Will tariffs prove to be a spectacular own goal for Trump?

Mabrouk Chetouane, Head of Global Market strategy at Natixis Investment Managers, and François Collet, Deputy CIO at DNCA Finance, compare their views on the macroeconomic context for Europe and the US.

Mabrouk Chetouane (MC): What’s your perception of the economic impact of Donald Trump’s election on Europe in terms of economic growth, inflation and monetary policy?

Francois Collet (FC): The European economy is not in great shape. The recovery is there, but its magnitude hasn't been strong. Several factors explain this. First, there’s the political situation in France. Then there’s the evolution of international trade which is slowing down and weighing on Germany and therefore on the eurozone. Then there are the decisions of the European Commission whose regulations hinder and complicate entrepreneurial freedom. And finally, there’s Germany's energy choices.

The economic situation is delicately balanced. It could get better, but there is also a significant chance that we could see an even sharper slowdown in global trade due to Trump’s economic policies, and the ongoing political instability in France. All of this is quite negative.

MC: How optimistic are you that things could get better?

FC: I have two hopes. First, the high savings rate in Europe, which can continue to rise and offers some support to the European economy. Second, the possible fiscal support from governments, particularly in Germany, which is the main European economy, where there is room for public deficits to grow, meaning there is the opportunity to implement a real stimulus plan. Among Germans, there is support for modifying the debt brake, allowing for more public deficit.  

MC: For me, regulation is limiting factor for entrepreneurship and investment across the eurozone. When we look at corporate investment through the indicator of gross fixed capital formation, for example, Europe is significantly lagging the US. Would you agree that current monetary conditions in the eurozone are a problem, and secondly that the interest rates in the eurozone are too high which is preventing companies from investing more?

FC: One of the challenges of the eurozone is that the European Central Bank (ECB) pursues a single objective, that of price stability. It is not tasked with supporting demand, even though demand cannot be ignored as it impacts inflation. I think the interest rates are probably a bit too high, even though their level doesn’t prevent a slight recovery in some countries like Spain, for example. Italy is doing relatively well. But interest rates will need to continue to come down.

2% seems to me to be a landing rate to achieve monetary neutrality. The ECB will need more guarantees regarding the continuation of the disinflation trend to go below 2% and enter accommodative territory. Inflation in services is still close to 4%. We can anticipate a decline in this indicator following a decrease in wages. However, it will be complicated for Christine Lagarde to achieve a consensus within the ECB's Governing Council to ease monetary policy once this neutral rate is reached. The hawks will highlight the risk of reigniting inflation.

MC: The Draghi report highlighted the investment gap between Europe and the US. Former US President Joe Biden was able to deploy massive investment programs thanks to low interest rates. Do you see the decoupling of monetary policy between the US and eurozone as an inflation risk or a growth opportunity, even if it leads to a depreciation of the euro?

FC: Actually, I believe the depreciation of the euro is rather good news. We need to distinguish between service inflation, which is essentially domestic and related to wage developments, and consumer goods inflation, which is largely imported and very low. The depreciation of the euro could indeed push up the price of goods, but their increase is largely below 2%.

Certainly, the euro has declined over the last few quarters, but it remains 20% above its level at the beginning of the century. I believe the ECB could find arguments to say that the depreciation of the euro, if it were to continue, does not undermine its medium-term inflation scenario. We cannot rely on our productivity gains to improve the competitiveness of the eurozone.

MC: How are you thinking about opportunities within corporate debt?

FC: We have been waiting for credit spreads to widen before entering the market. The maturity of the market is much more significant than in the past. Long ago, when an issuer defaulted, like Parmalat, the entire credit market would wobble. That is no longer the case. Defaults today have little impact on the market and there has been no sectoral contagion.

The good performance of the market can be explained by fundamentals and flows. We experience huge inflows in the European credit market with supply far below demand. Thus, we see a significant contraction in spreads. The high yield market has evolved significantly, moving from CCC/Single B ratings about fifteen years ago to a BB rated market now. It is normal that we have tighter credit spreads in high yield than in the past.

MC: You mentioned the prospects for sluggish growth in the eurozone, which contrasts with the rude health of the US economy. Will this economic trend continue across the Atlantic?

FC: US growth was solid in 2024 but may slow down in the coming quarters. Growth has been enabled by the 16 million immigrants over the last four years. We believe that the tax cuts and deregulation promised by Donald Trump are powerful long-term support factors for the American economy. And Trump's election has likely boosted the confidence of American small business owners who tend to vote Republican and are eagerly awaiting these tax cuts and deregulation.

Conversely, two measures will negatively impact growth: the closing of immigration channels, which has strongly contributed to growth and disinflation, and the tariff barriers. The country that will be most impacted by the tariff barriers is not the victim of this protectionist policy like Mexico, China, or Europe. It is the US.

The US, which represents roughly 20% of global GDP, will face inevitable retaliatory measures imposed by 100% of the countries with which it trades, while these countries will only face an increase in tariff barriers from a single trading partner: the US. These tariff measures may be cancelled, or their scope reduced – no one knows. But a sword of Damocles now hangs over the American economy, and we believe the Fed will lower its key rates more than the market anticipates.

MC: Isn't the reduction in the corporate tax rate – a campaign promise from Donald Trump – expected for 2026 rather than 2025, given the budget deficit?

FC: I think we will soon know. Donald Trump is a good salesman; he loves announcements. Even if he announces a tax cut for 2026, American business leaders will feel like it's already here. As for the Fed, we will have to wait for a real slowdown before it returns to monetary neutrality, not before 2026.

MC: In this very uncertain world, do you have any certainty or strong conviction?

FC: I am convinced that we are heading towards a world with generally less growth, more inflation, and slightly more accommodative central banks. If there is a dilemma between growth and inflation, central banks will come to the aid of growth rather than fighting against inflation. I find it hard to understand how a world with more tariff barriers and more tensions can be positive for growth and negative for inflation.

Written in February 2025