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How Tariff Troubles May Hurt Europe’s Growth

17 April 2025
3 min read
On a car dashboard, a warning light is illuminated and the hand on a digital display dial is hovering just above zero.
| European Economist—Fixed Income

President Trump’s tariffs bring déjà vu for the euro-area economy: it’s back to slower growth and lower rates.

Markets rallied on the announcement of President Trump’s 90-day pause in his administration’s new global trade tariffs—with notable exceptions:

  • The moratorium was restricted to trade partners that haven’t retaliated.
  • Reciprocal tariffs weren’t lifted but instead lowered to 10%, except for China, which is now subject to a 125% levy.
  • The 25% global tariff on steel, aluminum and automobile imports remains in force.

As well as the actual impact of the tariff measures, business confidence has also taken a hit, with survey evidence already pointing to lower economic growth. Further tariff-related initiatives, such as the US inquiry into imports of pharmaceutical goods and semiconductors, will likely create more uncertainty and loss of confidence.

Tariffs Are Already Damaging Europe’s Growth

Instead of the previously announced 20% tariff, the European Union (EU) is now subject to a 10% universal tariff—still a higher effective tariff rate than prior to the April 2 US announcement. Meanwhile, the EU voted on April 9 to impose tariffs on €21 billion of US goods—countermeasures that have also been put on hold. Despite the tariff pauses, the danger for euro-area economies is far from over, and damage is already being done.

Based on our assessment, growth is set to fall, with risks skewed to the downside. Compared with a counterfactual scenario in which the new tariffs were never implemented, and with only marginal damage to confidence, the hit to growth will probably be substantial. In the Display below, we show our 2025 forecasts across different scenarios. The wide range of possible outcomes reflects the high level of tariff uncertainty.

Tariff Uncertainty: The Range of Potential Outcomes Is Very Wide
Comparative Forecast Scenarios for 2025 Growth, Inflation and Rates (Percent)
Comparative forecast scenarios for 2025 growth, inflation and rates show a very wide range, reflecting tariff uncertainty.

For illustrative purposes only.
*Counterfactual scenario: assumes tariffs were never implemented and damage to confidence is marginal.
†Upside scenario: the current 90-day pause is extended to become a permanent removal of universal tariffs, except for China.
All percentages are shown as point estimates to present a clear difference between the counterfactual and other scenarios. Actual range of outcomes may be wider.
As of April 15, 2025
Source: AllianceBernstein (AB)

With economic recovery still only recent and weak, the euro area is once again likely to face low growth or recession risks, partly from tariff impacts and partly from uncertainty and loss of confidence.

Risks of Inflation Undershoot Are Rising

The eurozone was already heading towards its target 2% inflation on a sustainable basis during the course of this year. However, with growth now expected to weaken and the economy potentially to enter recession, the downward pressure on inflation is likely to intensify, aided by three additional factors:

  • Energy prices are a major driver of inflation: they fell significantly following the April 2 US tariff announcement and remain relatively depressed.
  • Financial conditions in the US have been tightening, and the euro area could experience the initial knock-on effects. Meanwhile, the euro has strengthened against the US dollar, making US imports cheaper. If the euro remains strong, this effect will continue.
  • China will continue to seek markets for its exports because tariff barriers make exporting to the US uneconomic. The country will likely reroute its goods to other regions, notably the EU. This was the case during Trump’s first round of tariffs, when exports to the EU surged (Display, below). The reaction is likely to be greater this time around.
More Chinese Exports May Be Heading Europe’s Way
Previous US Tariffs Led to Rerouting of China Exports
Two lines showing imports from China to the US and EU sharply diverge in 2018, the date of the first round of Trump tariffs.

Current and historical analyses do not guarantee future results.
As of December 31, 2024
Source: Statistical Office of the European Communities (Eurostat)

Hence, our baseline forecast is that the European Central Bank will cut policy rates to below 2%, reaching 1.75% by the end of December. The probability of more cuts increases in line with recession and undershooting risks.

No Easy Solutions from Fiscal Policy

Fiscal policy is unlikely to be as supportive as it was during the energy crisis, as most EU member states face tight budget constraints.

Some countries might provide sector-specific relief, like the €14 billion package the Spanish government announced recently. But only Germany has the headroom to provide material fiscal support. Given that Germany could be facing a third year of recession, it’s possible that fiscal restrictions will be suspended to provide immediate support to its industries.

Even so, the EU as a whole faces a tough position.

 

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. Views are subject to revision over time.

About the Authors

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