Europe’s economic optimism is facing a critical test as US President Donald Trump’s unexpected threat to impose a 30% blanket tariff on EU exports from 1 August reignites fears of a transatlantic trade war.
With markets heavily positioned for a European growth renaissance fuelled by fiscal expansion, any escalation could reverse months of investor confidence and spark sharp corrections in European assets.
While European officials hope to de-escalate tensions before the deadline, the threat has already introduced significant policy uncertainty at a time when sentiment on European equities and the euro is riding high.
Goldman Sachs: Tariffs could hit eurozone GDP by 1.2%
According to Goldman Sachs, if the full 30% tariff package is implemented and sustained, it would raise the US effective tariff rate on EU goods to 26 percentage points, up from the current 8.5.
The investment bank warns that this could result in a cumulative 1.2% decline in eurozone GDP by the end of 2026, with the most acute impact likely to materialise in the next few quarters.
Even under Goldman’s baseline scenario, which assumes a negotiated outcome that retains sector-specific tariffs and adds new levies on critical goods such as pharmaceuticals and aviation components, the eurozone would still face a 0.6% GDP hit.
“Much of the current strength in manufacturing reflects front-loading ahead of tariffs,” said Sven Jari Stehn, chief European economist at Goldman Sachs. "Combined with the ongoing appreciation of the euro, we see little growth in the second half," Stehn added.
Stehn expects the EU to respond gradually to a 30% across-the-board tariff, likely beginning on the day the new US duties take effect — potentially increasing the risk of further trade escalation.
EU holds fire, for now, but prepares countermeasures
Despite the economic risks, Brussels is opting for restraint. An EU spokesperson confirmed on Tuesday that the bloc has no intention to implement countermeasures before 1 August.
Nonetheless, preparations for retaliation are under way. The EU's trade representative Maroš Šefčovič warned that 30% tariffs would make transatlantic sales "almost impossible", and confirmed that Brussels has drafted a new package of rebalancing measures worth €72 billion in imports from the US, complementing the existing rebalancing measures for steel and aluminium.
German Chancellor Friedrich Merz struck a cautious tone, saying: “The EU is refraining from countermeasures for now, but the US should not underestimate our willingness to respond.” “The goal is a quick solution,” Merz added.
A bullish Europe trade under threat
The latest Trump tariff threat lands at a pivotal moment for market sentiment.
Since the start of the year, the euro has surged over 11% against the US dollar, marking its strongest first-half performance since the currency’s inception. European equities, measured by the EURO STOXX 600, have gained 10%, outperforming the S&P 500 by 4 percentage points.
Bank of America's July European Fund Manager Survey showed investors overwhelmingly bullish on Europe.
A net 44% expect stronger eurozone growth in the coming 12 months, up from 29% in June, driven largely by Germany’s landmark €500bn infrastructure programme and broader fiscal easing.
Investor exposure to eurozone equities is at a four-year high, with a net 41% of fund managers overweight, up from just 1% in January.
The euro itself has become heavily overbought, with a net 20% overweight — the highest since January 2005 — after the fastest six-month positioning reversal on record.
Sector preferences in the Bank of America's survey showed a strong tilt towards cyclicals, banks, and German equities, with autos and basic resources among the most underweighted.
The sharp positioning shift reflects a belief that European macro fundamentals can decouple from US policy headwinds, with 63% of respondents viewing fiscal expansion as powerful enough to shield the bloc from Trump-induced turbulence.
But the risk now is that these bullish expectations could unravel swiftly if the tariffs are implemented, triggering a sharp deterioration in sentiment, earnings outlooks, and growth momentum across the eurozone.
