MNI INTERVIEW: EU More Prepared, But Vulnerable, To US Tariffs
MNI (LONDON) - The European Union is more prepared to respond to U.S. tariffs on its goods than during the first administration of President Donald Trump, but a trade war could both spark higher inflation and, in combination with fiscal retrenchment, push the bloc towards recession, a leading Austrian trade expert told MNI.
“Trump must expect that the European Union will retaliate within the scope of WTO rules, and it will do so faster, with more resolve than last time, when it took a while for the Europeans to get united. At least in Germany there were people saying, ‘No, let's be careful.’ I don’t think that will happen again,” said Gabriel Felbermayr, director of the Austrian Institute of Economic Research as well as an adviser to the German Federal Ministry of Economic Affairs and Climate Action.
A swift European response may be made easier by the fact that trade is the exclusive competence of Europe, at a time when the EU’s two largest countries are undergoing a period of political uncertainty.
“The Commission could react more quickly if Berlin and Paris are preoccupied with other things,” Felbermayr said in an interview.
But Europe’s relative weakness, with the bloc, and especially Germany, now more dependent on American energy, security, technology and trade than in 2018, could make reaching an understanding with Washington more difficult. (See MNI INTERVIEW: EU Should Rethink Green Policy-Austria's Kocher)
“All that makes it a little bit harder this time to enter discussions with strong arguments, but the danger of not reacting is that you could simply be stuck with stupid, discriminatory tariffs,” he said.
TRADE UNCERTAINTY
While deepening the EU’s single market would be an optimal response to increased trade uncertainty, fresh barriers to U.S. markets are likely to prompt Europe to seek substitutes elsewhere, Felbermayr said, noting that the medium-to- long-run effect of U.S. trade action against China has been to boost its sales to other Asian countries and Mexico.
“A deeper single market gives the EU negotiators a stronger bargaining position, because a deeper market is not only valuable for the Europeans themselves, but also for outsiders who want or have access to it.”
Import tariffs will raise U.S. prices just as Trump’s planned, and largely unfunded, tax cuts are likely to further boost inflation and push up fiscal deficits, reducing the scope for the Federal Reserve to ease monetary policy, and pushing the dollar higher against the euro, Felbermayr said. A weak currency, with upside implications for prices, will add to the European Central Bank’s challenges if reduced exports also squeeze growth, and, in combination with the implementation of Europe’s new fiscal rules, could tip the bloc towards recession. (See MNI INTERVIEW2: Trump Stagflationary For Eurozone-ECB's Wunsch)
“Baseline growth is already weak. If we see a lot of fiscal retrenchments in many countries at the same time that would cause recessionary tendencies.
“Here in Austria the government has announced a budget reduction worth about 1.2% of GDP in one year - and Austria is not the country that is running the most unsustainable deficit. There is, however, the opposite possibility in Germany, where the new government -although it may not be in place until the second half of 2025 - does mobilise more investment. But with Europe already close to recession the risk is very realistic.”