US economic policy and its impact on the European economy and financial markets

Six months after Donald Trump’s new US administration took office, businesses and markets in Germany and Europe are beginning to feel the effects. The US government’s economic policy decision to increase industrial production in the US through tariffs has led to irritation and, in some cases, to disruptions in international trade relations. In doing so, Donald Trump is largely putting into practice the program he announced before the election as part of his “America First” strategy.

Tariffs damage economic relations

In particular, the long-running tariff dispute has had a direct impact on many businesses over here. Higher tariffs run counter to the principle of competition, weakening long-term innovation potential and ultimately damaging all parties. There are no signs of industrial production returning to the US, at least not in the foreseeable future. The recent agreement between Trump and von der Leyen (27 July 2025) represents a pragmatic solution and prevents further escalation. This should – at least for now – bring back an air of calm to economic relations. It remains to be seen how this impacts trade and investment relations.

Businesses and the overall economy are also indirectly affected by US economic policy through developments on the financial markets. This is where other economic policy measures from the US government come into play, which – according to assessments by many capital market participants – are likely to cloud longer-term prospects for economic growth in the US. In addition, there are increasing labour force shortages and the prospect of high levels of government debt over the long term. These developments are causing international investors to take a more sceptical stance on the US dollar zone.

The US dollar is falling – but still remains the leading key currency

Nevertheless, as the dollar falls against the euro, European exports to the US are becoming more expensive – as they are in other countries where trade is conducted in dollars. It is also possible that the dollar will continue to fall against the euro. The US government has indicated it will not take measure to prop up a weak dollar. However, exchange rate fluctuations on the currency markets – including the euro-US dollar exchange rate – have also taken place in the past.

There is no question yet of the US dollar losing its position as the leading key currency. Although the US dollar has lost some ground to other currencies in recent decades, it remains by far the leading global reserve, trading and hedging currency. A comprehensive sell-off seems unlikely given the enormous breadth and depth of the US financial market – not least due to a lack of genuine alternatives and the limited market volumes of other bond markets.

US bonds with price premiums

US government bonds saw prices rises this year. This was the capital market’s response to the uncertainties triggered by the US’s new economic policy and the prospect of further increases in government debt. As a result, the US must pay higher interest rates on government borrowing. The response by the capital markets early in the year has, in turn, led to – at least temporarily – restraint when it comes to US customs measures.

In principle, US government debt is likely to continue to rise, not least due to the tax laws in the One Big Beautiful Bill Act, making refinancing the US budget increasingly challenging. To what extent the expected additional income from US tariffs can contribute to reducing debt remains to be seen.

Shifting capital to Europe

Similarly, the capital market’s response observed in recent months has been to shift capital, partly out of the US and into Europe. Irrespective of the EU’s announcement to also (continue) investing significantly in the US, it must strengthen the attractiveness of the EU as an investment hub long term and, above all, deepen the domestic market for capital – capital markets union.

US market remains key – stability important

Despite economic policy developments in recent months, the US market for German and European businesses – and vice versa – remains highly attractive. This not only applies to exports but also, in particular, to investments. The US capital market and the US dollar remain key to the global financial system. This makes it all the more important that a solution was found in the latest EU-US trade deal, which is likely to ensure stability for the foreseeable future. An escalation in the trade dispute, possibly extending beyond tariffs, would be damaging to all parties. Expanding transatlantic free trade would make the most sense. And this objective should remain on the political agenda.

Strengthening the EU

Also, and especially given the recent EU-US trade deal, it remains the task of politicians in Germany and the EU to make the EU more resilient and future-proof, in particular, by

• strengthening economic competitiveness,
• improving the framework conditions for investments,
• expanding economic relations with other partners and
• deepening the EU capital market and the EU Single Market as a whole.