EU Sovereigns Face Multiple Risks to Credit Outlook from Shifts in US Policy

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Decisive action will be needed to counter disruptive US de-globalisation policies.

US president Donald Trump’s renewed push for unilateralist policies spanning trade, finance, fiscal policy, energy and immigration has far-reaching implications for Europe and the creditworthiness of its member states.

Four Principal Risks

Four principal risks stand out (Figure 1). First, higher tariffs targeting sectors and/or countries – such as China, Mexico, Vietnam, Germany, Japan and Italy – with which the US has a large trade deficit – could disrupt European exports and manufacturing supply chains.

Second, European governments may be forced to increase military spending to reduce reliance on US military and security commitments amid the persistent threat from Russia. Third, on the domestic political front, US support for Europe’s far-right political parties may accelerate instability within Europe, complicating consensus-driven policymaking at the EU level.

Finally, an appreciating dollar driven by tighter Federal Reserve policies and global risk aversion could exacerbate borrowing costs mostly for emerging markets such as Ukraine, Egypt and Türkiye but also central and eastern European (CEE) sovereigns such as Hungary.

Figure 1. US policy shifts and potential policy options to mitigate impact

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Alvise Lennkh-Yunus is the Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH. Eiko Sievert, Senior Director at Scope, and Brian Marly, Senior Analyst at Scope, contributed to writing this article.