed by another Trump administration are particularly acute. Its economy foundered after Russia invaded Ukraine in 2022 and the flow of cheap Russian gas — a key ingredient in the country’s industrial success — ended.


Germany is struggling on two fronts. Volkswagen, the continent’s biggest automaker and Germany’s largest employer, recently announced that it would probably close plants and lay off workers. Competition from Chinese electric cars has already bitten into the sector’s sales overseas and in Europe.


Leaders are torn between placating China or confronting it. The German government last month voted against the EU’s plan to impose tariffs as high as 45% on electric vehicles made in China. Other countries such as Spain abstained. A majority approved, and in response, China slapped new duties on European brandy, most of which comes from France.


Tit-for-tat tariffs between the United States and the EU would further dim the outlook for the auto industry. The United States is the largest market for cars exported from Germany, accounting for nearly 13% of the 3.1 million autos that it sold abroad in 2023.


Trump’s talk during the campaign of making the EU “pay a big price” for not buying enough American imports and imposing across-the-board tariffs of 10% or 20% may be a starting point for negotiations. Yet even analysts who expect him to take more modest steps say targeted duties on the auto industry are likely.


“Many in Europe have not yet fully understood what it means to think about geopolitics and economic policy together,” said Hildegard Müller, president of the German Association of the Automotive Industry.


Higher American tariffs, of course, reach far beyond Germany and the automotive industry to include Novo Nordisk, the pharmaceutical company behind Ozempic, as well as sectors such as food, wine, cheese, pearls, chemicals, nuclear reactors, glassware, shoes and more in more than two dozen countries.


Luisa Santos, deputy director of BusinessEurope, a lobbying group representing thousands of companies, warned that tariffs would raise costs and hamper investment.


“We’re still hoping that because of the importance of the economic relationship, they will be reconsidered and we won’t have them,” she said of tariffs. Direct investment from the EU in the United States totaled $2.4 trillion in 2022, which in turn created more than 3.4 million American jobs, according to the EU.


Currently, the average U.S. tariff for European imports is about 3% to 4%.


Meanwhile, higher U.S. duties on China, another of Trump’s trade promises, would probably encourage Chinese manufacturers to expand sales outside the United States, heightening competition with European producers.


European companies may look to set up or expand production in the United States. Yet any manufacturer that uses materials imported from China would find costs rising no matter where their facilities were.


Vestas, a Danish company and the world’s leading wind turbine maker, said it was already increasing production at its two American plants in Colorado. More than 40% of its orders originated in the Americas in the three months that ended in September.


“The world has become different in terms of tariffs,” Vestas CEO Henrik Andersen said on a call with industry analysts last week. Vestas has already had to navigate tariffs that were imposed during the first Trump administration and the Biden administration, he said. “Which is why you try to exclude more and more volumes and more and more components from China origin when it’s about the U.S.,” he said.


The need for a coordinated EU response dominated last week’s summit in Budapest, Hungary.


“The sense of urgency is greater than it was a week ago,” said Mario Draghi, the former Italian prime minister who recently completed a report on European competitiveness.


Draghi called for increasing yearly public investment by $900 billion to enable Europe to reverse its stagnant economy and compete better with the United States and China.


More important now, he said, is to redouble efforts to link the bloc’s economies with a single capital market and by issuing common debt, proposals that have bred contention.


“Don’t ask what the U.S. can do for you, ask what Europe should do for itself,” Italian Prime Minister Giorgia Meloni said at the meeting. “Europe must find a balance. We know what we have to do.”


By the meeting’s end, leaders adopted a declaration promising to ramp up Europe’s competitiveness.


But whether the EU can turn those sentiments into reality remains an unanswered question given increasing political fragmentation within Europe and the rise of right-wing parties that are skeptical of giving Brussels more power.

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