America First: Trump’s trade aggression could trigger another eurozone crisis

Maybe then Trump will grasp that his tariff actions, which constitute a significant part of his ‘America First’ agenda, risk triggering a Europe-wide recession and another eurozone debt crisis.

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Some might argue that Trump has no interest in the fate of Europe or any country on the other side of the Atlantic from the United States. But given how badly the 2010 Greek debt implosion shook American and world financial markets, similar crises in France and Italy—which are not just the European Union’s second- and third-largest economies but also many times the size of Greece’s—would have truly catastrophic consequences for markets and the global economy.

That is the last thing that President Trump needs on his watch.

Germany’s recent economic woes, like Shakespeare’s sorrows, “come not single spies but in battalions.”

Germany’s current woes include supply-chain disruptions related to the covid pandemic, an energy shock caused by Russia’s 2022 invasion of Ukraine, a major slowdown in Chinese demand for German capital goods (which followed the collapse of the Chinese housing-market bubble), and increased competition from Chinese firms, especially in the automotive and clean-energy sectors.

Under these circumstances, and given that exports account for nearly 50% of Germany’s gross domestic product (GDP), its economy can ill afford US import tariffs.

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It is difficult to overstate the adverse effects that the aforementioned shocks have had on the German economy. Since the start of the pandemic in 2020, the economy of the United States has grown by 12%, whereas the German economy experienced no growth in output, and even fell into recession in 2023, from which it has yet to recover. 

Now, the Bundesbank, Germany’s central bank, is warning that Trump’s proposed import tariffs could cause the German economy to contract by 1.5% in 2027.

Unfortunately, all signs point to Trump setting his sights on Europe in general, and on Germany in particular, as the next target of his trade war.

Following his 25% tariff on steel and aluminium imports, the US president is reported to be contemplating similar duties on automobiles and pharmaceutical products—a large share of which the United States imports from Germany. Trump has also threatened ‘reciprocal tariffs’ to match those of America’s trading partners, while pledging to target countries that have large bilateral trade surpluses with the US. In 2024, Germany’s trade surplus with America reached a record $72 billion.

Meanwhile, Italy and France currently have higher public debt-to-GDP ratios than they did during the eurozone sovereign-debt crisis of 2010-12. The governments in Rome and Paris have also amassed unsustainably large budget deficits, but seemingly lack the political will to address their public- finance problems.

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Even if the leaders of Italy and France mustered the political will to act, it would be difficult for these two countries to put their public debt on a sustainable path. Stuck in the euro straitjacket, Italy and France cannot use interest-rate or exchange-rate policy to boost exports or consumer demand to offset the contractionary effect of fiscal belt-tightening on aggregate demand.

Moreover, a significant downturn in the German economy would make it even more difficult for these countries to reduce their debt burdens, because demand for their exports to Germany would fall.

Given the unfolding dynamics, Europe’s last hope is that Trump recognizes, before it is too late, that triggering a recession and a debt crisis in Europe is not in America’s economic interest.

As the Greek sovereign-debt crisis illustrated, the financial system of the United States has considerable exposure to the European economy. At the same time, a eurozone recession would likely be bad news for Trump’s beloved stock market. This is because around 40% of the profits of companies that compose the S&P 500 index are derived from their overseas operations.

But hope is not a strategy, especially not at a time when Trump seems fully committed to an aggressive ‘America First’ trade policy.

Instead, European policymakers should ready themselves for an all-out trade war. The best defence they could mount under the circumstances would be to undertake the bold structural reforms that Mario Draghi, the former president of the European Central Bank, proposed last September to restore the bloc’s global competitiveness. ©2025/Project Syndicate

The author is a senior fellow at the American Enterprise Institute, former deputy director of the International Monetary Fund’s Policy Development and Review Department and a former chief emerging-market economic strategist at Salomon Smith Barney.