Samy Chaar, chief economist at Lombard Odier, a private bank and asset manager, shared his views with Paperjam on the potential economic consequences for the EU during a second term of a Trump presidency, following his victory in the US presidential election on 6 November 2024. Trump’s political agenda, including his “America First” policy and rhetoric suggesting potential increases in trade tariffs with China, Japan and the EU, could have significant implications for global trade. Experts warn that in today’s highly integrated supply-chain world, a trade tariff war would disrupt global economic ties and stifle growth. Chaar believes that while such a conflict would be detrimental and likely harmful, the possibility cannot be fully ruled out. Despite being a key US ally, Europe could find itself caught in a broader geopolitical struggle, as the shifting dynamics of multipolarity--an amalgamation of competing global forces--sends ripples through European officialdom.

While economic recovery is progressing at different paces across European countries, the larger eurozone economies are likely to face significant headwinds if Trump proceeds with imposing additional tariffs. Such measures could exacerbate existing vulnerabilities, particularly in member states that are heavily reliant on global trade and external demand.

“We don’t expect Trump’s tariffs and the EU’s likely retaliation to have a large inflationary impact on Europe, as the relative size of US goods in the European consumer basket is limited,” said Chaar. “However, the risks to [European economic] growth are more worrisome.” He explained that Europe’s starting point is one of more anaemic GDP growth compared to the US, and rising uncertainty would be damaging, especially given Europe’s reliance on external demand.

On the other hand, Chaar suggested that the EU might negotiate deals to purchase more US defence or energy supplies to mitigate the negative effects of these tariffs. Either way, he believes that Europe would still face economic pressure.

Chaar added, “A reasonable reaction from the European Central Bank is to cut rates more than otherwise--given inflation risks would be contained, and the growth outlook would be a bigger concern.” Such a move would aim to boost consumption and investment. The good news, according to Chaar, is that “unlike last time when a trade war was under way, the ECB now has room to do this.” Over the medium to long term, with inflation under control, Chaar expects euro area deposit rates to settle around 1.50%, “a far cry from zero, or even -0.5% from the last cycle.” This would give the ECB more room to manoeuvre with monetary policy rates. “So, in extremis, rates could be cut by an additional 100bps and still be above zero,” he argued.

Overall, Chaar forecasted, “Our base case is something more limited--we would expect just one or two additional 25bps rate cuts next year [in 2025] by the ECB, leaving room for more easing later if the growth picture calls for it.” He added, “It’s a strategy with limited drawbacks,” as “these moves can be reversed later, inflation is unlikely to be a big issue given Europe’s weak demand picture, and as discussed, rates are sufficiently above zero to offer policy space.” Such a move would have “clear benefits,” Chaar affirmed, “stimulating the rates-sensitive sectors of the economy and offsetting some of the damage to growth from a trade war.” Though cautious, Chaar concluded, “So, we think from a risk-management perspective, it makes sense to pursue it.”