Why the New EU-US Trade Deal Could Be a Blow to Europe’s Growth Prospects
The Euro Plunges:
The euro experienced a sharp decline on Monday, signalling market anxiety following the announcement of a contentious new trade agreement between the European Union and the United States. As the single currency dropped close to 0.9% against the US dollar, traders, investors, and analysts alike began to scrutinise the implications of the deal. Though at first glance it may appear that an agreement is better than a full-blown trade war, the detail beneath the surface tells a more sobering story—particularly for Europe’s already vulnerable export sector.
In this blog post, we will delve into the background of the deal, assess the potential economic ramifications for the eurozone, explore political reactions from both sides of the Atlantic, and unpack how this development could shape the months ahead for currencies, equity markets, trade relations, and monetary policy.
A Deal That Raises More Questions Than It Answers
On Sunday, EU Commission President Ursula von der Leyen and former US President Donald Trump reached a trade agreement aimed at preventing a tariff escalation between the two economic giants. While this has been touted as a stabilising moment in transatlantic relations, the finer details suggest otherwise.
Under the agreement, the majority of European Union exports to the United States will be subjected to a new 15% tariff regime. This is less severe than the 30% rate previously threatened by Trump, which was scheduled to take effect on 1st August. However, it’s worth noting that the EU failed to secure any reciprocal concessions from Washington. No sectors were exempted, no favourable quotas introduced, and no safeguards placed on sensitive European industries.
The lack of balance in the deal has left analysts concerned. Rather than being a mutual compromise, many see this as a capitulation by Brussels—one that puts European manufacturers and exporters in a precarious position, especially at a time when global growth remains fragile.
The Euro’s Sharp Reaction Reflects Deeper Concerns
Currency markets were quick to react. The euro fell nearly 1% against both the dollar and the pound by Monday afternoon. This marks the steepest one-day drop for the currency since May. The reaction wasn’t simply driven by currency speculation or algorithmic trading. Rather, it reflected a deeper concern that the deal could hinder Europe’s economic recovery, which is still limping out of the shadow of energy shocks, supply chain issues, and post-pandemic restructuring.
Trevor Greetham, head of multi-asset investments at Royal London Asset Management, offered a succinct verdict: “It’s great they’ve made a deal, but beyond the noise it is still a worsening in trade relations, not an improvement.”
Markets had initially responded positively to the announcement, with early trading in European equities showing modest gains. However, these gains evaporated by midday as the broader implications began to sink in. Investors are now recalibrating their expectations for economic growth in the eurozone, particularly in trade-sensitive nations such as Germany, Italy, and the Netherlands.
Political Fallout: Backlash from Within Europe
The political backlash within Europe has been swift and severe. French Prime Minister François Bayrou didn’t mince his words, describing the agreement as the EU having “resigned itself into submission.” He criticised the deal as both economically and symbolically damaging, arguing that it undermines the bloc’s sovereignty and negotiating credibility.
Far-right leaders have seized on the development to criticise the EU’s leadership. Alice Weidel, co-leader of Germany’s Alternative for Germany (AfD) party, took to X (formerly Twitter) to slam the deal as “not an agreement, but a slap in the face to European consumers and producers.” The populist sentiment reflects growing frustration among European voters who feel that Brussels is ill-equipped to stand up to global powers such as the United States or China.
Karl Falkenberg, a former senior trade official at the European Commission, called the deal “a reminder that the EU is still an economic giant and a political dwarf.” According to Falkenberg, the failure to negotiate a more balanced outcome is not just a missed opportunity, but a sign of strategic weakness.
Impact on Bonds and Monetary Policy
As traders absorbed the implications of the new tariffs, bond markets responded accordingly. Yields on short-term German government bonds fell, bucking the broader trend in global debt markets. The yield on the two-year Bund dropped by 0.04 percentage points to 1.90%, a move that reflects increased expectations of interest rate cuts from the European Central Bank (ECB).
Short-term bond yields are highly sensitive to shifts in rate expectations. In contrast, their US equivalents rose slightly to 3.93%, suggesting that the Federal Reserve is likely to maintain its current stance or even adopt a more hawkish approach if inflation picks up.
Pooja Kumra, a strategist at TD Securities, offered this analysis: “The deal was the best the EU could extract, but it is still negative for the euro area in terms of both growth and inflation.” If European exports decline, GDP growth will take a hit—and with inflation already under control in much of the bloc, it gives the ECB more reason to consider loosening monetary policy.
