The euro and European stocks are under pressure as attention on trade shifts to Europe. Late last week, the commerce department submitted a report on European autos to the White House. The report was commissioned by the president with the goal of investigating whether the European autos posed a national threat to the United States. This came shortly after the US president met with EUs Jean-Claude Juncker.
In the past, American presidents have tried to cultivate a close relationship with Europe. This is mainly due to the trans-Atlantic alliance formed after the end of the second world war to prevent more wars. The European Union is a close member of NATO of which the US provides most of the funds. The two sides pride themselves as the leading promoters of democracy around the world.
However, under Donald Trump, the relationship has been strained. This is because the US president has always reveled against the idea of the European Union. He was also a key supporter of Brexit, when the United Kingdom decided to leave the union. Trump believes that the European Union was created for the goal of countering the US influence.
He also believes that the EU takes advantage of the United States. He has argued that the region has failed to meet the required defense spending threshold, even as the United States continues to ramp up spending. He has also pointed to the high tariffs the region has put in place for American exports like cars. For example, American automobiles going to the union receive a tariff of 25% while those entering the US receive a tariff of below 2%.
While the report from the commerce department has not been made public, there is a likelihood that it will recommend more tariffs on European cars. This could have major implications for the relations of the two countries. It could also have major implications on the trade. Estimates believe that EU auto tariffs would cost the region more than $10 billion a year. The US too may be affected because it continues to host a number of European manufacturers. For example, the biggest BMW plant is located in South Carolina.
These challenges come at a time when the European economy is facing a challenging period. Germany, its biggest economy, recently avoided a technical recession in the fourth quarter. Its factory orders and exports declined while the industrial production declined for the fourth consecutive month. In the same month, retail sales declined by the fastest rate in 11 years. At the same time, business executives have continued to be more pessimistic as evidenced by the IFO climate data that fell to the lowest level in three years. The same trend has been seen in other countries like Italy, which is in recession and Spain which is facing some political pressure.
The uncertainty in Europe has led to the slowdown in euro and a sluggish growth in stocks. The chart below shows the performance of the euro and the Stoxx index. While the Stoxx has made some gains, it still trails the performance of comparable indices like the Dow and the S&P 500.