Wall Street sounds alarm on Europe’s economy over renewed U.S. tariff threat
U.S. President Donald Trump’s threat to impose a 30% tariff on European Union goods has investment banks warning that the move could trigger a “prolonged and deeper economic slowdown” across the continent and potentially force the European Central Bank to cut rates. Trump revealed the new rates in letters to European Commission President Ursula von der Leyen on Truth Social over the weekend. He added that if the EU retaliated with higher tariffs , “then, whatever the number you choose to raise them by, will be added on to the 30% that we charge.” Goldman Sachs said the letter to the EU came as a “surprise” that “reignited concerns around the Euro area outlook,” as it followed what were seen as “constructive” trade negotiations. “That said, President Trump’s threat might well be a negotiating tactic and (for now) we maintain our baseline that a “framework agreement” to maintain current tariff rates can be reached, including 10% on all goods and 25% on steel/aluminium and autos,” said Goldman Sachs’ chief European economist Sven Jari Stehn in a note to clients on July 13. However, the potential economic damage if the tariffs are implemented is significant. The Wall Street bank estimates that a sustained 30% tariff would lower the euro area’s gross domestic product by a cumulative 1.2% by the end of 2026. Economists at Barclays echoed the sentiment, forecasting a “deeper near-term contraction in economic activity.” They suggest that a major tariff hike could slash a further 0.7 percentage points from the euro area’s real GDP growth. “The hit to euro area growth would be larger if we were to account for the fact that, so far, the EUR has appreciated and that global growth would also be affected by the higher tariffs the US is threatening to impose on other countries from 1 August,” said Barclays chief European economist Silvia Ardagna, in a note to clients on Monday. This downturn would likely be disinflationary, putting further pressure on the European Central Bank to lower rates, according to the team led by Ardagna. Barclays forecast that inflation would “undershoot the 2% target more deeply, and for longer,” prompting the European Central Bank to cut rates. The investment bank suggested that if the U.S. goes ahead with a 30% tariff and the European Union retaliates, the ECB could be forced to cut rates to 1% by the first quarter of 2026. Goldman Sachs, likewise, sees the strong euro, combined with tariffs, leading to “small core inflation undershoot in 2026,” forecasting a slightly lower interest rate than the rest of the market. “While the Governing Council might hold rates at 2% if a favourable trade agreement is reached, we would expect ECB officials to cut further under a 30% tariff rate than in our baseline,” Goldman’s Stehn added. The bank expects the ECB to hold rates in July. The Wall Street bank also expects the euro to strengthen further against the dollar over the next 12 months, forecasting a EUR/USD rate of 1.25, driven by a large German fiscal stimulus package and a weaker dollar. That said, EU Trade Commissioner Maros Sefcovic on Monday expressed optimism that the U.S. and the EU could find a solution. “The feeling on our side was that we are very close to an agreement,” he reportedly said ahead of an EU trade ministers’ meeting in Brussels. Berenberg economists, like Goldman Sachs, believe the tariff threats, while escalatory, are still a negotiating tactic. “While the negotiations between the EU and the US are still ongoing and Trump has come out with extreme positions multiple times before reversing them later, this new threat is worse than we expected,” said Berenberg economist Salomon Fiedler. “While we still think that a 10% tariff rate is the most likely final outcome, the risks are now strongly skewed towards higher rates,” Fielder added. “The fact that Trump only threatened the new 30% rate for 1 August, instead of implementing it more quickly, suggests he is still looking to negotiate.” EUR= YTD line
