The European Union faces a potential economic shock as former U.S. President Donald Trump prepares to announce sweeping tariffs on European goods, a move that could slash exports by at least €85 billion and severely impact key sectors such as automobiles and pharmaceuticals.

The new tariffs, expected to be as high as 20% on all EU imports, are part of a broader trade policy shift that Washington has dubbed “Liberation Day.” If enacted, the measures would escalate transatlantic trade tensions and deal a significant blow to Europe’s already fragile industrial economy.

Germany and Central Europe Face the Biggest Impact

The EU exported €382 billion worth of goods to the U.S. in 2024, making America its largest single export market, accounting for 12% of the bloc’s total external trade. The automotive industry—one of Europe’s most vital export sectors—stands to suffer the most.

EU vehicle exports to the U.S. reached €46.3 billion last year, and with the new tariffs adding to an existing 25% levy imposed in March, combined duties on European cars could climb to 45%. This increase threatens to make European vehicles uncompetitive in the U.S., leading to a near-collapse in shipments.

Germany, Slovakia, and Hungary are particularly vulnerable, given their heavy reliance on automotive exports. Germany’s key manufacturing hubs—including Stuttgart, Upper Bavaria, and Wolfsburg—could see substantial losses, impacting Mercedes-Benz, BMW, and Volkswagen.

Slovakia, home to Kia and Volkswagen plants, and Hungary, which hosts Audi’s production in Gyor, also face significant risks. Any slowdown in Germany’s automotive exports would disrupt Central Europe’s tightly integrated supplier network, further amplifying economic consequences.

Pharmaceutical Sector Also at Risk

Pharmaceuticals, the EU’s most profitable export category to the U.S., are another major target. In 2023, pharmaceutical exports to the U.S. generated record trade surpluses, with Ireland and Denmark leading the sector, thanks to the success of companies like Novo Nordisk.

However, reports suggest that Trump may impose a specific tariff on semaglutide—the active ingredient in Novo Nordisk’s best-selling weight-loss drug, Ozempic. Such a move could significantly impact Denmark’s pharmaceutical sector while giving an advantage to American competitors.

Potential Economic Fallout and ECB Response

Goldman Sachs analysts warn that the new tariffs could push the eurozone economy toward a slowdown, if not a full recession. In their baseline scenario, the average tariff on EU goods would rise from 7% to 20%, leading to a 0.7% reduction in the euro area’s GDP by the end of 2026.

A worst-case scenario—where additional U.S. adjustments to Europe’s value-added tax system increase tariffs to 43%—could trigger a 1.2% cumulative GDP loss and push the eurozone into a technical recession by 2025. Inflation is also expected to rise, with core inflation potentially peaking at 2.3%.

In response, the European Central Bank (ECB) is likely to implement monetary easing. Analysts expect the ECB to cut interest rates in April and June, with another 25-basis point cut in July, bringing the deposit rate down to 1.75% to counteract economic stagnation.

As the EU braces for the official tariff announcement, concerns are mounting over the broader implications for trade, investment, and geopolitical relations between Europe and the U.S.

Uncertainty surrounding US trade tariffs is set to cost the eurozone and UK economies billions over the next two years, according to a recent report by S&P Global. The potential economic fallout cannot be fully offset by increased defence spending, despite upcoming fiscal stimulus measures in Europe.

Eurozone Growth Downgraded Amid Trade Concerns

S&P Global’s latest economic forecast projects that the eurozone economy, valued at €14.6 trillion, will contract by 0.4% of GDP cumulatively in 2025 and 2026 due to trade-related uncertainty. Prior to the recent announcement of 25% tariffs on US car imports, the organization had already downgraded its eurozone growth expectations for 2025 from 1.2% to 0.9%.

Sylvain Broyer, Chief Economist for Europe, the Middle East, and Africa (EMEA) at S&P Global, emphasized that “uncertainty itself is likely to pose a greater risk to the European economy than the tariffs alone.”

While US tariffs could weaken economic recovery, there are some positive indicators. Fiscal stimulus measures in Germany and the broader EU could help drive eurozone GDP growth to 1.4% in 2026. Additionally, confidence in the region is improving due to falling inflation and interest rates, which are strengthening the labour market.

Potential Economic Impact of Tariffs

S&P Global considered multiple scenarios regarding the impact of US tariffs on the eurozone economy. In the worst-case scenario, where all EU exports to the US face a 25% tariff, eurozone GDP growth could be limited to 0.5% in 2025 and 1.2% in 2026.

Germany, heavily reliant on US car exports, would be particularly affected. Broyer noted that Germany’s exposure to US car markets is 1.5 times the European average, and tariffs could lower its economic output by 0.1% in 2025.

Despite these challenges, EU defence spending could provide some economic support. European governments are expected to increase defence budgets by 1% of GDP from 2026 onward, potentially boosting eurozone GDP by 0.1% in 2026, 0.2% in 2027, and 0.3% in 2028.

European Central Bank’s Expected Response

S&P Global anticipates that the European Central Bank (ECB) will cut interest rates once more in 2025, reducing the rate to 2.25% by mid-year. However, it expects the ECB to start raising rates again in the second half of 2026, with two hikes bringing the deposit facility rate to 2.75% by year-end.

Broyer warned that additional risks to the forecast include continued trade uncertainty, potential failures in executing fiscal plans, and economic slowdowns in the US due to rising import costs. However, stronger-than-expected fiscal stimulus could improve confidence and support growth.

