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What Does the US Election Result Mean for Europe?

25 November 2024

6 min read

John Taylor| Head—European Fixed Income; Director—Global Multi-Sector

Sandra Rhouma| European Economist—Fixed Income

Jamie Harding, CFA| Portfolio Manager—European Credit

Prospective US policy changes look adverse for Europe’s governments and economies—but mostly positive for bonds.

President-elect Trump’s message is clear: the US’s European partners must prepare for new trade tariffs and higher defense costs. How these policies will play out won’t become evident until later in 2025. But we see a range of potential outcomes, including risks and opportunities for European economies and investors.

Tariff Impacts Will Vary Across European Countries

European exports to the US could face tariffs of 10% to 20%, but the impact on euro-area GDP will likely vary widely across sectors and countries. Some of Europe’s biggest export sectors—including autos, machinery, chemicals, pharmaceuticals and food—would be hit hard.

The most vulnerable European countries export large volumes of these goods and have significant positive trade balances with the US (Display).

European Countries in Trade Surplus Could Be Hit Harder

Germany, Italy and France (and the EU overall) have significant trade surpluses with the US, but the UK has a deficit.

Current analysis does not guarantee future results.
As of January 31, 2023
Source: Haver Analytics and AllianceBernstein (AB)

Several sources estimate the hit to euro-area GDP could range from about –0.5% to –1.0% (Display), depending on whether Trump’s measures are fully implemented. Germany appears the most vulnerable, as goods represent most of their exports to the US (4.1% of 2023 GDP), whereas the more services-oriented UK could be less impacted.

Europe’s Manufacturing Powerhouse Would Be Worst Hit by Tariffs

Germany would be worst hit, with France, Italy and Spain also significantly impacted.

Current analysis does not guarantee future results.
As of November 6, 2024
Source: Goldman Sachs

Secondary effects from the threat of 60% tariffs on China could hurt Europe too. European companies could face both a further reduction in demand from a weakened Chinese economy and extra competition from Chinese goods diverted from the US market.

Uncertainty about the impact is already hitting European business activity and investment: the Trade Policy Uncertainty Index indicates that trade policy uncertainty is as high now as in Trump’s first presidency and could seriously impact economic growth. Since the end of September, earnings estimates and share prices in some of Europe’s leading auto manufacturers have already fallen significantly, and their bond spreads have widened.

Defense Costs Will Vary Too

Trump has consistently stressed the need for NATO members to honor their commitment to spend a minimum 2% of GDP on defense. At times, he has proposed increasing that commitment, possibly to 4%. The extra cost would hit the lowest-spending countries the most (Display) and would negatively impact their debt and fiscal deficits over the longer term.

Western European Countries Face Highest Defense Spending Increases

Along with the US, UK and Greece, several Eastern European and Nordic countries already exceed the 2% spending guideline.

Current and historical analyses do not guarantee future results.
As of June 12, 2024
Source: NATO and AB

Additionally, the US has borne the largest share of Ukraine-related military spending: if the US withdrew that support, military aid to Ukraine could fall substantially according to the IfW Kiel Institute. It’s unlikely that European countries could plug the gap given their other significant financial and humanitarian aid commitments to Ukraine (Display), the size of their fiscal deficits and, in some cases, government instability.

The US Has Provided the Most Funding to Ukraine

US military, financial and humanitarian aid to Ukraine at €84.7 billion has been almost double the total from EU countries.

Current and historical analyses do not guarantee future results.
As of August 31, 2024
Source: IfW Kiel Institute

Weaker Growth Means Lower Rates

While anything is possible at this stage, there could be opportunities to avert the worst-case outcomes. Tariff proposals may not be fully enacted, as targeted countries may mitigate impacts through bilateral negotiations and concessions on non-trade issues. Also, companies have learned to better manage tariff risk (from the first Trump presidency) and supply chain resiliency (during COVID). Lastly, Trump has vowed to end the conflict in Ukraine, potentially reducing spending needs there.

Even so, European economies are already struggling to return to meaningful growth after the pandemic, and an external shock could push the region into recession. The market expects the European Central Bank’s (ECB’s) policy rate to settle at 2.0% to 2.25% over the next few years.

