U.S. tariffs have emerged as a significant challenge for Europe, with the potential to adversely affect the region’s already struggling economy due to escalating trade tensions. These tariffs are likely to make European products, such as wine, cheese, and cars, more costly for American consumers while also negatively affecting European consumers by dampening demand within the Eurozone.
As the European Central Bank (ECB) deliberates on further interest rate cuts later this month, the region’s growth remains slow, with inflation nearing the ECB’s 2% target and consumer confidence beginning to stabilize. However, the Governor of Greece’s central bank has expressed concerns that the tariffs could undermine these gains, potentially leading to a “negative demand shock” by significantly reducing prices.
Yannis Stournaras, a former finance minister, highlighted the risks of Europe becoming a destination for inexpensive Chinese goods if the U.S. becomes a less attractive market. In response to previous issues, the EU had imposed anti-dumping duties on China’s electric vehicles to prevent a saturation of low-cost Chinese goods in European markets, prompting China to retaliate with tariffs on European pork.
Stournaras echoed EU Commission President Ursula von der Leyen’s caution regarding the potential indirect effects of these tariffs, emphasizing the EU’s stance against accommodating global overcapacity or market dumping. During a televised interview following the tariff announcement, von der Leyen reiterated this perspective, underscoring the need for close observation of these developments.
President Trump’s tariffs, calculated using a straightforward formula, impose varying rates on different countries: 10% on the U.K., 31% on Switzerland, and an additional 34% on China, with the EU facing a 20% tariff on U.S. imports. This policy shift is significant for Trump’s presidency and alters the U.S.’s trade relationships globally.
According to a note by Andrew Kenningham, Chief Economist at Capital Economics, the high tariffs are unlikely to be fully absorbed by consumers or producers, potentially affecting sentiment more than anticipated. Amid these uncertainties, ECB policymaker Isabel Schnabel suggested that the uncertainty may continue beyond “Liberation Day.”
In response to Trump’s extensive tariff regime, the EU is preparing possible countermeasures if diplomatic negotiations do not succeed. One potential measure could be targeting American tech companies, which have contributed to Europe’s €109 billion trade deficit in services with the U.S. However, opinions differ on the best response, with Belgium’s Prime Minister Bart De Wever criticizing tariffs as detrimental and arguing against reciprocal actions.
If the EU engages in retaliatory actions, it could intensify the trade war, impacting major companies on both sides. Previously, the EU considered implementing a digital services tax but lacked unanimous support among its 27 member states.
The Euro Stoxx 50, a leading regional stock index composed of 50 stocks from eight Eurozone countries, has fallen by 11.5% over the past five days. The ECB is set to reveal its next interest rate decision on April 17.
This story was originally featured on Fortune.com.
