Europe's Tussle with the Cost of Living Poses Fresh Risks and Opportunities as Trump Tariffs Loom Large It's been an exceptionally challenging decade so far for Europe. Now, as Trump 2.0 gets into full swing in the United States, the continent's cost of living challenges appear set to reemerge. But what solutions are there for the Eurozone?

The return of Donald Trump to the White House was always set to impact the economic outlook for Europe, but the very real threat of tariffs could severely hinder the continent's ability to fully turn a corner from its drawn-out battle to control inflation.

Trump is determined to address the deficit of $213 billion that the United States ran last year, and the President was quick to impose 25% steel and aluminium tariffs on the European Union, raising the threat of a trade war that spills into many more industries.

With pharmaceuticals, cars, and machinery among the leading European exports to America, with US oil, gas, and financial services moving in the opposite direction, tariffs and retaliatory import levees could impact a vast range of sectors. Worryingly for a region that's faced plenty of cost of living challenges in recent years, the result could mean a return of high inflation.

President of the European Commission, Ursula von der Leyen, has promised that the increase of US tariffs on steel will not 'go unanswered', making countermeasures a probability. But what could this mean for the inflation outlook for Europe?

The threat of inflation

The post-pandemic recovery and geopolitical conflict in Ukraine have been contributing factors to high inflation rates in the European Union throughout the 2020s.

October 2024 saw Eurozone inflation fall below its 2% target for the first time in three years, dropping to 1.8%. This placed the EU in a leading position throughout the Western hemisphere's struggle to control the runaway cost of living.

By November, Lituania posted one of the Union's lowest rates for annual inflation, which fell to 1.1%, while the country's monthly rate was 0.6%.

Given that peak inflation in Lithuania and much of the Baltic states and Eastern Europe approached and exceeded 20% in some cases back in 2022, the continent's economic recovery has been impressive, but tariffs targeting EU imports could damage the progress made by the bloc.

When nations have to contend with high tariffs, retaliatory measures can be inevitable which drives the costs of imports and exports higher which are generally passed on to consumers.

Continuing the focus on Lithuania, 4.8% of the nation's exports went to the United States in 2023, and as a major exporter of cars, the nation may suffer in a trade war along with nations that are even more dependent on exporting to the US.

Controlling the cost of living

Should Europe's trading challenges with the United States continue to intensify, we could see a return to the high inflation, high-interest environment that burdened much of the continent's lowest-income households.

Because many central banks use interest rates to control high inflation rates by increasing the cost of borrowing to slow spending, we could see EU states resort to hawkish monetary reversions should the cost of goods impacted by tariffs begin to rise.

Proactive interest rate hikes may be good at slowing inflation, but they also increase the interest paid on loans like mortgages, smartphone contracts, and cars, which compounds the challenges that consumers face to protect their income against devaluation.

The EU's previous battle with inflation saw 30% of survey respondents report difficulties in making ends meet in 2024, representing a significant increase from 22% the year before.

Worryingly, lower-income households in the Eurozone didn't simply struggle to save in the wake of the continent's last high inflation and high interest rate environment, they dissaved, posting a negative median saving rate of -5.86% for the bottom income quintile.

Despite this, the insights of the recent past could help Europe to strategize its control on trade in an environment that's impacted by Trump's imposition of tariffs.

Opportunities in emerging economies

Europe's advantageous position can help the EU build more conducive relationships with trading partners in emerging economies in response to increasing challenges in US trade.

While nations like China have been viewed as less reliable than the United States, Trump's protectionist policies could lead to a reassessment of the nation's role on the world stage. Following the unveiling of strong stimulus packages to boost its economy, China's industrial prowess appears to be recovering and opens the door to stronger alternative supply chains for European businesses.

Other BRICS+ nations like India and many South American countries could also aid Europe in overcoming fresh tariff challenges.

This could pave the way for European businesses to discover new opportunities in plenty of fast-growing markets in places that would have seemed unlikely before the pandemic.

European Commission representatives exchanged views on emerging markets in October 2023, with members of the Parliament's Committee on International Trade (INTA) underlining the need to keep an eye on the expansion of BRICS+ nations and their potential impact on EU trade policy.

The future of European supply chains

For businesses in Europe, the prospect of a trade war with the United States will rightfully seem daunting, but it could open the door to fresh opportunities to build partnerships with rapidly growing economies at more competitive rates.

The age of Trump 2.0 may be set to introduce a wide range of challenges for business in Europe, but it could also pave the way for fresh innovation in the supply chains used to prevent the worrying return of inflation and a cost of living squeeze throughout the bloc.