President Donald Trump has persisted with his policy of imposing higher tariffs on trading partners, so the EU faces a potential 30% tariff without an agreement, up from the 20% tax imposed in April and then paused, although still below the 50% rate threatened in May.
The EU has avoided direct retaliation to date. Scope Ratings (Scope) expects this cautious approach to continue, even as the EU prepares possible counter-measures. Nevertheless, the approach risks growing tariff asymmetries particularly if US levies on EU goods rise more quickly than EU levies on US exports.
Scope’s model-based estimates suggest that the implementation of a 15% US tariff would trim euro area and EU growth within a year by increasing the effective US tariff on EU exports by around 16pps, excluding the proposed across-the-board 30% rate (Figure 1). This estimate assumes threatened levies on pharmaceutical exports go into effect.
The most-exposed EU economies are those with a large trade surplus and/or significant trade with the US, such as Germany and Ireland, with the impact of higher tariffs also felt indirectly through their effect on global supply chains.
Among the EU’s four largest economies – Germany, France, Italy and Spain – Germany and Italy are the most vulnerable, each facing an estimated short-term output loss of 0.4pps. The higher tariffs will reduce Spain’s output by a moderate 0.3pps in the medium run. France is expected to experience a more modest cumulative reduction in output of 0.2pps in the medium term.
Trade tensions underpinned the reduction last month of Scope’s forecast for euro area growth for 2025 by 0.5pps to 1.1% though growth is expected to improve to 1.5% next year, lifted by fiscal stimulus in Germany and higher defence spending across the EU.
US-EU Preliminary Agreement Probable
Considering this, it appears likely that the US and EU will achieve some form of a framework agreement even if this involves average US levies of above 10%. A preliminary agreement by 1 August remains firmly possible. Nevertheless, given the seesawing US trade policies of the recent months, the White House might in an alternative scenario firstly impose the 30% levies, potentially temporarily, as leverage in negotiations before settling on an agreement after 1 August.
Any preliminary agreement is likely to contain many caveats and carve-outs – with limited enforceability – serving only to avert further worst-case escalation and act as the starting point for further negotiations.
The EU has several ways to retaliate in the scenario of a worsening trade war, from the newly introduced but yet-to-be-used anti-coercion mechanism to possible tariffs on American exports and the imposition of export controls, though Scope expects any such retaliation to remain gradual.
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Dennis Shen is the Chair of the Macro Economic Council and Lead Global Economist of Scope Group. The rating agency’s Macroeconomic Council brings together the company’s credit opinions from multiple issuer classes: sovereign and public sector, financial institutions, corporates, structured finance and project finance. Arne Platteau, analyst in Credit Policy at Scope Ratings, contributed to this research.