Admittedly, a lot is still unclear, and fully quantifying the impact of such a tariff tsunami, which actually brings back tariff levels of the 1930s, is almost impossible. The 20% blanket tariffs could shave off 0.3pp of eurozone GDP growth over the next two years when only focusing on the direct and indirect trade impact. Interestingly, eurozone exports to the US had increased materially ahead of tariff announcements, and the most immediate effect will be the reversal of frontloading as tariffs take effect.
But there is more to it than the direct impact. Think of the secondary effects on confidence these tariffs will already have on European consumers and businesses. Holding back consumption and investments looks likely. This would keep economic growth in the eurozone at a snail’s pace.
Earlier on Wednesday, Bloomberg reported on a possible support package from the European Commission, accompanying countermeasures to the US, that could help alleviate the impact for the sectors that would be hit hardest. If this were to be the case, it would naturally limit the short-term impact of the tariff shock, but the question remains how long it can limit the fallout of demand.
We’re reducing our eurozone GDP growth forecast
The also-mentioned reforms and boosts to competitiveness would take longer to take effect and materially improve the fate of vulnerable sectors. While the devil is in the details with plans like this, structural improvements to the eurozone economy couldn’t come at a better time. For now, we are reducing our eurozone GDP growth forecast to 0.6% YoY, from 0.7% YoY, for 2025, and to 1.0%, from 1.4%, for 2026
Gauging the impact on inflation is as complicated as it will also depend on the EU’s reaction. Assuming some retaliation by the EU, inflation in Europe will also increase. However, at the same time, US tariffs could add to already high inventory levels and low capacity utilization, being the right recipe for disinflation once companies try to destock. At the same time, other countries hit by US tariffs, think China, might also try to increase exports to Europe by lowering prices. As counterintuitive as it might sound, in the longer run, a fully fledged trade war is likely to be disinflationary for Europe. But in the short term, all eyes are on the Commission’s countermeasures to gauge the impact on inflation properly. The first countermeasures will take effect mid-April, but those are relatively small as they retaliate against steel and aluminium tariffs. As the Commission has not yet announced countermeasures to today’s announcements, the jury is still out on how the overall impact on eurozone prices plays out.
Regarding the European Central Bank, the latest comments by ECB officials stress that there still seems to be a significant group supporting a pause at the next meeting, which will be held in two weeks. Monthly inflation and services inflation are still not where they should be, and many officials are still stressing that the job is just not done.
However, the call for a pause was stronger a few weeks ago when fiscal stimulus expectations brightened the outlook for eurozone growth (and inflation). With tonight’s negative trade and confidence shock and little prospect of quick negotiations, the chances that the ECB will want to push the policy interest rate further into neutral territory in two weeks have clearly increased.