Monetary Policy

Policy Brief
EN
20.03.25

When America Rewrites the Rules, Europe Needs a Plan

Trump’s trade and currency agenda could redraw the global economy, testing Europe’s sovereignty and the ECB’s resolve.

Executive Summary

The second Trump presidency could reorder the global economy on American terms. In this study for the European Parliament, “Europe’s Policy Options in the Face of Trump’s Global Economic Reordering”, we examine how renewed US protectionism, exchange-rate pressure, and selective disengagement from multilateral institutions could reshape the macro environment for Europe. Broad tariffs and unpredictable policy shocks would raise inflation while weighing on growth, forcing the EU and the ECB to navigate difficult trade-offs between price stability and demand support.

Europe is directly in the line of fire. “Reciprocal” US tariffs would grant wide discretion to levy duties on EU goods, potentially citing VAT and EU regulations as de-facto trade barriers. In a high-tariff scenario, model results indicate EU27 exports to the US could fall by ~17% and EU real wages by ~0.25%, with Canada and Mexico facing even larger losses. More limited tariff actions still complicate the outlook through supply-chain rerouting and uncertainty.

Risks extend beyond trade into finance and currencies. An “escalate-to-de-escalate” strategy could push toward a Plaza-style currency accord—or, in a tail-risk scenario, trigger financial fragmentation if the US politicises dollar liquidity or withdraws support for the IMF/WTO. Either path would heighten exchange-rate volatility and test Europe’s macro framework.

The ECB may be pushed to the edge of its current toolkit. Tariffs and possible FX shocks combine upside inflation risks with weaker activity. The ECB would need to calibrate rate policy and balance-sheet normalisation cautiously, strengthen swap/repo facilities, and coordinate more closely with fiscal authorities. In extreme scenarios, it may need to expand counterparties and backstops to safeguard financial stability.

Preparing now improves Europe’s room for manoeuvre. Clear contingency planning — on tariffs, FX coordination (Art. 219 TFEU), liquidity lines, and fiscal-monetary interaction — can mitigate spillovers and preserve resilience if global rules fray or a negotiated re-alignment materialises.

Policy recommendations

  1. Plan for tariff shock management. Use scenario-based ECB projections; pace balance-sheet reduction prudently; preserve public-investment envelopes to stabilise demand during trade disruptions.

  2. Strengthen Europe’s financial safety net. Pre-authorise expanded ECB swap/repo lines and counterparties; coordinate with ESMA/ESRB to monitor market plumbing under stress.

  3. Clarify FX governance for contingencies. Prepare ECOFIN-ECB procedures for possible cooperative FX actions under Art. 219 TFEU, including communication protocols and intervention guardrails.

  4. Coordinate EU trade and industrial responses. Align targeted retaliation with Single-Market cohesion; accelerate diversification of critical inputs and demand-side support for exposed sectors.

  5. Reinforce multilateral fallback options. Develop EU positions on IMF resources, emergency liquidity and global policy coordination in case US policy shifts strain existing arrangements.

  6. Improve transparency and modelling. Publish regular tariff/FX stress tests (trade, prices, employment) and embed short-term elasticities and GVC effects into official assessments.

This study was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 20 March 2025.