Just when investors were starting to evaluate the growth potential of Europe, the duties by the Trump administration were introduced. The 20% duty risked increasing up to 39%, but was temporarily reduced to 10% for a period of at least 90 days. In a dispute between taxes and duties, Which approach is winning? And to what extent does the growth potential of Europe remains valid? Are the questions to which the long analysis of Eoin O’Callaghan, a macro strategist of Wellington Management.
Duties should not negatively influence European evaluations review process
The recent change in Germany’s tax policy “started to change the growth potential STof Europe and the revaluation of its assets. Subsequently, the duties were introduced. The 90 -day truce on the duties imposed by the Trump administration reduces the most probable negative impact on the growth of the euro area. However, the effect on GDP will still be relevant: a 10% global duty, with 150% for China, could reduce European growth this year by about 1% “.
This situation “will compromise the revaluation of European assets compared to other markets, derived from the German tax turning point? In summary, until extreme scenarios of duties and commercial wars will avoid, it is believed that the relative structural revaluation of Europe will continue. Furthermore, the US duties could accelerate this process. If the duties remain unchanged, over time the growth should prevail over from the tax announcement of Germany, with an estimated increase of at least 1 percentage point (pp) per year in Germany and 0.3 pp in the euro area for the next 12 years.
The duties are a tool used to try to reduce the commercial imbalance between Europe and the United States. However, this involves a lower flow of capital from Europe to US assets, which could help reduce the Evaluation gap between the two markets. Europe has a stock of $ 15,000 billion in US activities cHe could now be re -evaluated and partly repatriated. “
What factors could help make the environment less bright?
US duties could still intensify and evolve in a global commercial war. The probability of this scenario has decreased now that President Trump has moderated his most aggressive tariff positions. However, this risk deserves continuous attention.
Commercial negotiations TRto the United States and the European Union they could undergo an interruption. The EU could propose the purchase of greater quantities of liquefied natural gas (LNG) and American military equipment. However, if the United States does not show flexibility regarding their repairs requests, value added tax (VAT) and non -tariff barriers, reaching an agreement will be difficult. In the event that the interviews stop and the United States and Europe increases customs duties, the impact on economic growth could be significant. In addition, Europe could further aggravate the brake to growth if it decides to increase duties to other countries to protect its industries from the dumping phenomenon, such as the one practiced by China.
What could be the implications for the ECB?
The developments of the last few weeks indicate an increase in the probability of a Further loosening by the ECB. A shock of 1 percentage point of the GDP deriving from the US duties requires a further ease of 25-50 basis points to compensate for the impact on growth. The increase in the euro and the drop in prices of raw materials will also influence inflation. The ECB involved a cut to about 2% before the duties. This suggests that a terminal rate of about 1.50% – 1.75% could be more appropriate. The search for the ECB- explains the expert- indicates that the fragmentation of global trade can lead to a less favorable trade-off for inflationary growth. This may require a certain caution on the speed with which you intend to achieve the goal.
Currently, tax issues may prevail
The revaluation of European assets compared to other markets “should continue with the current duties. The change in German tax policy could dominate the impact of Usa dice sUI capital flows between Europe and the United States, reducing the evaluation gap. However, a phase of escalation in global commercial protectionism would make the situation more uncertain “.
