January 2, 2025

By Mathew Gilbert, Head of Capstone’s European Practice

Capstone believes President-elect Trump’s second administration will profoundly impact Europe’s economic and policy outlook. We believe Trump 2.0 will not be like his first term. Given his overwhelming mandate, the next four years will see unprecedented US policy changes, with underappreciated implications for EU trade, environmental, tech, and tax policy, European industry, and the broader EU economy.

Outlook at a Glance:

• Trump’s Universal Tariff on Imports to Weigh on European Economic Recovery, Impact a Broad Variety of EU Companies, and Provoke a Likely EU Response
• EU Commitment to Climate Leadership via its Domestic Green Deal Implementation Strengthened by a Trump White House is a Positive for EU Clean Energy
• Impact on Economic Growth to Drive More Dovish Monetary Policy; Regulatory Initiatives to Slow but Deregulation Unlikely, Prefer US-Exposed Banks
• More Politicized Mandates for Incoming European Competition Commissioner and the UK Competition and Markets Authority
• Trump Administration to Drive a Proliferation of Digital Services Taxes, a Negative for US Big Tech

 Introduction

At home, the two continental European heavyweights, France and Germany, are navigating complex political landscapes. European governments are grappling with fiscal constraints and right-wing populism, adding domestic challenges for European corporations and investors in European assets.

We do not expect a wave of deregulation in Europe in reaction to US events, but we anticipate a more pragmatic approach from EU and UK policymakers. Although we see continued challenges for export-orientated sectors, the Trump era will accelerate the domestic focus on European competitiveness and strategic autonomy, which can create opportunities in the energy and technology sectors. We expect greater flexibility in competition and state aid rules to promote European champions and investments in strategic sectors.

Trump’s Universal Tariff on Imports to Weigh on European Economic Recovery, Impact a Broad Variety of EU Companies, and Provoke a Likely EU Response

Winners

N/A

Losers

Automobile producers: Volkswagen (VOW on the Frankfurt exchange), Mercedes-Benz Group (MBG on the Frankfurt exchange), BMW (BMW on the Frankfurt exchange), Porsche (P911 on the Frankfurt exchange) Luxury goods: LVMH (MC on the Paris exchange), Kering (KER on the Paris exchange), Hermes (RMS on the Paris exchange) Alcohol Sector: Pernod Ricard (RI on the Paris exchange), Rémy Cointreau (RCO on the Paris exchange)

The Second Trump Administration Will Likely Introduce Universal Import Tariff In 2025

Capstone believes the incoming Trump administration’s promised universal tariff on European imports will weigh on the EU’s economic recovery, impact a broad swath of companies and industry, and provoke a likely EU response.

During his campaign, Trump outlined a series of aggressive tariff measures. These new proposals represent a significant escalation of ‘America First’ trade policies: (1) 10%-20% universal tariffs; (2) a 60% import tariff on Chinese goods; and (3) a 100% tariff on all imported cars.

Capstone believes there is a 75% probability that the incoming Trump administration will announce a universal tariff on imports – including those from the EU and UK – by the end of 2025. He has said the tariff could be 10%-20%. That said, we believe Trump will negotiate specific exclusions with trading partners, which could mitigate the impact.

The US is the EU’s largest trading partner, with EU exports to the US currently accounting for 19.7% of all exported European goods. In 2023, the EU exported €502 billion worth of goods to the US and imported €344 billion, creating a trade surplus for the EU. In 2024, the EU trade surplus is on track to hit a record $230 billion, a statistic likely to draw Trump’s ire. In 2023, 20 EU Member States had a trade surplus with the US, Germany being the largest, at $89.4 billion (€85.8 billion). In 2023, the most exported EU goods were manufactured products such as machinery and vehicles (41%), followed by chemicals (27%).

Consequences of Trump Tariffs on EU-US Trade and the EU’s Likely Policy Responses

We believe EU exports across the Atlantic would decrease by a third in some sectors if tariffs were fully implemented. Sectors such as machinery, vehicles, and chemicals would be the hardest hit as they together accounted for 68% of EU exports to the US last year.

The automobile sector would be the most vulnerable, with a proposed 100% tariff on imported cars. Given Germany’s reliance on US exports, the EU Member State would be especially susceptible to shocks. The US is Volkswagen Group’s second-largest export market after China; the automaker sold 713,000 vehicles in the US in 2023, of which 243,000 were manufactured in Germany. Immediately after Trump’s election win in November 2024, the share prices of Volkswagen (VOW on the Frankfurt exchange), BMW (BMW on the Frankfurt exchange), Mercedes-Benz (MBG on the Frankfurt exchange), and Porsche (P911 on the Frankfurt exchange) dropped by between 4% and 7%. Germany had already invested in US manufacturing sites. Last year, a record 908,000 German-branded vehicles were manufactured in the US, half of which were exported.

