Liberation Day Blues: Impact on Europe
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Article Type
Market Updates
Topics
Macro, Long-Term Outlook
Published
April 03, 2025
Read time
5 mins
Authors
Jacob Vijverberg, CFA
Jordy Hermanns, CFA
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After a tumultuous couple of weeks following the inauguration of President Donald Trump, the directions of US policy have begun to crystallize, shaping an economic landscape that warrants careful scrutiny for investors. At the heart of the new administration’s strategy a belief that other countries are mainly competitors rather than partners. On Wednesday 2 April, Trump declared it would be “Liberation day” . And indeed the US administration raised tariffs substantially. Europe will be facing a tariff of 20% on exports to the US. Other countries are even harder hit with tariffs on China rising to 54%. One could wonder whether “Liberation day” is not a declaration of a trade war. The tariffs were presented as reciprocal, but in reality, are far higher than tariffs charged on US goods.

A painful liberation

This worldview of seeing other countries as foes is driving policy decisions with implications that ripple through global markets, leading to lower economic growth and an increased chance of economic conflicts. This requires an increased risk premium on financial assets, or in other words lower equity markets and higher credit spreads.

 

Figure 1: Tariffs on US imports as percentage of import value
Source: U.S. International Trade Commission, Aegon Asset Management  (As of April 2025)

 

 

Taking a cue from tariffs…

One of the most immediate effects of Trump's approach can be seen in his administration's swift and aggressive implementation of tariffs. Investors had initially believed that tariffs would serve primarily as a negotiating tool, but this assumption proved misguided. In particular, the confrontational stance adopted towards Canada and Mexico has served as a wake-up call. The imposition of high tariffs on historically very close allies signifies that the US is willing to pursue a much more isolationist approach compared to previous administrations.

 

…and from geopolitics

The changes aren’t confined to trade. Foreign policy under Trump has also surprised many, particularly in Europe. Financial and military support for Ukraine was expected to wane, but the attempts to force Ukraine into signing a deal to claw back previous support came unexpectedly. Additionally, the administration's hostility towards Europe in official and leaked communications is worrying investors.

 

Cost of reducing dependencies

For Europe, this shift is a threat. Not only because of the direct negative effect on growth, but also due to the signal of what might be in store. Not only trade in goods is targeted, but also the many treaties and regulations on which companies and investors rely to conduct their business and investments.

 

The desire among European countries to become less dependent on the US brings about significant economic costs. The new German government has already made a large pivot in fiscal policy to accommodate the changing political landscape.

 

The optimist would argue that the increased sense of urgence is finally creating momentum to reform shortcomings in the EU. One positive development is the recognition that Europe should be able to defend itself militarily without US support. However, this comes with the risk of a prolonged conflict in Ukraine.

 

Also, in other areas like energy dependence, technological dependencies and in its political setup, the EU still has a lot of work to do. In the meantime, these dependencies will make it vulnerable to further pressures from the outside.

 

What’s next

Given these developments, what does the future hold? The uncertainty is profound. And as the new economic policy is so unorthodox, investors rightly wonder what else is in store.

 

Speculations have emerged about a possible "Mar-a-Lago Accord," in which the US could seek to debase the US dollar and effectively restructure US debt to the detriment of foreign holders. While this scenario seems absurd due to the potential for causing widespread economic disruption and panic among investors, the fact that it isn’t directly dismissed highlights the environment of uncertainty.

 

More broadly, the Trump administration's willingness to use a range of economic tools as pressure levers raises risks for investors. Potential restrictions on the use of technology, changes to tax treaties aimed at avoiding double taxation and pressure on firms regarding their investment decisions, all contribute to an environment where stability cannot be taken for granted.

 

Impact on Europe

The impact on Europe remains uncertain, but several key trends are evident.

 

Firstly, tariffs on imports are likely to remain in place under the current administration, which could lead to lower growth for Europe due to reduced exports.

 

Secondly, the relationship with the US is expected to remain contentious, with ongoing disagreements over the war in Ukraine, taxation, and trade continuing to dominate headlines. This uncertainty may create a dynamic in which consumers and companies postpone consumption and investment, causing a slowdown.

 

Thirdly, any retrenchment from the private sector might be partially offset by more ambitious fiscal plans from Germany and the EU. However, most of the German fiscal boost is not expected until 2026, and many other countries are fiscally constrained from implementing similar measures.

 

Finally, reducing dependencies on the US will incur significant economic costs, but also potentially yield benefits. The US is particularly strong in technology and financial services  (see also Is the trade deficit of the US with the EU really that bad?), and while replacing these with European alternatives could mitigate some negative trade impacts. However, finding suitable alternatives in certain sectors may prove challenging.

 

Financial markets impact

Overall, the increased uncertainty implies that a higher risk premium should be applied to financial assets. Essentially, investors should demand greater compensation for bearing the increased financial and economic risks that this new reality entails. In our view, this applies equally to US and EU financial assets as both can be impacted. Also lower growth and possibly a recession will reduce corporate profits leading to lower equity markets and higher spreads as well.

 

In Europe, inflation is likely to fall for various reasons. Wage inflation is already expected to decline sharply. Also, the retaliatory tariffs on US imports will likely be limited. And lastly a surplus of (Chinese) exports previously bound for the US will be looking for another destination leading to import price deflation. As a result, we are constructive on sovereign bonds.

 

There is significant speculation regarding the future trajectory of the US dollar. Higher tariffs could bolster the value of the dollar, yet an economic slowdown generally results in currency depreciation. A key consideration is determining which economy will experience the most substantial downturn: the US or Europe. Additionally, some outlandish theories, such as the "Mar-a-Lago Accord," could trigger substantial currency fluctuations.

 

Conclusion: The Value of Trust

Tariffs alone would be painful but likely manageable. However, the erosion of trust is far more concerning and difficult to restore. Trust arrives on foot but leaves on horseback, as the saying goes.

 

In this new economic reality, demanding a higher risk premium is not only prudent but necessary. Over the past few months, markets have begun to realize the impact of these changes, and this sentiment is slowly being priced in. As we move forward, continued vigilance and adaptability will be essential for investors navigating the Trump trade and its repercussions on asset values globally.

Disclosures

Authors

Jacob Vijverberg, CFA
Head of Asset Allocation
Jacob Vijverberg, CFA, is head of asset allocation. He is responsible for both strategic and tactical asset allocation. The team is managing a wide range of multi-asset funds  
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Jordy Hermanns, CFA
Portfolio Manager
Jordy Hermanns, CFA, is a portfolio manager in the multi-asset group and serves as an investment strategist in the asset allocation team.
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