Wall Street Shrugs, but Focus Turns to the Fed
Interestingly, the US stock market appeared largely unbothered by the agreement. The S&P 500 opened the week with modest gains, continuing its rally from recent months. Tech giants such as Microsoft, Meta, Apple, and Amazon are all due to report quarterly earnings this week, and expectations are high.
This week also marks a critical moment for the Federal Reserve, which is due to make its next interest rate decision on Wednesday. While the Fed is widely expected to keep rates on hold, there is growing pressure from Trump and other political figures to begin cutting rates more aggressively. Trump, who continues to wield substantial influence over the Republican base, has called for “sharply lower borrowing costs” to stimulate American competitiveness.
Pharmaceuticals: The Next Tariff Battleground?
Another notable development came from Trump’s comments regarding the pharmaceutical sector. Speaking after his meeting with UK Prime Minister Sir Keir Starmer, Trump revealed that the US would soon impose new tariffs on pharmaceuticals. However, he implied that the UK would be spared the harshest measures.
“We want to bring a lot of the pharmaceuticals back to America,” Trump said. “Covid taught us a lesson. We were getting our pharmaceuticals from other countries.” However, he added that the US feels “a lot better” about sourcing pharmaceuticals from the UK than from other nations, hinting that a bilateral carve-out could be on the cards.
Earlier this year, the UK and US agreed to negotiate the terms of any pharmaceutical tariffs affecting British companies. While nothing has yet been formalised, the direction of travel is clear: protectionism is back, and no sector is immune.
Steel: Europe’s Industrial Backbone Under Threat
The steel industry is another area of rising concern. On Monday, France and ten other EU member states, including Poland and Spain, published a joint paper calling for stronger protective measures against cheap steel imports. The document urged the European Commission to implement new duties of up to 50% on steel imports that exceed a redefined tariff-free quota.
The group argues that the current system leaves the EU vulnerable to global overcapacity, particularly from producers in Asia who are often accused of dumping. Under the new EU-US trade agreement, European steel exports to the United States that exceed a still-undetermined quota will be hit with a punitive 50% tariff.
EU Trade Commissioner Maroš Šefčovič stated that both sides have agreed to work together to combat global overcapacity, but critics argue that this is little more than diplomatic window-dressing.
Broader Implications: Is Europe Losing Its Economic Mojo?
The current situation raises some profound questions about the EU’s role in the global economy. Once hailed as a beacon of economic integration and globalisation, the European project is now increasingly seen as reactive rather than proactive. In trade negotiations, it often appears that the EU is on the defensive—managing crises rather than shaping global standards.
The consequences of this latest deal may not be felt immediately, but over time, the loss of competitiveness in key industries such as automotive, pharmaceuticals, and steel could have serious repercussions. The EU’s largest economy, Germany, is already grappling with stagnant growth and industrial contraction. Add a weaker euro and falling exports to the mix, and the outlook becomes even murkier.
What Happens Next?
Several outcomes are possible in the weeks ahead:
- Pressure on the ECB to Cut Rates: As economic growth projections fall, the European Central Bank may come under renewed pressure to cut interest rates, despite concerns over long-term inflation.
- Further Political Fractures: The backlash from within Europe could fuel Eurosceptic movements and put pressure on national governments to demand more accountability from Brussels in future trade negotiations.
- UK-EU-US Triangle Diplomacy: With the UK potentially exempt from the harshest pharmaceutical tariffs, its role as a transatlantic intermediary could grow. This could be a diplomatic advantage—or a political headache—for Sir Keir Starmer’s government.
- Retaliation or Recalibration?: There’s still a chance that the EU could seek to renegotiate parts of the deal, particularly if it becomes clear that certain industries are being disproportionately harmed.
Final Thoughts: A Pyrrhic Victory?
In the end, this trade deal may prove to be a Pyrrhic victory for the EU. Avoiding the worst-case scenario of 30% tariffs is one thing; accepting a 15% hit with no meaningful concessions in return is quite another. The euro’s sharp fall is more than just a currency blip—it’s a signal that investors see real, tangible risk in the direction Europe is heading.
As political and economic pressure mounts, European leaders must confront a difficult truth: economic strength alone is not enough. Without strategic vision, diplomatic resolve, and political unity, the EU risks becoming what critics already claim it is—an economic giant, but a political dwarf.