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The outcome of the U.S. presidential election on November 5, 2024, is likely to have a significant impact on the European Union’s economy. As the world’s largest economy and one of the EU’s key trading partners, U.S. policies and rhetoric can influence global markets, affecting trade, investment, and economic stability in Europe.

Economic Uncertainty and Market Volatility

The ongoing U.S. presidential campaign has already introduced uncertainty into financial markets, with starkly different policy agendas from candidates like President Joe Biden and former President Donald Trump. Investors are bracing for volatility, particularly with Trump’s potential return to protectionist trade policies. During his first term, tariffs on European goods triggered market disruptions, and a Trump victory could reignite similar fears. Goldman Sachs has projected that a Trump re-election could reduce Eurozone GDP by 1%, representing a €150 billion blow to the EU economy due to heightened trade tensions and uncertainty.

Trump’s “America First” policies are expected to strain U.S.-EU trade relations. His proposal to impose a 10% tariff on all U.S. imports, including those from Europe, could spark retaliatory measures from the EU, risking a full-blown trade war. This scenario could lead to reduced industrial output in Europe and put upward pressure on inflation, adding to existing economic challenges.

Impact on Key European Economies

Germany, as Europe’s largest economy and a major exporter to the U.S., is particularly vulnerable to disruptions in transatlantic trade. Economists warn that a Trump presidency could trigger declines in Germany’s industrial production, echoing the downturns seen during his first term. Italy and Finland, with their strong manufacturing sectors, are also likely to face economic headwinds due to increased tariffs and trade barriers. The interconnectedness of the EU means that disruptions in one country could have cascading effects throughout the region.

Defense Spending and Security Concerns

The U.S. election will also have implications for European defense spending. Trump has consistently pressed NATO allies to meet their 2% GDP defense spending commitments. A second Trump term could force European nations to allocate more funds to military budgets, potentially diverting resources away from critical social services and infrastructure. His stance on U.S. military aid to Ukraine could further complicate European security. If U.S. support is reduced, EU nations might need to shoulder more of the burden for regional security, straining national budgets and reshaping the strategic landscape as tensions with Russia persist.

Financial Market Reactions

Historically, U.S. elections have caused global market fluctuations. After Trump’s 2016 election, markets saw a surge in equity prices and long-term yields due to expectations of fiscal stimulus. If Trump is re-elected, similar short-term dynamics could emerge in U.S. markets, although European economies could face longer-term risks. Rising interest rates and a stronger dollar would likely tighten financial conditions, weakening the euro and limiting Europe’s ability to benefit from any U.S.-led global demand increases.

The 2024 U.S. presidential election will have far-reaching consequences for the EU economy, particularly through trade policy uncertainty, defense spending pressures, and financial market reactions. If Trump is re-elected, the EU will face a challenging economic landscape marked by heightened volatility and strategic dilemmas that could reshape transatlantic relations for years to come. Preparing for these uncertainties will be crucial for European leaders as they navigate an unpredictable global environment.

Written by: Nenad Stekić