Trump’s tariff onslaught casts shadow over European economy, even in best case scenario

Robots work on cars of German car manufacturer BMW at an assembly line in Munich, Germany, Friday, Oct. 22, 2021. (AP Photo/Matthias Schrader)

FRANKFURT, Germany — U.S. President Donald Trump’s tariff offensive has led European officials to cut their growth forecasts for this year and next — even in a best-case scenario in which the highest rates on most goods could be negotiated away.

The forecast for this year for the 20 countries that use the euro currency was cut to 0.9 per cent from the previous forecast in November of 1.3 per cent, the European Union’s executive commission said Monday in its regular spring forecast.

The forecast for 2026 was cut to 1.4 per cent from 1.6 per cent.

One reason for the lower growth estimate was the stagnating economy in Germany, where growth is expected to be zero this year after two years of shrinking output. Germany’s economy is heavily dependent on exports but has faced strong headwinds from higher energy costs after the loss of Russian natural gas due to the invasion of Ukraine as well from lack of pro-growth infrastructure spending and competition from China in autos and industrial machinery.

The proposal for a 20 per cent U.S. tariff, or import tax, on goods from Europe in addition to its suspension for 90 days have meant uncertainty “not seen since the darkest days of the COVID-19 pandemic,” said Economy Commissioner Valdis Dombrovskis.

He said the European economy remained “resilient” and that the jobs market remained robust, with the commission predicting a fall in unemployment to a record low 5.7 per cent next year.

And the risks are “tilted to the downside,” he said. One reason: The forecast assumes that the proposed 20 per cent rate can be reduced through negotiations with Washington to the base tariff rate imposed on all countries of 10 per cent.

While the EU‘s top trade official, Maros Sefcovic, has spoken several times with administration officials it remains uncertain how willing Trump might be to reduce the rate. European officials have paused any retaliatory tariffs for 90 days and made a “zero for zero” offer in which each side would drop tariffs on industrial goods such as autos.

The forecast assumed that 25 per cent tariffs on steel and autos from all countries will remain in place, as would exemptions on computer chips and pharmaceuticals.

The eurozone economy grew 0.3 per cent in the first three months of the year, amid hopeful signs of a stronger upswing. But the mood was darkened just two days after the first quarter ended, when Trump on April 2 announced a slew of new, higher than expected tariffs on almost all U.S. trading partners.

David Mchugh, The Associated Press