Eurozone: Damage Limitations on Tariffs, Uncertainty to add to Banks' Caution??
It remains unclear just how much of a movable feast the new U.S. tariff deadline of Aug 1 actually is. Trade deals with the US were supposed to be agreed by today, or face the reciprocal tariffs as outlined in April. But that has now been deferred to, with US Treasury Secretary Bessent, hinting actually a month later. But for the EU, recently considered to be in the clearest firing line for severe tariffs to placate President Trump’s disdain for the bloc, a deal could appear with days – according to both sides. But the likelihood is that this would be a temporary “framework” agreement that keeps “reciprocal” tariffs at the current 10% but it being unclear what will happen to the industry specific tariffs. Basically, it seems, the EU would effectively be accepting a damage limitation, one-sided deal to stave off a much harsher trade backdrop. But putting details on any such framework may expose divides within the EU about the speed and scope of what should be aimed for. In the interim, the EZ faces additional questions about its trade competitiveness as the euro appreciates, this possibly adding to existing EZ bank’s worries about lending to EZ companies based around trade uncertainty.
Without any deal, tariffs on the EU could rise to as high as 50% on August 1. With this in mind, the European Commission (which leads trade negotiations on behalf of the EU), has tried to get more explicit guidance on whether to accept a deal with some higher tariffs, or be more combative with the US. But it seems the EU remains divided: some countries, especially those that rely heavily on exports such as Ireland and Germany, are in favour of a swift deal. Germany has already created added divides with an innovative scheme where European carmakers would be allowed to export one car tariff-free to the U.S. for each car they make on American soil and export. This though is clearly designed to benefit German car makers and at the expense of other EU countries and this reflects Germany’s position of preferring a quick and simple solution than a long, protracted and complicated deal. Other countries, including France and Spain, are sceptical about accepting a deal either just for the sake of it and/or one that wold be clearly damaging. The latter note that actual trade deals have historically taken an average 18 months to reach bilaterally, and 2-3 time longer to implement; the recent U.S.-UK agreement was such a framework but not only breaks WTO rules but is a legally nonbinding agreement to protect UK exporters and still left the UK with tariffs despite not running a trade surplus with the U.S.
Instead, the focus seems to be on focused on damage control. While the European Commission had signaled a readiness to retaliate if the U.S. retains the 10% baseline, several EU counties states — particularly those with sizable trade surpluses with the US — are reluctant to trigger an escalation that could provoke a 50% blanket tariff. The working assumption may be that a 10% baseline tariff shock would have a limited impact on growth would of around 0.3% of EU GDP. But the policy and trade picture is complicated by continuing strength in the euro and this factor seems to be a fundamental factor behind the slashing earnings expectations for listed European companies this year: expectations for earnings per share have dropped from 9% down to 2%, with even more adverse outlooks for exporting companies. With this mind, we wonder to what degree EZ banks will further highlight their worries and even reservations about lending to EZ companies, this making the looming ECB bank lending survey (BLS) on Jul 22 all the more important. In fact, while the last two BLS did suggest banks becoming warier about lending to EZ exporters, perhaps this is already showing up in what have been recent weaker shorter-term credit growth dynamics.