European Union countries are freaking out over Donald Trump’s incoming administration. They want to start talks with his team now to avoid a full-blown trade disaster.
The guy’s made it clear he’s all in on protectionist policies, and Europe isn’t exactly in the mood for surprises from its largest trading partner. Some EU diplomats are saying the bloc should be ready for anything, including slapping retaliatory tariffs on U.S. goods if Trump makes good on his threats.
On Thursday, trade ministers from across the EU sat down to map out their strategy. The hot topic? Trump’s promise of across-the-board tariffs ranging from 10% to 20%. That’s not a slap on the wrist—it’s an economic punch in the face for Europe.
But it’s not all bad. The EU thinks it can find some middle ground, like boosting liquefied natural gas (LNG) imports from the U.S. or teaming up with Washington to go after China’s shady trade tactics. That said, a backup plan is on the table. The commission is putting together a list of U.S. goods it can target if things go south.
Retaliation ready, but cooperation comes first
Valdis Dombrovskis, the EU’s trade chief, summed it up like this: “If we see new disputes or measures targeting the European economy, we’ll react in a coordinated, precise, and proportionate way.”
During the Thursday meeting, EU diplomats agreed on one thing—they’ve got to stick together if they’re going to handle whatever Trump throws their way.
Eric Mamer, the commission’s spokesperson, tried to calm nerves, saying they’re already talking to Trump’s team. Of course, they’re limited by U.S. transition protocols, but at least the lines of communication are open. That’s not enough for some EU leaders though.
Poland, which takes over the EU’s rotating presidency in January, is pushing hard for stronger ties with Washington. Polish Deputy Minister Ignacy Niemczycki said the EU has to be proactive and bring solutions to the table, not just react to what Trump’s team does.
While the EU figures out its next move, markets aren’t waiting. The euro dropped to $1.0335 on Friday, its lowest level in two years. Traders are panicking over the possibility of harsh U.S. tariffs hitting Europe’s export-heavy economies.
And it’s not just about Trump. Germany and France (the bloc’s powerhouses) are dealing with their own political disasters, which isn’t helping.
Matthew Landon, a global market strategist at J.P. Morgan, didn’t sugarcoat it. “This puts a 50 basis point rate cut on the table,” he said, referring to the European Central Bank (ECB) potentially slashing interest rates to prop up the economy.
That’s a big jump from the 15% chance traders were betting on just a day earlier.
Economic fallout looms as markets brace for impact
The eurozone’s troubles don’t stop there. The currency has been one of the worst performers in the Group of Ten over the last three months. It’s so bad that traders think the euro could hit parity with the dollar. That’s only happened twice since the currency was launched in 1999. And now, the cost to hedge against further losses is at its highest level in five months.
The economic data coming out of Europe isn’t exactly inspiring confidence either. On Friday, business activity in Germany and France tanked. The eurozone’s composite Purchasing Managers’ Index (PMI) dropped to 48.1, below the 50-point threshold that separates growth from contraction.
Analysts weren’t expecting much, but they were still shocked by how bad the numbers were. The services sector, which had been holding steady, shrank for the first time since January.
The ECB has a tough decision to make. Do they cut rates aggressively to boost the economy, or do they play it safe to avoid stoking inflation? German two-year bond yields fell to 1.98% on Friday, their lowest level since 2022, as traders bet on rate cuts. Some are even expecting up to 150 basis points of easing next year.
Not everyone’s convinced that’s the right move though. ECB Vice President Luis de Guindos urged caution earlier this week, saying they shouldn’t rush decisions with so much uncertainty in the air. Rising trade tensions, global conflicts, and skyrocketing natural gas prices all make the situation more complicated.
Meanwhile, Christian Mueller-Glissmann from Goldman Sachs painted a grim picture. “Europe needs lower rates, but there are too many factors weighing on the region right now,” he said. Rising wages and energy costs are making it harder for the ECB to cut rates without risking inflation.
The ongoing war between Ukraine and Russia is casting a long shadow over the region’s economic outlook. The conflict is driving up energy prices and adding to the uncertainty that’s already making investors jittery.
And let’s not forget about China. The EU is trying to figure out how to team up with the U.S. to tackle China’s trade practices, but that’s easier said than done. Aligning with Washington sounds good on paper, but it’s a tightrope walk when Europe also depends on China for manufacturing and trade.
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