Status quo and outlook for the European economy

Trump 2.0 seems the most likely scena­rio. In our base­line scena­rio, we assume that Donald Trump wins the US presi­den­tial elec­tion and can initi­ally “govern through” with a Repu­bli­can majo­rity in both houses. Further poli­ti­cal pola­riza­tion also seems likely in Europe. The clear re-elec­tion of Ursula von der Leyen as EU Commis­sion Presi­dent has preven­ted the EU from ente­ring a second Trump presi­dency without leader­ship. Howe­ver, the expec­ted streng­thening of the poli­ti­cal frin­ges in the 2025 Bundes­tag elec­tions and, in parti­cu­lar, the elec­tion of Marine Le Pen as French Presi­dent in 2027, pose new thre­ats. — We are aware that these assump­ti­ons are asso­cia­ted with a high degree of uncer­tainty and that the risk of geopo­li­ti­cal escala­tion remains high. 

Protec­tion­ism and a loose fiscal policy are on Trump’s agenda. Raising tariffs against syste­mic rival China and, above all, count­ries with large trade surplu­ses with the US and a strict reduc­tion in immi­gra­tion are at the top of the list of prio­ri­ties. In addi­tion to these protec­tion­ist measu­res, Trump 2.0 is likely to seek an addi­tio­nal loosening of fiscal policy. Over­all, there will be higher defi­cits and debt compared to a Demo­cra­tic presidency. 

Further­more, uncer­tainty is likely to increase under Trump. This means that Donald Trump’s second presi­dency will make the alre­ady fragile geopo­li­ti­cal situa­tion even more uncer­tain and increase the risk of regio­nal conflicts spreading. 

In the USA, we expect the broad-based increase in US tariffs to be imple­men­ted shortly after the take­over. — The plan­ned signi­fi­cant rest­ric­tion of immi­gra­tion or even a repa­tria­tion of immi­grants will lead to a worsening of the alre­ady tense labor situa­tion due to the reti­re­ment of the baby boomers. In other words, the announ­ced immi­gra­tion policy will increase wage pres­sure. Weaker US econo­mic growth is also to be expec­ted in the medium term due to higher infla­tion and inte­rest rates. 

We expect the count­ries affec­ted by the US tariffs to respond with coun­ter­me­a­su­res. These will then gene­rate addi­tio­nal infla­tio­nary pres­sure in the count­ries concerned. 
But there are also winners from Trump’s policy. — The tariff increa­ses will place an addi­tio­nal burden on inter­na­tio­nal trade, which will prima­rily affect count­ries with export surplu­ses such as China and Germany. Howe­ver, there will also be count­ries that will make “deals” with Presi­dent Trump (e.g. India) or will only be slightly (if at all) affec­ted by the tariffs due to exis­ting free trade agree­ments. These count­ries could bene­fit from the relo­ca­tion of produc­tion faci­li­ties. Along­side Mexico and Canada, Japan is ther­e­fore also on the list of poten­tial bene­fi­ci­a­ries of a new Trump administration. 

The rest of the world is likely to be parti­cu­larly affec­ted by the geopo­li­ti­cal course set by a Trump admi­nis­tra­tion. Europe and China are likely to bear the brunt of this. Europe will be affec­ted by the US change of direc­tion in its Ukraine and NATO policy. Under US pres­sure, the EU is likely to mobi­lize addi­tio­nal resour­ces to support Ukraine and push ahead with its own defence stra­tegy. In such an envi­ron­ment, the previously contro­ver­sial recom­men­da­ti­ons of the Draghi report are likely to be imple­men­ted. Under exter­nal pres­sure, there is a chance that there will not only be joint defense initia­ti­ves, but that the propo­sed far-reaching measu­res to over­come the struc­tu­ral weak­ness of growth in the EU will be tack­led. The common bonds called for by Draghi will then proba­bly also become a reality. 

Dr. Jürgen Michels has been Chief Econo­mist and Head of Rese­arch at BayernLB in Munich since Octo­ber 2013. Before joining BayernLB, he worked between 66 2002 and 2013 as a capi­tal market-orien­ted euro­zone econo­mist at Citigroup in London, since 2008 as chief euro­zone econo­mist. From 1997 to 2002 he worked as an econo­mist at Sal. Oppen­heim in Colo­gne and from 1996 to 1997 as a rese­arch assistant at the Insti­tute for Inter­na­tio­nal Econo­mic Policy at the Univer­sity of Bonn. — Dr. Michels studied econo­mics at the Univer­sity of Bonn. He recei­ved his docto­rate from the Univer­sity of Frank­furt with a thesis on central bank strategies.