On November 8, 2016, Americans will decide whether Donald Trump or Hillary Clinton will be the president of Europe’s most important trade and investment partner. In 2015, 20 percent of EU exports went to the U.S., while 17 percent of U.S. goods and services were sent to the EU. Together, the U.S. and EU have the largest bilateral trade relationship in the world. The investment relationship is equally strong, with the two economies providing each other with their most important sources of foreign direct investment. What will the impact of the U.S. election be on this economic relationship and the European economy? Three key factors need to be considered: trade, fiscal policies, and certainty.

The first major concern for Europe is the U.S.’ commitment to free trade. Regardless of whether Trump or Clinton will be occupying the White House from January on, Europeans need to brace themselves for a more inward-looking U.S. The negative effects from Trump’s aggressive protectionist stance, which focuses on pulling out of existing trade agreements and slapping tariffs on countries such as Mexico and China, would be more far-reaching than Clinton’s more pragmatic approach that emphasizes enforcing existing trade deals. But her shift from a supporter to an opponent of the Trans-Pacific Partnership (TPP) indicates that neither candidate will push for expanded trade deals. One victim of the current anti-globalization mood (seen not just in the U.S., but also in Europe) may be the Transatlantic Trade and Investment Partnership (TTIP), which the U.S. and EU have been negotiating since 2013.

Fiscal policy is another area of potential concern for European economies. Given Trump’s stated opposition to changing entitlement programs such as Social Security, Medicare, and Medicaid, combined with lower tax revenues and increased spending for defense and infrastructure, the U.S. deficit and debt would soar under his current plans. Trump’s statements on the campaign trail about renegotiating the U.S.’ national debt with creditors raised eyebrows across the Atlantic and beyond, as European countries hold some of this debt, but more importantly rely on U.S. government bonds as a benchmark of safety and reliability. Under Clinton, the U.S.’ fiscal position would be mostly unchanged according to the Committee for a Responsible Federal Budget. No matter who wins on November 8, Europe will watch closely as one of the first challenges facing the next president and Congress will be raising or suspending the debt ceiling by March 2017.

Though every presidential election comes with a certain amount of uncertainty, a Trump presidency would be characterized by a particularly high degree of unpredictability. A win for the GOP candidate would likely lead to fluctuations and downward pressures on the U.S. dollar and stock markets. In the longer term, a trial-and-error presidency would impede confidence and thus investment as well as unsettle global financial markets. Though a Clinton presidency would be associated with a higher degree of certainty, it’s unclear to what extent she would be able to implement her suggested proposals in the face of a likely divided Congress.

Overall, according to Moody’s Analytics, Trump’s proposals would lead to a recession with 3.5 million job losses whereas Clinton’s plans would result in a somewhat stronger U.S. economy with increased GDP and 10 million more jobs. In assessing what these different outcomes could mean for Europe, it helps to bear in mind how fragile the state of the economy on the other side of the Atlantic is. A Trump-led economic downturn would come at a time of weak growth in Europe, where investor uncertainty is already high in the wake of Brexit and Italy is facing major difficulties in its banking sector. In short, a U.S. recession would risk tipping the European economy back into a recession.

Europe’s need for a steady U.S. economy and global economic leadership means that the choice Americans faces in November is a stark one—and not only for the U.S.

 

Marianne Schneider-Petsinger is the U.S. geoeconomics fellow at Chatham House’s U.S. and the Americas Program. She is a participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement.”

This blog post is sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).