The French economy would also be impacted, given the country mostly exports aeronautics, medicine, and alcohol (wine and spirits). Tariffs from the first Trump administration had already damaged the French alcohol industry, including Hennessy (owned by LVMH; MC on the Paris exchange), Pernod Ricard (RI on the Paris exchange), and Remy Cointreau (RCO on the Paris exchange). The cognac industry is currently hit by China’s tariff increases due to the EU-China electric vehicles dispute. In the luxury sector, which is already suffering from a decrease in Chinese demand, companies such as Kering and LVMH will be further hampered by Trump’s tariff proposals.

The US is the UK’s single largest trade partner. Services such as business services, management consultancy, finance, and travel make up the bulk of UK exports to the US. Goods represent a third of UK exports to the US, mainly high-value products such as medicines, cars, and aircraft. The UK is under pressure to pick a side: either rebuild trade relations with the EU or get closer to the US.

We have outlined options for the EU’s reaction to Trump’s tariffs, in the order of likelihood:

• Preemptive discussions – For example, the EU would offer to start buying more American liquefied natural gas (LNG) instead of energy from Russia to deter Trump’s tariffs.
• Targeted protective measures – These measures would protect especially vulnerable sectors such as the automobile industry. Examples would  would include temporary subsidies or tax relief, public investment, and diversification of export markets.
• World Trade Organisation (WTO) – The EU would sue the US at the WTO.
• Anti-dumping or anti-subsidy measures –The EU would extend existing anti-dumping and countervailing duties or initiate new duties on US products, which are WTO-approved tariffs. However, any new investigation could take over a year to complete.
• Technical barriers to trade – The EU would implement further technical barriers to trade such as banning the entry of goods from outside the EU that compete with products manufactured in the region.
• Anti-coercion instrument (ACI) – This is a measure aimed at countering bullying of the EU or member countries through a range of trade, investment, and funding restrictions.

—Aaron Gao, [email protected]

EU Commitment to Global Climate Leadership via its Domestic Green Deal Implementation Strengthened by a Trump White House, a Positive for EU Clean Energy

Winners	Domestic producers of clean energy technology, Nel (NEL on the Norwegian exchange), Sunfire
Losers	EU oil and gas companies, TotalEnergies (TTE on the Paris exchange), ENI (ENI on the Milan exchange), Repsol (REP on Madrid exchange)

New European Commission’s Priorities in the Trump Era

European Commission (EC) President Ursula von der Leyen was reelected for her second term in July 2024, following which she published political guidelines for the next 2024-29 EC covering multiple pillars, including climate and energy.

In her Mission Letter to Commissioner-designate for Climate, Net Zero and Clean Growth, Wopke Hoekstra, von der Leyen laid out her priorities for him in his new role, including enshrining the 90% emission-reduction target for 2040 in the European Climate Law and developing a Clean Industrial Deal to execute the goals of the EU Green Deal. In all the hearings of commissioner-designates, all candidates stressed their commitment to delivering on the ‘Fit-for-55’ and leading from the front, a message we expect will be amplified over the EC’s five-year term in light of a Trump presidency, which signals US backtracking on climate action. To counterbalance a US retreat, we anticipate the EC will adopt a pragmatic approach in shaping new legislation to minimise risks of retaliation from third countries and mitigate internal criticism.

Clean Industrial Deal

Von der Leyen has pledged to introduce the Clean Industrial Deal in the first 100 days of her mandate. We expect the programme to be the cornerstone of the new EC’s energy and industrial strategy, and cut across multiple sectors.

Hydrogen

Under the Renewable Energy Directive (RED III), at least 42% of hydrogen used in industry must be a renewable fuel of non-biological origin (RFNBO) by 2030, a share that increases to 65% by 2035. Additionally, at least 1% of the fuels in the transport sector need to be an RFNBO by 2030. Member States have until May 2025 to transpose these targets into national law. However, as renewable hydrogen production is not keeping pace with targets, the EU will continue to rely on the European Hydrogen Bank (EHB) and other mechanisms such as the Innovation Fund to finance and accelerate the development of a full hydrogen value chain in Europe. After 2026, the EHB will remain active as an auction platform for Member States to finance domestic projects (auction-as-a-service), streamlining processes and avoiding the need for separate infrastructures.

Separately, the EC is finalising the Delegated Act on low-carbon hydrogen (LCH-DA) to establish a framework for methane-reformed hydrogen with carbon capture (blue hydrogen). Crucially, the constraints of the rules governing LCH will significantly influence its potential role in the EU’s decarbonisation strategy. The proposed framework published in September was widely criticised by industry and third countries such as the US, particularly for the framework’s links to methane regulation, which mandates EU-based assessment methodologies for natural gas imports—a requirement likely to face US resistance, especially under Trump 2.0.