UK Growth Forecast Cut Nearly in Half

The UK is also facing economic headwinds. Before the car tariff announcement, S&P Global had already lowered its UK growth forecast for 2025 from 1.5% to 0.8%, citing persistent inflation, weak export volumes, and restrictive monetary policy.

Marion Amiot, Chief UK Economist at S&P Global Ratings, highlighted that if the UK cannot avoid the newly imposed 25% tariffs on car exports to the US, it could face an additional 0.2% hit to GDP. “Car exports to the US are the largest source of bilateral goods trade surplus for the UK,” Amiot noted.

The UK’s export sector is struggling due to weak demand in Europe and China, as well as the strong value of the British pound. High energy and labour costs are also limiting competitiveness. “Energy prices are still twice as high today as they were before the energy crisis, so businesses have a lot to absorb,” Amiot explained.

The Bank of England’s Dilemma

The Bank of England (BoE) faces a challenging economic landscape. While businesses and investors are eager for interest rate cuts, inflation remains a key concern. In its latest meeting, the BoE kept its benchmark interest rate at 4.5%, despite inflation dropping to 2.8% in February.

S&P Global predicts that the BoE will lower rates to 4% by the third quarter of 2025, although it now expects one fewer rate cut than previously forecast. Inflationary pressures are likely to remain a constraint on monetary policy decisions.

Looking ahead, UK economic growth is expected to accelerate in 2026, with S&P Global projecting a 1.6% GDP increase. “Things are looking up for 2026, with regional growth picking up, interest rates cut by another 50 basis points, and inflation edging back to 2.5%,” the report concluded.

As trade tensions and policy uncertainty continue to shape economic conditions, both the eurozone and the UK must navigate a complex environment, balancing fiscal stimulus with monetary policy adjustments to maintain stability and growth.

British books and stationery retailer WH Smith is set to disappear from UK high streets following a £76 million (€91.2 million) deal to sell its 480 retail outlets to private equity firm Modella Capital, the owner of Hobbycraft.

The move is the latest in a series of high-profile closures affecting the UK retail landscape, which has struggled to recover from the pandemic. WH Smith, a brand with over two centuries of history, will continue to operate under its name in airports, railway stations, and hospitals, but its high street stores will be rebranded as TGJones.

Retail Shake-Up as Modella Capital Expands Portfolio

Modella Capital, which has previously acquired The Original Factory Shop and Hobbycraft, will take control of WH Smith’s high street operations, including several stores in shopping centres and retail parks. However, the exact timeline for the transition remains undisclosed.

WH Smith’s Post Office counters will continue running as usual, and the company has reassured customers that business operations will remain normal during the transition. The retailer, which employs around 5,000 people across more than 1,100 stores in the UK, has also hinted at exploring further strategic changes, including the potential sale of its digital greetings card brand, Funky Pigeon.

Despite the deal, concerns remain over potential job losses, though Modella has not confirmed whether redundancies will follow. The firm has stated that new product ranges will be introduced, but further operational details have not yet been revealed.

WH Smith Shifts Focus to Travel Business

The decision to exit high streets comes as WH Smith pivots towards its more profitable travel division. Group CEO Carl Cowling highlighted that the high street business, while still profitable, had become a smaller part of WH Smith’s overall operations amid the company’s international expansion.

“Our UK High Street business has been a good, cash-generating operation, but with our rapid international growth, now is the right time for a new owner to take it forward,” Cowling said. “This will allow WH Smith’s leadership team to focus exclusively on our travel business, which has stronger growth prospects.”

Russ Mould, investment director at AJ Bell, noted that the deal enables WH Smith to concentrate on expanding its travel retail footprint. However, he cautioned that losing the WH Smith name from high streets could negatively impact footfall.

“The WH Smith brand was a key reason why its stores survived in an increasingly challenging retail environment,” Mould said. “Shoppers relied on the retailer for specific items, and removing the brand could see customer traffic decline under the new TGJones name.”

High Streets Continue to Struggle

The departure of WH Smith from UK high streets is expected to further weaken an already struggling retail sector. The pandemic and changing consumer habits have led to a wave of closures, including Debenhams, Daniel of Ealing, and Cool Britannia. Retailers like New Look, Quiz Clothing, and Select Fashion have also been forced to shut multiple locations.

High street banks have followed a similar trend, with major lenders like Halifax, Lloyds, Bank of Scotland, and Barclays closing branches in response to shifting consumer behaviour.

Despite these challenges, the retail sector showed resilience in February, with the Office for National Statistics (ONS) reporting a 1% monthly increase in sales volumes. This exceeded market expectations of a 0.3% decline and followed a 1.4% rise in January.

Household goods led the growth, experiencing their strongest monthly performance since April 2021, while clothing and footwear sales also contributed positively. However, food store sales saw a decline.

On an annual basis, retail sales in February rose 2.2%, surpassing analyst projections of a 0.5% gain.

Consumer Spending Outlook Remains Mixed

Looking ahead, consumer spending trends appear uncertain. A McKinsey & Company report found that while 22% of shoppers plan to increase spending on garden furniture and 17% on hotels, many are cutting back in other areas.

“Nearly 40% of consumers plan to reduce clothing purchases, and almost half (49%) intend to spend less on jewellery,” said Sagar Shah, associate partner at McKinsey & Company.

He also noted that while inflation is easing, it has yet to drive stronger sales volume growth. Rising wages are putting pressure on retailers’ margins, forcing them to adjust pricing strategies and promotional tactics to maintain profitability.

As WH Smith transitions out of the high street retail landscape, the sector faces ongoing uncertainties, with businesses having to adapt to changing consumer preferences and economic conditions.