As countries across the globe rewrite their trade rule books following the uncertainty posed by US tariffs, a new strategic report predicts that US President Donald Trump’s policies are just the medicine that the European Union needs to become a true single market, fuelling growth, productivity, and profits over the long term.
Although Europe won’t avoid a recession, coordinated fiscal support, likely monetary policy easing from the European Central Bank (ECB), and a renewed integration push “will soften the blow and boost long-term growth”. That’s according to a report by investment research company BCA, called ‘Trump The Unifier’.
“Ironically, Trump is doing more to advance European unity than anyone since Schumann, Monnet, and Adenauer,” Mathieu Savary, BCA’s Chief European Strategist, noted.
Despite the temporary 90-day pause on the 20% tariffs hitting EU goods exports to the US, BCA said a recession is definitely on the cards.
According to the report, the eurozone economy is plagued with uncertainty, weakening business confidence and deteriorating capital expenditure. These challenges arrive at a time when the region is already struggling, with GDP only growing a modest 0.1% in the final three months of 2024.
Tariffs and uncertainty are expected to push an already fragile economy into contraction for at least for two consecutive quarters around mid-2025.
The European Commission estimated tariffs could wipe out 0.2% of eurozone GDP by 2027. In a more severe scenario, if tariffs are permanent or if there are sustained countermeasures, this hit count amount to 0.5%-0.6% in three years' time.
What is on the table when the EU negotiates with the US?
BCA expects that negotiations will take a while, as the US will want to conclude new trade deals with Mexico and Canada before it cooperates with the EU. Canada is also having federal elections on 28 April, pushing back any serious talks until after that.
Savary believes that the discussions between the EU and the US will go into full force in the third quarter of 2025.
And those talks are not going to be easy, as most of the topics on the table are linked to non-tariff barriers. Many of them are linked to internal EU rules, including the EU regulation on information privacy, dubbed GDPR, the common Central Securities Depository regulation (CSDR), and the Common Agricultural Policy.
What is potentially helping the EU’s negotiating position is that the US is exporting a lot more services to the EU than the EU is to the US. The total bilateral trade in this sector was worth €746 billion in 2023, according to the European Commission.
One measure that could help the EU clinch a deal is if the bloc offered to buy more energy from the US. Savary told Euronews Business that “a trade deal will hinge on Europe softening a few nominal rules, but most importantly, buying a lot more US energy”.
The US wants to increase energy production, while Europe is on the lookout for affordable liquified natural gas imports as it builds an enormous LNG regasification facility on the Northern coast to help meet demands across the bloc.
The strategist calls it a win-win situation: “For the United States to have a stable buyer of natural gas is a win. For Europe to be fully supplied in natural gas is a win.”
How to boost the lagging European economy
Washington’s latest flip-flop on tariffs has brought about trade uncertainty, and as a result, the EU’s economy is experiencing declining business sentiment, lowering corporate profits, and dwindling European capital expenditure and investment rates. In short, this is leading to recession in Europe.
A crucial short-term step BCA expects is fiscal support from countries like Germany, where the government’s stimulus package promises an additional 1% per year to growth over the next 2 years.
Another move to boost the eurozone economy could be for the European Central Bank (ECB) to cut its deposit rate below 2%.
Moreover, the report said that the ECB could resume its quantitative easing (QE) programme, a tool that allows the central bank to buy bonds from commercial banks, pumping additional liquidity into the European economy and boosting investments.
Further EU policy measures are expected to include diversifying trade away from the US, which could act as an insurance policy for any external trade shocks the bloc could face in the future.
Improving trade with India, Canada, Latin America, and the UK is on the table, Savary said.
How is Trump good news for the European economy?
With the urgent need to protect the European economy from external shocks and further impacts from Washington’s ever-changing tariffs, the European Union is expected to take a few long-awaited leaps of faith, including the completion of the single market.
The European Union’s economy is still very fragmented, and regulatory variations between countries often act as non-tariff barriers between the member states, a long-running hindrance to Europe’s competitiveness and prosperity.
Lifting regulatory barriers could give a boost to the overall EU economy — as argued in a number of high-profile EU reports.
According to the IMF, non-tariff barriers within the EU are equivalent to a 44% tariff on goods and a 110% tariff on services.
“It’s as if there was a 44% tariff between Germany and Italy, for example,” Savary said, adding that “this is starting to have a very negative impact on growth and explains in big part the gap in productivity between Europe and the United States”.
Services are struggling the most, though this sector provides 65% of the EU’s economic output.
“There's a lot less service trade between European countries than we see between US states, for example,” Savary explained.
Implementing the Capital Markets Union (CMU), now dubbed the Savings and Investments Union (SIU), has been a challenge to EU integration. The SIU aims to tap into private savings to channel them into investments in Europe, as well as streamlining fragmented financial regulations across member states.
However, there is still a long way ahead for European policymakers before it becomes a reality. “The probability of this happening has increased a lot thanks to President Trump,” said Savary.
What investment in Europe appears to be the most favourable?
Amid volatile movements on the stock markets, the German bunds appear to be one of the safest choices, according to BCA. “It's not US Treasuries, it's UK Guilds, it is the Germans Bunds,” Savary said.
The peripheral bond market is also seen as safe in Europe right now, with Spain leading the race, thanks to its strong public finances.
Besides sovereign bonds, so-called defensive stocks (the ones that outperform when markets and the economy are down) also offer protection against the current turmoil, according to the report. Defensive stocks include shares in utilities and telecom firms.
Wider European equities could remain unstable for the next 3 to 6 months, said BCA. However, in the longer term, the report expects European stocks to yield attractive returns, seeing a moment to re-engage as structural reforms take hold.
The bloc’s outlook is expected to improve as “Europe’s energy crisis will continue to fade, global capex will recover, and most importantly, German fiscal stimulus and deeper integration will lift European growth and productivity,” the report said. It added that the current near-term pullback in European stocks has created a buying opportunity for long-term investors.
“Europe is on a much stronger footing to grow than it's been at any point in the last 15 years or so,” Savary said.
Against this backdrop, as the US president’s trade policies are pushing Europe to reform faster, BCA foresees a boost in productivity and profit growth in Europe.
“We think that the next few years are going to remain quite friendly to European equities relative to US equities and for European assets relative to US assets,” the chief strategist said.
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