EU-US: Trump likely to be a much greater economic than security headache for the EU

• The withdrawal of former South Carolina Governor Nikki Haley from the Republican primaries today likely further ensures that former President Donald Trump will be the Republican party’s nominee. For the EU this reaffirms security fears around a Trump presidency, following his repeated comments calling into question US support for NATO countries not meeting a 2%-of-GDP defence spending threshold.

• In our view, however, EU fears over a Trump presidency are partly misplaced: we think the security risks are being overblown, and instead, that it is the economic consequences of a Trump presidency that are likely to be much more of a problem for Europe if he wins.  (Side note: our base case is a President Biden victory, see here.)
  • Reasons we think the security threat is over-appreciated:
    • 1) Though admittedly insufficient, there are safeguards: it is now passed into law that a US president cannot unilaterally withdraw from NATO.
    • 2) The condionality of Trump’s NATO statement was focused around countries not paying, which in our view, confirms it is rhetoric designed almost entirely to get countries to increase spending, rather than to undermine NATO.
    • 3) Most importantly: Trump’s threat of allowing Russia to invade countries that do not meet the 2% target means little given that EU NATO countries bordering Russia are all meeting that 2% target anyway.
  • Reasons the economic risks are being under-appreciated:
    • A trade dispute with the US would not only be likely, but would be likely almost immediately into a Trump presidency, given that:
      • A decision will need to be made by the next US president on Trump-era steel and aluminium tariffs on the EU in March 2025.
      • Trump has threatened an additional 10% tariff on all imports and reciprocal tariffs – both of which would become immediate sources of tenison with the EU.
    • Even if escalation is avoided on those disputes (which seems very unlikely), there will be multiple further flashpoints in the pipeline, making longer-term de-escalation difficult, including:
      • The January 2026 implementation of the EU’s CBAM on imports from (among others) the US.
      • Signs that US tech companies will be targeted forcefully by the EU’s Digital Services Act (e.g. already here and here).
    • Trump’s plans would prove particularly damaging to the EU economy, as:
      • The EU has become increasingly dependent on trade with the US in recent years.
      • Germany in particular would be hard-hit, given its open trade economy, (see here), adding further weights on growth to Europe’s largest economy.
    • Even Trump’s NATO threats could prove impactful mainly through an economic lense, as:
      • Many of the countries furthest from reaching the 2% of GDP goal are also those with the highest debt loads and largest fiscal deficits:
        • Spain, Italy and Belgium are not scheduled to meet that target before 2028, and some not until 2035.
        • In each case, enforced faster defence spending growth will likely weigh on the overall growth outlook as:
          • (1) The fiscal situation in those countries will require tougher choices (and probably therefore making some politically less problematic investment cuts).
          • (2) Other investment could be replaced by less productive military spending, given the purchase of military hardware has few knock-on economic benefits comparative to other forms of investment.