Risks in the Eurozone Under American Protectionism

Key Chapter Title List

1. Introduction
2. Protectionist Measures
3. Demand and Supply Forces
4. Impact on Euro Area Trade and Economic Activity
5. Inflation and Monetary Policy
6. Tariffs and Monetary Policy in a New Keynesian Model
7. Empirical Evidence Based on Survey Expectations
8. Conclusion

Document Overview

This report, commissioned by the Economic and Monetary Affairs Committee (ECON) of the European Parliament and authored by the Economic Governance and Euro Area Scrutiny Unit (EGOV), aims to provide analytical support for the monetary dialogue with the President of the European Central Bank (ECB) on March 20, 2025. It focuses on the multidimensional impact of U.S. trade protectionist policies on the Euro Area economy. As the U.S. Trump administration reinstates and escalates tariff measures, the global trade landscape faces restructuring. The Euro Area, as a major U.S. trade partner, finds its economic stability and policy responses becoming a critical issue.

The report first outlines the evolution and uncertainty characteristics of U.S. protectionist measures, including the tariff policy timeline targeting major trade partners such as China, the EU, and Mexico since 2025, as well as the significant upward trend in the Trade Policy Uncertainty (TPU) index. By distinguishing dual perspectives from the demand and supply sides, it constructs a macroeconomic analysis framework encompassing four core forces: tariff shocks, exchange rate adjustments, and trade diversion. This framework is used to quantitatively assess the potential impact of U.S. tariffs on Euro Area exports, investment, and GDP.

The analysis primarily utilizes data from authoritative sources such as Eurostat trade data, the ECB Survey of Professional Forecasters (SPF), and the Federal Open Market Committee (FOMC) Summary of Economic Projections. Combining New Keynesian models with trade elasticity analysis methods, it systematically explores the exchange rate transmission mechanisms, inflation dynamics (including Producer Price Index PPI and Consumer Price Index CPI), and optimal monetary policy response paths under tariff shocks.

Core findings indicate that while Euro depreciation and ECB policy adjustments can partially offset the direct impact of tariffs on exports, the financial contagion effect triggered by rising risk premiums on long-term U.S. bonds could increase European financing costs, posing challenges to public debt sustainability. Furthermore, a potential "Second China Shock," where Chinese exports shift towards the European market due to stronger U.S. tariffs on China compared to those on Europe, intensifying sectoral competition, emerges as a significant indirect risk for the Euro Area.

The report emphasizes that the key to policy response lies in avoiding overly restrictive monetary policies and retaliatory protectionist measures. Instead, strategies such as trade diversification, innovation incentives, and coordination of fiscal and monetary policies should be adopted. Through targeted policy design, sectoral shocks can be buffered, economic resilience maintained, and long-term growth stability for the Euro Area secured amidst global trade tensions.