Trump policies may push ECB to cut rates, Draghi urges reform efforts
Trump’s protectionist policies could push the ECB to cut rates faster than predicted, as renewed tariffs on European exports threaten growth. Draghi urges EU reforms to bridge the tech gap and calls for a united stance in trade talks with the US.
Economists warn that a second Donald Trump term, marked by a return to protectionist policies such as new tariffs on European exports, could pressure the European Central Bank (ECB) to accelerate interest rate cuts to offset expected damage to eurozone growth.
“Renewed trade tensions are likely to weigh materially on growth,” wrote Goldman Sachs economists Sven Jari Stehn and Filippo Taddei in a note this week.
“We expect Trump’s policy agenda to reinforce the case for lower policy rates across Europe,” they added.
Should Trump reintroduce tariffs, the already subdued economic growth in the eurozone could face additional headwinds.
Trade tensions under Trump will hit European exports
European Commission data indicates that the European Union exported €502.3 billion in goods to the United States in 2023, with machinery and vehicles making up nearly €207.6 billion of this total.
Auto exports alone amounted to approximately €40 billion, with the lion share of it coming from Germany.
The prospect of US tariffs on these critical sectors has already impacted German automaker stocks. BMW shares fell over 8% this week, marking their steepest weekly decline since February 2022, when Russia invaded Ukraine. Mercedes-Benz shares saw a similar drop, while Volkswagen extended its record lows.
According to the Goldman Sachs’ report, Europe’s economic output could take a 0.5% hit in real GDP terms, with Germany facing a 0.6% contraction and Italy a 0.3% decline.
The investment bank has consequently lowered its growth projections for the eurozone to 0.8% in 2025 and 1.0% in 2026, both below previous forecasts and consensus expectations.
Analysts indicated that Europe’s economic output could take a 0.5% hit in real GDP terms, with Germany facing a 0.6% contraction and Italy a 0.3% decline.
ECB interest rates, initially expected to settle at 2% in 2025, are now predicted to fall to 1.75%, with an additional 25 basis-point cut forecast for July 2025, according to Goldman Sachs.
Defence spending and security pressures add to EU strains
In addition to the economic implications of higher tariffs, a Trump re-election could bring renewed defence spending pressures for Europe.
Should the EU need to compensate for reduced US military support in Ukraine and to meet NATO’s 2% of GDP defence spending target, the bloc could face a significant financial burden.
Goldman Sachs estimates that such spending could cost the EU an additional 0.5% of GDP each year.
Economists indicate that while increased defence spending could provide some short-term economic stimulus, European economies may struggle to capitalise fully due to typically low growth multipliers in this area. Additionally, rising deficits could exert upward pressure on long-term yields, further dampening consumer and business confidence amid heightened geopolitical risks.
Draghi calls for swift EU reforms to counter competitiveness gap
Former ECB President Mario Draghi has urged EU leaders to accelerate structural reforms, cautioning that further delays would only worsen Europe’s economic stagnation.
“The recommendations from the competitiveness report are already urgent, given the current economic situation. They have become even more urgent following the recent US elections,” Draghi said at a European Council session on Friday.
“Trump’s presidency will make a substantial difference in US-Europe relations, but not necessarily all in a negative direction. Europe must acknowledge this new reality and act accordingly,” he added.
Draghi identified Europe’s productivity lag in the tech sector as a critical area requiring reform, particularly as the US is likely to prioritise technology under a Trump administration. He argued that Europe’s slow pace in adopting new technologies has already widened the productivity gap with the US, a disparity that could further increase if the US accelerates its tech investments.
“The productivity gap between the US and Europe is already significant,” Draghi noted. “If the US further intensifies its focus on the tech sector, this disparity could expand further. Europe must take action to bridge this gap, especially in productivity-enhancing areas.”
Unity in EU trade negotiations essential Draghi also called on the EU to adopt a unified stance in its trade negotiations with the US, emphasising the need to protect European industries.
While he avoided advocating for a trade war, Draghi highlighted the importance of clear dialogue with the US to prevent disruption to Europe’s exports, particularly in sectors most susceptible to Trump’s potential protectionist measures.
“It’s essential to negotiate with the US as allies, with a unified European approach, to protect our producers,” Draghi asserted.
Source: Euro News