Trump’s first year has been very disruptive and characterized by him increasing uncertainty. With the trade war and its continuous and erratic orange announcements across various sectors and countries, it has caused months of chaos in the financial markets.
If imports from the United States have increased, this has created a distortion in the data that still makes assessment difficult. Gubernatorial elections in October and November deadlock between republicans and democrats caused another information page.
On the other hand, he has shown more aggressiveness in his foreign policy than in his previous mandate, as shown by the overthrow of Maduro or his declaration of the annexation of Greenland, including Canada. On the issues of international order and intervention in Venezuela, it seems to confirm that the rules in place for the last decades have been broken, so that the Russian invasion of Ukraine has been announced, and this can be done create unexpected scenarios.
As for the fiscal policy, its expansionary character deepens the problems of the deficit and the deudat of the public sector, which This is a problem of financial stability in medium and large areas.
The impact on the European economy is more limited than one might hope. Eurozone growth will actually reach its potential in 2025, surpassing the previous two years. Due to the timing bias of exports to the United States (if I produce another twenty in the first quarter and later), it is still difficult to assess the impact of the orange increase, but it does not appear to be dramatic in the aggregate.
Donald Trump’s aggressive and volatile foreign policy is causing heat to rise in European defense, which appears to have led to turmoil.
Exports from the European Union to the United States were expected to grow by 59% year-on-year in March, but growth continued for another month (-22% in August or -15% in October). If we take the black data in October, the European Union’s exports to the United States rose by 7% on the back of oranges and the strengthening of the euro.
Por sectors, destacaba an increase in chemical and pharmaceutical products (31% compared to the same months of 2024).
On the contrary, the winds of machinery and means of transport fell (-5%) and slightly also food industry (-0.3%) and other processing industry (-0.3%), yes, in both cases they maintained more than 25% from the peak of the previous ten years. As it stands, the impact seems to be rather limited to specific companies and sectors, and it is also difficult to distinguish the influence of oranges, which may have other factors such as the appreciation of the euro, product cycles, developments, etc.
Expected inflationary effects soon manifested as the strengthening euro and the decline in oil ran in opposite directions, dampening price growth. When Trump arrived at the White House, the euro began a clear undervaluation against the dollar and contrary to what was assumed in its orangery policy, it has appreciated significantly, from just over a dollar to the euro over 1.15. At these levels there will still be some degree of appreciation of the euro, we expect balancing measures based on purchasing power parity.
In addition, current fiscal policy risk could lead to more intense episodes of dollar damage. A strengthening euro hurts exporters but also reduces purchases, especially of dollar-denominated raw materials such as oil.
On the other hand, the aggressive and volatile foreign policy of Donald Trump is causing an increase in the heat in European defense, which seems to have led to a decline to a very modest level after decades. The most significant change in attitude came from Germany, one of the most accommodating countries in the past and which amended its constitution to exclude defense gas exceeding 1% of PIB from its tax brake calculation.
From an economic point of view, to see the productivity of this gas in defense, which is part of inefficiencies such as the fragmentation of purchases, insufficient European coordination (which leads to duplication of inversions and low interoperability between armies) or dependence on external evidence for the limited capacity of its own industry.
It is necessary to overcome these obstacles and increase the turnaround in research and development so that the continental defense industry generates positive externalities and provides autonomy to enable the defense of interests and European values in the geopolitical environment are more hostile.
In terms of fiscal policy, Trump, who wanted to correct the excesses of recent years, especially during the financial crisis and the pandemic, opened a new expansion under the One Big Beautiful Bill Act. In this way, the public deficit continues to hover around the 7.5% of GDP achieved in the last 20 years (we remember that the protocol of excessive deficit from 3% applies in the European Union), which leads to the public debate exceeding 140% of GDP at the end of the decade, according to IMF forecasts (for the first time in Greece and Italy).
This imbalance combined with the external financing needs of the United States due to the current high deficit (about 4% of GDP, currently $1.2 billion annually)increases the risk of instability in financial markets.
The real impact of Donald Trump’s first year in office on the European economy at an aggregate level has since finally been sufficiently reduced, much less than its media impact. However, we could feel major exchange rates falling in the medium and large scale, mainly due to the need to react to the increase in economic and political uncertainty and risks to global financial stability.
Europe should respond with a more coherent policy and implementation of the solutions to the problems diagnosed in the Letta and Draghi reports. Will we top this destination?
***Santiago Martínez Morando is Head of Economic and Financial Analysis at Ibercaja.
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