Europe’s Economy Faces Sink-or-Swim Moment as Trump Returns

Wall Street’s verdict is clear: A second Trump presidency is likely to deliver a blow to an export-dependent European Union that is struggling with sclerotic economic growth and ever-multiplying political crises. Whether it will finally spark some change is the question for patient investors.

Since Wednesday, the day after the election, the S&P 500 has gained 3.7%. Meanwhile, the Euro Stoxx 50 and the FTSE 100 are down. Among those to shed the most market value have been clean-energy firms such as Vestas, carmakers such as BMW , consumer-goods companies such as Nestlé and Unilever and sellers of pharmaceuticals such as Roche. They all sell a lot to the U.S.

The U.S. is the top goods export market for the European Union, and for Germany, with pharmaceuticals, machinery and vehicles topping the export list.

During the campaign, President-elect Donald Trump floated a 60% tariff on Chinese imports and a 10%-to-20% levy across the board. The think tank German Economic Institute estimates that such a measure could make the German economy between 1.2% and 1.4% smaller than it would have been by 2028.

The core of the European Union’s export machine has been plunged into difficulties because of the end of cheap Russian energy, delays in joining the electric-vehicle revolution and an over reliance on selling to China.

Volkswagen last week announced the closing of at least three plants in Germany. According to FactSet, American customers make up 18% of its sales, about the same as the German market.

“I want German car companies to become American car companies,” Trump said last month while holding a rally in Savannah, Ga. “If you don’t make your product here, then you will have to pay a tariff, a very substantial tariff,” he added.

On Wednesday, Oliver Zipse , chairman of German carmaker BMW, underscored that the company has a plant in Greer, S.C.

“The most demanded vehicles in the United States, we produce there,” he told analysts Wednesday in a conference call. “So there is some natural cover against possible tariffs.”

Volkswagen and Mercedes-Benz have factories in Chattanooga, Tenn., and Vance, Ala., respectively. Manufacturers Airbus , Siemens and BASF also service the U.S. market from within, as do Nestlé and Unilever.

Much depends on details. In early 2021, Airbus’s assembly line in Mobile, Ala., was forced to pay tariffs for its shipments of fuselage, wing and tail components from France and Germany, as part of a World Trade Organization dispute. An agreement was quickly reached to suspend them.

Regardless, building up capacity to service all types of American-based demand would be hard. The Mobile plant makes A220 and A320 jets, but A330 and A350 wide-bodies are assembled in France. Volkswagen uses Chattanooga for the Atlas SUV, the Passat sedan and the electric ID.4, but the bestselling Tiguan and Jetta are built in Mexico. Roughly a quarter of U.S. imported cars originate there, and Trump has suggested that a 200% tariff could be slapped on them.

And when it comes to high-performance models, most EU firms still make them domestically and ship them over. Exports to the U.S. amounted to about 800,000 cars in 2023.

To be sure, EU leaders have struck a conciliatory tone with Trump this week, suggesting that a more amicable endgame such as the 2018 trade deal between the U.S., Canada and Mexico is possible.

Another risk is that China would send even more cheap goods to Europe if the U.S. ratchets up its trade war with Beijing. Yes, recent experience shows that China often just reroutes exports through third countries—and, as of recently, faces higher tariffs for electric vehicles in the EU anyway—but even small shifts could have big effects.

For a decade and a half, the 27-nation bloc has limped along, fostering just enough political change to avoid a painful breakup during the debt crisis of the 2010s and the 2020 pandemic, but never enough to truly invigorate its economy. Attempts by France’s Emmanuel Macron and Germany’s Olaf Scholz to change course have ended in paralysis. Scholz’s three-party government collapsed this week, after years that saw the coalition’s pro-austerity member blocking efforts to spur domestic industry with public spending.

Yet the first Trump presidency did galvanise some early support for a cohesive industrial strategy in Europe. The long-term bull case for European equities is that Trump 2.0 will be a catalyst for further transformation. European Central Bank President Mario Draghi published a report in September urging less red tape, state aid to key sectors and, where appropriate, harsher tariffs, all of which has buy-in from officials in Brussels.

On a small scale, the impulse toward a European industrial policy is already playing out. European defence contractors such as BAE Systems, Rheinmetall and Thales have seen their shares jump on the expectation that less American military involvement in Europe will force governments there to rely on their own capabilities. By 2030, the EU wants members to direct 50% or more of their procurement budgets toward European contractors.

Elsewhere, substituting foreign markets for domestic consumers will prove much harder, though providing advantages to buyers of electric vehicles has proved extremely effective in Norway. They now outnumber cars that run on gasoline.

Caught between the U.S. and China, Europe’s economic strategy is soon to face its biggest challenge since the eurozone crisis. Investors are right to be wary.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Europe’s Economy Faces Sink-or-Swim Moment as Trump Returns

With the US election result and the German government’s collapse, the lagging European economy is at a crossroads

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.