How Will Trump's Tariff Threats Affect Europe's Economy?

Source: Coindoo Original Title: How Will Trump’s Tariff Threats Affect Europe’s Economy? Original Link: Europe’s economy could feel a noticeable, though limited, shock if Washington follows through on its latest tariff threats, with analysts warning that political symbolism could spill into real economic costs.

Economists at Goldman Sachs Group have modeled the impact of a potential 10% US tariff on several European economies and concluded that the euro area would likely lose around one-tenth of a percentage point of output. While that may sound modest, the bank cautions that the damage would be concentrated in a handful of trade-exposed countries.

Key Takeaways

• Goldman Sachs estimates a 10% US tariff could trim about 0.1% from euro-area GDP.
• Germany would likely take the largest hit due to its heavy reliance on exports.
• Market volatility could amplify the economic impact if confidence weakens.

Politics first, economics second

The scenario stems from remarks by Donald Trump, who said the US could impose tariffs on European nations that sided with Greenland as tensions flared over Washington’s claims toward the semi-autonomous Danish territory. The countries potentially caught in the crossfire include Denmark, Germany, France, Sweden, Norway, Finland, the Netherlands, and the UK.

Rather than a broad global trade war, Goldman views this as a targeted political move with economic side effects. Reduced exports to the US would be the primary transmission channel, weighing on growth in the affected economies.

Germany most exposed

Not all countries would feel the pain equally. Goldman’s estimates suggest Germany would be hit hardest, reflecting its reliance on exports and deep trade links with the US. Depending on how the tariffs are structured, the drag on German GDP could reach between 0.2% and 0.3%, noticeably higher than the euro-area average.

Other countries would likely see smaller declines, closer to 0.1%, assuming the impact remains limited to trade volumes and does not spill into broader financial stress.

Markets react, but resilience remains

Financial markets have already shown signs of unease. European stocks weakened, US equity futures slipped, and investors rotated into traditional safe havens such as gold. Even so, several strategists argue that Europe’s underlying growth momentum remains intact, suggesting the market reaction could fade if tensions cool.

Goldman also notes that the headline estimates may understate the risks. Confidence effects, delayed investment, or renewed volatility in financial markets could amplify the economic hit beyond the initial trade impact.

Europe weighs its response

On the policy front, Brussels has multiple options. These range from slowing progress on trade talks with the US to introducing retaliatory tariffs or deploying the EU’s anti-coercion instrument, a mechanism designed to counter economic pressure from abroad. The UK, by contrast, is expected to focus on diplomacy, seeking to defuse tensions rather than escalate them.

EU officials are reportedly considering tariffs on tens of billions of euros worth of US goods, though sources suggest that negotiation remains the preferred first step before any hard measures are taken.

Little inflation impact, possible rate cuts

Despite the growth risks, Goldman expects the inflation effect to be minimal. Any upward pressure from tariffs would likely be offset by weaker demand. As a result, central banks could respond to a softer growth outlook by cutting interest rates rather than tightening policy.

For now, the tariff threat remains just that – a threat. But the analysis highlights how geopolitical disputes can quickly ripple into Europe’s economy, even when the numbers involved appear small at first glance.