Reaction to the US-EU trade deal is very mixed, partly because it is not a trade deal in the classical sense — at least not in the sense of the laborious trade deals that the EU is used to striking. This is partly because a large facet of the ‘deal’ is based on a promise and also because the optics of the deal are quite depressing for Europe.

At the headline level, EU exports into the US will be met with a 15% tariff to be paid by the US consumer, not unlike the Japanese ‘deal’. Auto companies will not be displeased with a 15% tariff. Wines and spirits, steel and notably pharmaceuticals have yet to have tariff levels finalised and there will be some nervousness around the investigation into pharmaceutical exports back to the US. Interestingly, the EU has resisted attempts to water down its digital regulations.¹

Politically, the spin that the EU is putting on the agreement is that it was the best possible outcome in a difficult geopolitical climate (recall that the recent EU-China summit was a damp squib). While there were some public expressions of dismay, notably from the French prime minister Francois Bayrou² – these can be seen to be largely aimed at the public rather than Brussels.

Humiliating optics

Though Ursula von der Leyen is unpopular with EU governments for the singular way she runs her office — it is populated with officials who are close to Emmanuel Macron such as Alexandre Adam (one of von der Leyen’s key deputies) — there is no sense that the large countries were left out of the negotiation process.

However, amongst the professional trade staff, there is still some despair at the humiliating optics of the deal, the fact that it is in many ways not binding. There’s also a risk that there is no undertaking that the deal is final and another round of tariffs is not imposed later.

Lack of clarity

Two of the key undertakings in the deal — that European companies invest $600 billion in the US in addition to a commitment to purchase microchips, as well as a commitment from the EU to buy $750 billion in energy from the US over the course of the Trump presidency — are not at all clear in their implementation and very much open to a fudge, with the right accounting treatment.

In particular, the energy purchase commitment is unrealistic because it exceeds what the EU spends on energy in a given year and US energy firms do not have the capacity to service a commitment of $250 billion in demand from Europe whilst also serving other markets.

The aftermath

In my sense, there are several aftershocks to watch for. The first is that the deal further damages transatlantic relations. The level of trust between the EU and the US is likely the lowest it has ever been, which has strategic implications as far afield as Russia/Ukraine and the Middle East. One other implication may be a drift by governments and consumers away from US brands — as this may well be an effect that is seen in other regions.

Two financial market implications are that, at the margin, any dampening of growth in Europe will maintain downward pressure on rates in Europe. More importantly, in the context of a very oversold dollar, there is now an incentive for EU policymakers to try hard to talk down the euro, and we may see a short-term rebound in the currency pair.

In sum, if this is a ‘final’ deal and the topic of tariffs does not re-emerge in the next three years, it is not a bad deal for the semis, autos and aerospace sectors in Europe, though the public optics are not good for the EU. The best parts of the deal for Europe are the fantastical claims of incoming European investment and energy purchases in the US. This is a fairy tale that the Europeans hope Mr Trump believes in.

The telling factor is that this deal has now emptied all goodwill from the transatlantic relationship and effectively completes another diplomatic rupture by President Trump. US brands may find that they are less popular in Europe and the dollar rallies against the single currency.

Opportunity for private markets

From a private markets point of view, this is yet another ‘wake-up call’ and the best that can be hoped for is that it accelerates projects like the savings and investment union and ‘strategic autonomy’. If this is the case, it may well provide a boost to private investment in infrastructure, defence and energy across Europe.