EU has few cards with Donald Trump, and it's bad at playing them

Times

a day ago

Donald Trump is treating the European Union like a plaything. Over the past three months, the president has made repeated unilateral threats of tariffs against the bloc, moving deadlines and throwing negotiations into turmoil at the drop of a Truth Social post.
The latest skirmish was over the weekend, when Trump derailed hopes of a tentative 'deal' with Brussels negotiators by threatening a sweeping 30 per cent levy on the bloc from August 1. That's down from the 50 per cent he threatened in May but above the 10 per cent minimum that the EU was hoping to land on and which the UK has already secured.
• Trump slaps 30% tariff on EU and says trade deficit is 'threat to security'
Trump's capriciousness towards the Continent is a reflection of the US's strong negotiating position vis-à-vis the EU, compared to China. The contrast in rhetoric and strategy from the White House on the two trade negotiations is stark. With Beijing, America's subservient dependence on China's raw materials export licences, and the fact that Beijing's mercantilist export model has continued unabashed this year, shows who holds most of the cards in US-China trade negotiations. So much so that the administration was quick to 'celebrate' a Geneva accord with Beijing that, a month on, no one knows the details of.
Europe simply doesn't boast anywhere near the negotiating leverage over Trump that China wields. It cannot easily weaponise Americans' love for luxury clothing or German cars, and instead is hampered by economies such as Ireland — an open small trading nation — whose economic fortunes hinge on retaining giant American multinationals on its shores. Ireland would be hit by import taxes in areas like pharmaceuticals, and even more so if Trump's larger threats force 'repatriation' of US multinationals.
• Ireland has most to lose if tariffs force companies back to US
Europe's messy economic relationship with the US skews the tariff talks odds in favour of the other side. But so does the nature of the EU itself. Of all the US's major trade-negotiation partners, Brussels has been uniquely ill equipped to handle Trump. The bloc has approached the head-to-head with its quintessentially legal and technocratic set of asks just as it would a conventional trade agreement.
The past week alone has underlined why the technicalities of tariff levels or goods trade simply don't matter to Trump. He is using tariffs, for example, to beat up the centre-left government of Brazil, which runs a trade surplus with the US, to defend his ally Jair Bolsonaro.
The Europeans this month gave up their right to impose a 15 per cent tax on US tech giants, hoping it would help pave the wave for a 10 per cent tariff deal — to no avail. It's little surprise that Bernd Lange, a German MEP and head of the European parliament's trade committee, was incandescent at Trump's 'impertinent slap in the face'. This just isn't how Brussels is used to doing things.
• Trump threatens Brazil with 50% tariffs 'over Bolsonaro witch hunt'
Member states are also divided about what to do next. Brussels has said it will delay planned counter-tariffs on metals that were due to come into force this week, in order to try and placate Trump. A new round of counter-measures worth €72 billion was agreed by EU trade ministers yesterday, but there is no guarantee they will ever be used. A more aggressive move to prepare ways to hit the US with an anti-coercion instrument has been left in reserve. It's no surprise that Trump keeps moving the goalposts.
• Trump's tariff may make normal trade impossible, says EU negotiator
A 30 per cent minimum tariff, if it comes into force, would result in a 1.25 per cent hit to the bloc's GDP over the next 18 months, according to figures from Goldman Sachs. The other growing worry for some European companies is the strength of the euro, which has brought complaints from the Continent's exporters and has also depressed earnings valuations for its businesses in recent weeks. This is a 'triple whammy' of hits for some of the most export-oriented firms in the bloc, where trade with the rest of the world accounts for about a fifth of total GDP.
The euro has gained 13 per cent against the dollar this year and is about 6 per cent stronger on a trade-weighted basis — a sustained and impressive appreciation for a currency that most thought was heading to below $1.00 at the start of the year.
Similar to the 'should we or shouldn't we retaliate against Trump?' issue, Europeans are unsure how to feel about their rapidly strengthening currency. There is a reasonably simple mechanical relationship between a strong exchange rate and variables such as inflation. A rough rule of thumb for the euro is that a 1 per cent trade-weighted appreciation will lower average consumer prices by about 0.1 per cent.
The pass-through is usually even higher when the euro's strength is down to 'external' factors — such as worries about the dollar — rather than internal factors such as improved growth.
This means the eurozone's inflation target of 2 per cent is almost certain to undershoot to about 1.6 per cent next year and could fall even further in 2027.
The European Central Bank will then find itself in the familiar position of having to cut interest rates to ultra-low levels to stimulate price growth — much as it has done for the past decade with the exception of 2022-2023. But the ECB and its president, Christine Lagarde, have also made it clear that they think the world is entering a 'global euro moment' where the single currency can benefit from the dollar's sustained decline and worries over its reserve status.
This is an unusually pointed political intervention by the ECB, which has been historically 'neutral' on the reserve status of the euro. Previously, it has been the European Commission that has pushed the 'internationalisation' of the euro as an explicit stated aim — despite having no tools at its disposal to achieve this.
A number of factors need to be in place before the euro can play a role anything like the dollar in the world's financial system; a likely eurozone safe asset through commonly issued debt is one of them. A reserve currency is also a strong, rather than undervalued one. The ECB should be careful what it wishes for.