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 Introduction

This report was commissioned by the European Parliament's Committee on Economic and Monetary Affairs (ECON) from the Economic Governance and Euro Area Surveillance Unit (EGOV). It aims to provide analytical support for the Monetary Dialogue with the President of the European Central Bank (ECB) on March 20, 2025, with a core focus on the multi-dimensional impact of US trade protectionist policies on the Euro Area economy. As the US Trump administration reinstates and escalates tariff measures, the global trade landscape faces restructuring. The Euro Area, as a major US trading partner, finds its economic stability and policy responses becoming a key issue.

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

The analysis data primarily originates 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 mechanism under tariff shocks, inflation dynamics (including Producer Price Index PPI and Consumer Price Index CPI), and optimal monetary policy response paths.

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 US long-term bonds could increase European financing costs, posing challenges to public debt sustainability. Furthermore, the potential "Second China Shock"—where Chinese exports shift to the European market, intensifying sectoral competition due to stronger US tariffs on China compared to those on Europe—emerges as a significant indirect risk for the Euro Area.

The report emphasizes that the key to policy response lies in avoiding excessively restrictive monetary policy and retaliatory protectionist measures, and instead adopting strategies such as trade diversification, innovation incentives, and fiscal-monetary policy coordination. 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.