Would Trump 2.0 policies be deflationary for Europe? By Investing.com

Donald Trump’s policies might influence global markets, especially in Europe, and his second term could have a deflationary impact on Europe, with potential negative effects on demand and positive effects on supply, Citi Research said on Friday.

As the US presidential election on November 5 approaches, it would be innocuous to say that the possibility of Donald Trump securing a second term is improving, especially after the recent debate and the assassination attempt turning the tide towards the former president.

Trump’s proposed policies, including a 10% blanket tariff on imports, ending the war in Ukraine, increasing domestic fossil fuel production and exports, and extending tax cuts, could have varied consequences for Europe.

Citi Research analysts pointed out that Europe’s €134 billion goods trade surplus with the US (1% of GDP) makes it particularly susceptible to US tariffs. Trump’s initial term, trade conflicts with China harmed external demand, and similar measures could again suppress European demand.

On the other hand, a resolution to the war in Ukraine and lower-cost US fossil fuel exports could provide a substantial boost to Europe’s supply. Citi Research noted that cheaper energy imports from the US could ease inflationary pressures, thereby contributing to a deflationary trend.

“The combination of dampened demand from tariffs and increased supply from energy imports creates a complex economic scenario for Europe,” according to Citi Research.

Trump’s policies could potentially reduce inflation in Europe by lowering energy costs, but this effect might be partially countered if the US exports higher inflation through dollar appreciation.

Additionally, potential EU retaliatory tariffs or increased CO2 prices and the Carbon Border Adjustment Mechanism (CBAM) could mitigate some of the deflationary impacts by raising prices.

Citi Research also noted that a significant concern regarding the potential spill-over from increased US borrowing on European real interest rates. This could tighten financial conditions, particularly for weaker European companies and governments.

“During Trump’s first term, the European Central Bank’s quantitative easing measures helped offset these impacts,” Citi Research states.