EU’s Sluggish Economy Faces Moderate Growth Slowdown from US Trade Tensions

President Donald Trump has persisted with his policy of imposing higher tariffs on trading partners, so the EU faces a potential 30% tariff without an agreement, up from the 20% tax imposed in April and then paused, although still below the 50% rate threatened in May.

The EU has avoided direct retaliation to-date. We expect this cautious approach to continue, even as the EU prepares possible counter-measures. Nevertheless, the approach risks growing tariff asymmetries particularly if US levies on EU goods rise more quickly than EU levies on US exports.

Scope Ratings’ model-based estimates suggest that the implementation of a 15% US tariff would trim euro area and EU growth within a year by increasing the effective US tariff on EU exports by around 16pps, excluding the proposed across-the-board 30% rate (Figure 1). This estimate assumes threatened levies on pharmaceutical exports go into effect.

The most-exposed EU economies are those with a large trade surplus and/or significant trade with the US, such as Germany and Ireland, with the impact of higher tariffs also felt indirectly through their effect on global supply chains.

Among the EU’s four largest economies – Germany, France, Italy and Spain – Germany and Italy are the most vulnerable, each facing an estimated short-term output loss of 0.4pps. The higher tariffs will reduce Spain’s output by a moderate 0.3pps in the medium run. France is expected to experience a more modest cumulative reduction in output of 0.2pps in the medium term.

Trade tensions underpinned the reduction last month of Scope’s forecast for euro area growth for 2025 by 0.5pps to 1.1% though growth is expected to improve to 1.5% next year, lifted by fiscal stimulus in Germany and higher defence spending across the EU.