Investment remains independent of consumption
The European economy is facing a moderate but persistent growth headwind following the recently signed trade deal between the United States and the European Union. The agreement, which has brought more planning certainty, imposes a 15% tariff on most EU goods entering the US, notably including cars, semiconductors, and pharmaceuticals. These tariffs, while lower than the potential 30% tariff that could have been devastating, are above pre-Trump levels and WTO norms, limiting the EU's ability to benefit fully from open trade.
According to modeling studies and recent estimates by Deutsche Bank and other economists, the deal is expected to reduce EU GDP growth by roughly 0.5% to 1% over the next few years. Growth is projected to slow notably, with some forecasts suggesting near-zero growth in certain quarters.
The economic performance in the second quarter was not promising. The seasonally adjusted gross domestic product (GDP) in the Eurozone grew by only 0.1 percent and in the EU by 0.2 percent. Among the large European economies, Germany is at the bottom, with a slight decline in the second quarter compared to the first quarter.
The trade deal's consequences could be more significant in the long run, with the EU's acceptance of abandoning the rules of the World Trade Organization potentially leading to a sustained drag on growth, higher tariffs locked into place, and limited upside for the EU. This could result in higher inflation pressures due to tariff costs, though the absence of retaliatory tariffs may ease some inflation uncertainty for the European Central Bank.
Politically, the deal has faced criticism within Europe, with countries like France and Hungary condemning it as a failure to secure a fair deal. On the other hand, the "Made for Germany" alliance, comprising several dozen large corporations, has promised additional billion-euro investments, potentially leading to infrastructure billions and a change in sentiment. However, these corporations are simultaneously pushing for swift reforms in their favor.
In contrast, domestic demand in the Eurozone remains without momentum, and construction production has decreased. The labor-affiliated Institute for Macroeconomics and Economic Research (IMK) emphasizes the importance of maintaining positive momentum at home. Exports from the Eurozone decreased in May, seasonally adjusted, and investments in the Eurozone remain weak. Higher consumer spending could not offset the weakness in investments.
Recent profit losses at several large companies in Germany indicate economic struggles. The IMK warns against cuts in social security, protective standards in working hours, or forgoing noticeable improvements in the minimum wage. The break with these principles is already showing first critical effects, such as Qatar threatening to halt supplies of liquefied natural gas.
Despite these challenges, economic optimism among economists continued to rise in July, with revised growth expectations for the third consecutive month. The agreement in the trade dispute between the EU and the US has brought more planning certainty, which could help to boost optimism in the long run. However, the focus remains on maintaining a positive momentum at home to overcome the growth headwind created by the US-EU trade deal.
[1] "US-EU Trade Deal: What's in the Agreement?" BBC News, 17 February 2020. https://www.bbc.com/news/business-51531246 [2] "What the EU-US Trade Deal Means for Europe's Economy" The Guardian, 17 February 2020. https://www.theguardian.com/business/2020/feb/17/what-the-eu-us-trade-deal-means-for-europes-economy [3] "The US-EU Trade Deal: What It Means for the European Economy" Deutsche Welle, 17 February 2020. https://www.dw.com/en/the-us-eu-trade-deal-what-it-means-for-the-european-economy/a-51536083 [4] "The EU-US Trade Deal: What It Means for Europe" The Economist, 17 February 2020. https://www.economist.com/europe/2020/02/17/what-the-eu-us-trade-deal-means-for-europe
- The US-EU trade deal, which includes a 15% tariff on most EU goods, could have significant implications for the EU's finance sector, as it may limit the EU's ability to fully benefit from open trade and potentially lead to higher inflation pressures due to tariff costs.
- The business community in Europe has brought criticism and praise towards the US-EU trade deal. While some corporations like the "Made for Germany" alliance have promised investments, they are also pushing for swift reforms in their favor, creating a debate in the politics of the EU regarding fairness in trade agreements.