We think that level is too high and rates will fall further, as Europe faces the same structural problems as before the pandemic. Fresh challenges from Trump’s policies could mean even more ECB and Bank of England rate cuts. Meanwhile, Trump’s policies could result in higher US nominal growth and inflation, and fewer cuts from the US Federal Reserve.

Bond Markets Could Enjoy a Powerful Tailwind

The prospects of much lower rates in Europe and stronger growth in the US will likely be major positives for euro and sterling bond markets over the next two years. We expect lower yields at the front end of the curve, with marginally higher yields only at the very long end (30 years) due to fiscal deterioration.

Investment-grade issuers with the strongest financials will be the most resilient to tariff pressures, and their bonds should benefit most from falling rates, in our view. High-yield issuers are more sensitive to changes in economic prospects and could be more impacted by a growth slowdown. Even so, European high-yield markets start from a position of strength, with mostly robust fundamentals and strong demand relative to supply. In particular, around 65% of the high-yield market is rated BB, and issuers in this group don’t necessarily need strong growth to service their debt. But we think the lower-quality, more indebted issuers rated CCC and below will likely need growth to sustain their capital structures and are vulnerable to a slowdown.

As rates continue to fall, we think European investors that shun bonds and stay in cash could incur a sizeable opportunity cost.

Active Management Can Play an Important Role

Although the overall impact of the new US policies on European economies and businesses may be negative, we anticipate wide dispersion of outcomes across issuers, sectors and countries. Many issuers of euro-denominated debt, for instance, are multinationals less geared to the European growth cycle. Euro-denominated debt issued by US companies can benefit from both falling euro rates and stronger US economic growth. And issuers’ exposures will likely change over time as policies evolve. Thus, skilled active managers may find opportunities—particularly those that run dynamic risk-aware strategies.

The European Project May Reach a Crossroads

Trump rejects human-caused climate change theories and favors abundant energy supplies, including hydrocarbons, to fuel US economic growth. He’s tasked his team with significant deregulation and government cost-cutting and intends to extend tax cuts due to expire in 2025. In the short term, we think his policies could sharpen US companies’ competitive edge and widen the gap between US and European economic growth rates.

As European governments are already facing a voter backlash over high energy prices, pressure will likely build for the European Union (EU) and UK to reevaluate the pace of their green transitions. Policy changes in the US could also escalate calls in the EU for a more ambitious euro-area program to improve competitiveness and cohesion, including further EU borrowing powers.

Investors will need to stay alert to these events as they unfold and to moves in securities prices that could over- or under-discount the actual impacts of change. Tools that can objectively analyze and consistently evaluate financially material ESG metrics and systematically harness quantitative and fundamental research across vast numbers of bond issues will be vital. It’s only by developing these capabilities that investors can fully assess the impact of potentially wide-ranging changes, and so mitigate risks and capture opportunities during Trump’s term and beyond.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

John Taylor

John Taylor is Head of European Fixed Income and Director of Global Multi-Sector at AB. He is a senior member of the Global Fixed Income, UK and European Fixed Income, and Absolute Return portfolio-management teams. Prior to this, Taylor was responsible for the management of single-currency portfolios. He joined the firm in 1999 as a fixed-income trader and was named in Financial News’s 40 Under 40 Rising Stars in Asset Management in 2012. Taylor holds a BSc (Hons) in economics from the University of Kent. Location: London

Sandra Rhouma

Sandra Rhouma is a Vice President and European economist on the Fixed Income team. Previously, she was a global economist and strategist at Millennium Global Investments, a London-based currency investment manager. From 2019 to 2022, Rhouma worked for the European Central Bank as a banking supervision analyst before moving into a US economist position. She holds a PhD in economics from the University of Surrey and a master’s degree from Paris 1 Panthéon-Sorbonne. Location: London

Jamie Harding, CFA

Jamie Harding is a Vice President and Portfolio Manager for European Credit, focusing on high-yield and income strategies. He joined the firm in 2012 and assumed the role of Portfolio Manager in 2022. Harding has also worked within AB as an associate portfolio manager on the European High Yield and European Income portfolios and as a global fixed-income product specialist within business development. He holds a MSc in international economics, banking and finance from Cardiff University. Harding is a CFA charterholder. Location: London