US-EU trade agreement ensures only modest blow to the sluggish European economy

Dennis Shen Scope Ratings

The United States-European Union trade deal ensures that euro area and EU growth will remain relatively resilient even though effective US tariffs on EU exports increase by around 16pps in aggregate this year.

The EU economies most exposed to the 15% US levies on imports agreed at the weekend are those with an elevated trade surplus and/or significant trade with the US, such as Germany and Ireland. The effects of the higher tariffs this year are also being felt indirectly through their effects on global value 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 from the trade levies this year. The higher tariffs may 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 adversely affect euro area growth, which Scope Ratings estimates at just 1.2% in 2025 though Scope expects growth to improve to 1.5% by next year, lifted by fiscal stimulus in Germany and higher defence spending across the EU.

US tariff rises set back growth in the largest EU economies

Cumulative impact on real output (percentage-point change) assuming the 15% levy on EU exports

Note: this scenario for the impact of US levies on the EU is based on the measures already in force or announced by the US since the start of Donald Trump’s second administration and the countermeasures from trading partners, including the agreements announced between the US and its trading partners and a 15% rate assumed on EU exports to the US. Source: Scope Ratings.

The preliminary agreement will likely contain many caveats and carve-outs, demonstrating limited enforceability, serving only to avert a worst-case escalation and acting as the starting point for further negotiations.

(Arne Platteau, analyst in credit policy at Scope Ratings, contributed to this research)

Author

Dennis Shen

Scope Ratings

Dennis Shen is Chair of the Macroeconomic Council and Lead Global Economist of Scope Ratings, the European rating agency, based in Berlin, Germany.

AUD/USD hangs near three-week low, below 0.6950 as traders await US NFP report

AUD/USD hits a three-week low during the Asian session on Friday as the RBA’s dovish shift and a rout in equity markets weigh on the risk-sensitive Aussie. However, the recent slump in US bond yields to a two-month low keeps US Dollar bulls on the back foot and limits losses for the currency pair as traders look to the US NFP report for a fresh impetus.

USD/JPY bounces off three-week low; keeps the red near 157.65 as focus remains on US NFP

USD/JPY bounces off the weekly low set during the Asian session, as bears turn cautious ahead of the US NFP report due later this Friday. The upside seems limited as the recent slump in US bond yields and hopes of Iran war de-escalation undermine the US Dollar. Moreover, a hawkish BoJ and intervention risks support the Japanese Yen, capping the pair.

Gold loses the grip; $4,000 comes next on the downside

Gold sets aside two daily advances in a row on Friday, opening the door to a potential test of the key $4,000 mark per troy ounce. The precious metal’s retracement follows a decent improvement in the sentiment surrounding the US Dollar, solid NFP data and higher US Treasury yields across the board.

Democrats win House and Senate in US midterms: Why isn’t all bad news for crypto

The biggest story this week was Tuesday’s US midterm elections, which saw Democrats win control of both the House and the Senate in a clear blue wave. This political shift in the US has triggered sharp price swings across the cryptocurrency market.

Week ahead – Inflation and geopolitics in focus as US political landscape shifts

Post-midterm election euphoria fizzles out as risk aversion prevails. US CPI, PPI and Fedspeak on the radar as Fed hike bets remain supported. Oil retreat pauses on mixed hopes about the ongoing conflicts.

US Dollar breaks below 101.50 as Democrats sweep Congress

The US Dollar (USD) comes under heavy selling pressure on Wednesday, with the US Dollar Index (DXY) falling around 0.5% to trade near 101.35 after sliding below the 101.50 level. The Greenback retreats to its lowest level in four weeks as investors reassess the political and economic outlook following the Democratic Party's sweeping victory in the United States (US) midterm elections.