BREAKINGVIEWS-EU dynamo is consumers, not trade deals or tariffs

By Jon Sindreu

LONDON, Jan 29 (Reuters Breakingviews) - Real strength comes from within. That's an annoying self-help cliché - but for the European Union’s beleaguered core, it's also a necessary reminder. This past week, German manufacturers dodged a bullet: after U.S. President Donald Trump lifted his tariff threats over Greenland, officials announced a landmark trade deal with India. Even the derailed Mercosur trade accord stands a chance of being fast-tracked. Yet all this pales next to the growth that could follow if European consumers were pushed to stop being so cautious.

Amid Europe's quest to reduce dependence on China and the United States, these trade deals look astute. With India, as well as with Argentina, Brazil, Paraguay and Uruguay, the EU has leveraged the strength of its domestic market — far more valuable to them than the reverse — to secure deeper tariff cuts on advanced manufactures. Germany has earmarked its machinery, vehicles, advanced instruments, metallic products and chemicals as the main beneficiaries.

India offers the greatest prize. It currently buys only 1.3% of these exports but it's the world's fourth-largest economy and is expanding at a breakneck pace. Imports of these key German goods have already been growing at a 7.5% annual rate since the pandemic. Factoring in how much each 1% change in tariffs affects demand for them - which, informed by the impact of Trump's 2025 policies, is on average roughly 1.3% - Reuters Breakingviews estimates that, by 2040, the EU-India trade deal could lift European exports of these items by an extra 4.7% a year. This is consistent with the EU’s projection of a broader 108% jump in exports to India by 2032.

Using the same methodology, the pact with the four Mercosur countries, which have small and sluggish economies, would likely only deliver a paltry 0.2% to 0.3% annual boost by 2040.

Let's place this in context. Half of the aforementioned German exports already stay within the EU, where consumption has risen only 3.3% a year since 2002, versus 4.6% in the U.S. This reflects a post‑2008 malaise and the scarring effect of post‑pandemic inflation, which Americans have brushed off thanks to soaring stock prices. Based on historical correlations calculated by Breakingviews, EU consumption would need to rise only 0.5 percentage points faster annually for core German exports to grow an extra 3% by 2040. Double that and the gains reach 6.1%, enough to have offset even the likely damage Trump could have caused with his 25% extra tariff over the Greenland spat. At 5% annual spending growth, the increase hits 10%.

Also, a reminder: any forecast affecting foreign markets is likely to be too optimistic, with India in particular sporting a myriad internal barriers. By contrast, EU consumers could be predictably stirred with the kind of “Buy European” subsidies proposed by economists such as Sander Tordoir at the Centre for European Reform. Europe does well to seek places to redirect its export machine. It just shouldn’t forget that its own 450 million consumers are the obvious first port. Other countries certainly haven't.

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CONTEXT NEWS

India and the European Union struck a trade deal on January 27 that would reduce tariffs and improve market access for both partners. On January 21, the European Parliament voted to challenge the EU's separate trade agreement with Brazil, Argentina, Paraguay and Uruguay, members of the Latin American trade bloc Mercosur, by referring it to the European Court of Justice and potentially delaying it by two years. However, Reuters has reported that European officials could apply it on a provisional basis as soon as March.

On January 21, U.S. President Donald Trump stepped back from threats to impose tariffs on those countries that had hindered his attempts to gain control Greenland, including Germany. The tariffs would have taken effect on February 1, increase to 25% on June 1 and continue until a deal was reached, Trump wrote on social media on January 17.