What could be the impact of a 50% tariff on EU economy?

Published 27/05/2025, 09:58
© Reuters

Investing.com -- U.S. President Donald Trump’s threat to impose a 50% tariff on imports from the European Union could significantly undermine eurozone growth and raise the risk of a broader trade conflict, according to UBS.

While the initial move was delayed until July 9 following talks with European Commission (EC) President Ursula von der Leyen, UBS warns that this is not a “stable equilibrium” and that the risk of escalation remains elevated.

UBS had previously estimated that the 20% reciprocal tariffs announced in April would push the eurozone into a technical recession in the second half of 2025, reducing growth by 0.7 percentage points.

In the case of a 50% tariff, the impact could be even deeper. “A 50% tariff—if maintained—would roughly imply a doubling of the effective tariff rate announced on April 2,” UBS economists led by Felix Huefner wrote.

They estimate eurozone GDP growth could fall from the current forecast of 0.7% in 2025 and 1% in 2026 to just 0.4% and 0.5%, respectively.

In the near term, companies may front-load shipments to the U.S. ahead of the July deadline, potentially boosting second-quarter activity. However, the economists note this would likely be followed by weaker performance later in the year.

The tariff shock so far has been disinflationary, but that could reverse if the EU retaliates. “Should the EC implement retaliation measures, inflation pressures could increase, everything else being equal.”

Brussels has already prepared two retaliation packages: a €21 billion list of tariffs delayed until July 14, and a broader €95 billion proposal under public consultation. Should negotiations with the U.S. collapse, UBS expects the EU to respond, viewing the current blanket and sectoral tariffs as “probably unacceptable” to the Commission.

“Overall then, this could potentially lead to a further escalation in trade tensions with the U.S.,” the economists added.

While fiscal spending on infrastructure and defense may support growth starting in 2026, UBS sees the coming months as pivotal.

The bank warns that recent developments increase the risk that U.S. tariffs may remain elevated after mid-July, undermining hopes for a rollback and threatening growth, while also heightening the chance of EU retaliation that could trigger a tit-for-tat escalation with negative impacts on both growth and inflation.

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