What Could the US Election Mean for the European Economy?

The upcoming U.S. presidential election is expected to have significant implications for the European economy, particularly regarding trade and defense, according to a report from UBS released this week.

The report notes that the political race has gained traction following Kamala Harris’s candidacy, which has seen her campaign outpacing Donald Trump’s in critical areas such as fundraising and polling. Although the election’s outcome is still uncertain, the potential impacts on Europe are becoming more apparent.

Trade is anticipated to be a primary concern for Europe, irrespective of who emerges victorious in the election. The United States is the European Union’s largest trading partner, and any changes in U.S. trade policy could reverberate throughout Europe.

UBS’s report indicates that there is a very low probability of securing a significant trade agreement between the EU and the U.S. under any scenario. Instead, the focus is likely to shift toward possible protectionist measures, especially if Trump wins. His campaign has proposed aggressive tariff strategies, including a blanket 10% tariff on all imports, which could be employed to leverage negotiations aimed at reducing the trade deficit and bolstering U.S. manufacturing.

Conversely, a presidency under Harris is expected to uphold a more stable approach to trade and defense policies, which might be less disruptive for European investors. UBS suggests that a Harris administration would likely bring continuity and a more predictable policy trajectory, thereby reducing risks to economic growth in Europe and fostering a more favorable investment landscape.

In terms of defense, European nations are already strategizing for a future where they cannot rely solely on U.S. support. The report indicates that, regardless of the election results, European countries recognize the need to allocate more resources to their own defense efforts. This urgency is compounded by recent increases in defense budgets driven by the energy crisis and the ongoing conflict in Ukraine. A Trump victory may heighten this urgency, potentially straining European budgets, whereas a Harris administration could provide additional time for adjustment.

Moreover, if European nations are compelled to allocate more funds to support Ukraine in light of diminishing U.S. assistance, it may create further financial pressures, particularly if the conflict persists. Even countries like Germany, which generally maintain robust financial standings, are facing political scrutiny regarding their willingness and capability to sustain higher-than-normal deficits.

In summary, UBS posits that the U.S. election will more significantly influence the timing of European defense spending rather than its ultimate direction. A potential Trump presidency could hasten the need for increased expenditure, while a Harris administration may facilitate a more gradual transition. Although immediate spending demands could challenge budgets due to Europe’s limited defense manufacturing capabilities, UBS believes that long-term economic advantages may arise from enhanced capacity and innovation in this sector.