Carbon Management

Industrial carbon management covers technologies to capture, store, transport, and use CO2 emissions from industrial and energy production facilities and remove CO2 from the atmosphere. The EU industrial carbon management (ICM) strategy was adopted by the EC on 6 February 2024, to enable the target to capture at least 50 million tonnes (Mt) of CO2 per year by 2030. The introduction of the ICM marked a significant shift for the EC, which has historically been hesitant to embrace carbon capture and storage (CCS) due to its perception as a tool enabling continued reliance on fossil fuels. In the years ahead, the EC will focus on translating this target into action through new legislation. This includes detailing obligations under the Net-Zero Industry Act for oil and gas producers, introducing specific frameworks for CCS permitting, and innovative models such as auction-as-a-service, as piloted by the EHB, within the upcoming Clean Industrial Deal framework.

State Aid

Teresa Ribera, Executive Vice-President for a Clean, Just and Competitive Transition, has been tasked with developing a new State aid framework to accelerate the rollout of renewable energy, help decarbonise industry, and promote domestic manufacturing capacity of clean technology. We expect this new framework to build on the learnings of the Temporary Crisis and Transition Framework ending in 2025, which loosened the bloc’s strict State aid rules to promote investments in strategic sectors, including climate and energy.

—Charlotte Bucchioni, [email protected]

Impact on Economic Growth to Drive More Dovish Monetary Policy; New Regulatory Initiatives to Slow but Deregulation Unlikely, Prefer US-Exposed Investment Banks

Winners	Investment banks with direct US exposure, such as Barclays (BARC on the London exchange)
Losers	Retail banks sensitive to interest rate cuts, such as Bank of Ireland (BIRG on the Dublin exchange)

Increasing Uncertainty Over Economic Recovery, Implying More Dovish Central Bank Policy

Before Trump’s election victory, the market expected policy divergence between the US Federal Reserve and the European Central Bank (ECB), and Bank of England (BOE). However, after his resounding win and the expected impact of US tariffs on European economic growth likely amplifying the divergence, we anticipate more dovish monetary policy in Europe with a stagnant growth outlook outweighing concerns about domestic inflationary pressures. However, we believe both the BOE and ECB will act cautiously, with neither likely to preemptively ease monetary policy until the proposed tariffs are confirmed.

Although European banks have benefited from rate increases and relatively benign asset quality over the past years, we expect lower interest rates will drag earnings in 2025. In a rate-cutting cycle, banks with exposure to fees from wealth management, insurance, and investment banking will benefit. Considering an almost 80% increase in European bank shares in just over two years, interest rate-sensitive retail banks will be vulnerable to US-driven economic growth shocks.

Further Delays to FRTB Rather than Meaningful Reduction in Capital Requirements

Shifting to regulatory policy, large European banks will call on policymakers in the EU and the UK to delay or soften a planned increase in bank capital requirements following Trump’s victory, with the expectation that the new administration would ease the regulatory burden on US banking competition.

The 2016 election reignited European concerns about the US commitment to the Basel process, considering Trump’s perceived contempt for institutions encouraging international cooperation. However, the US participated in the Basel negotiations and in December 2017, the Basel Committee finalised its Basel 3 reforms.

Basel standards are not legally binding, Member States must implement them in national legislation before banks comply. On 19 June 2024, the final texts of the EU’s Capital Requirements Regulation 3 (CRR3) and the Capital Requirements Delegation 6 (CRD6) were published. On 12 September, the UK Prudential Regulation Authority (PRA) published its second near-final policy statement covering the implementation of Basel 3.1. The Europeans are near the finish line after drawn-out regulatory consultations and politically driven delays. 

Trump’s re-election will likely delay any implementation of the ‘Basel III Endgame.’ In Europe, the national finance ministries of France, Germany, and Italy recently called for the EC to emphasise the competitiveness of the financial sector to ensure a level playing field with other major jurisdictions.

We do not expect the EU to restart negotiations on the entire set of Basel proposals; rather, we believe there is room to adjust the agreed measures in Europe through the European Banking Authority’s accompanying technical standards to ensure proportionality. Any meaningful reduction in capital requirements for the already agreed measures in Europe is unlikely to occur, due to US actions. The main area of debate from a capital perspective will be the timing of implementation of the Fundamental Review of the Trading Book (FRTB).

European banks’ calls for lower Basel capital requirements on areas impacting domestic credit risk will likely go unheeded by national regulators, but the argument that Deutsche Bank’s or BNP Paribas’ trading desk should not have higher market risk capital charges than Goldman Sachs’ for the same products has already resonated with EU governments. The EC has recently postponed the start date of the FRTB until 1 January 2026. If the US delays or dilutes the market risk rules further, we expect overwhelming political pressure on Europe to do the same.  Irrespective of the incoming Trump administration, we believe new global regulatory initiatives for the banking sector will slow as “regulatory fatigue” and domestic growth agendas temper international cooperation on new financial reforms.

In Europe, Barclays generates 30% of group revenues from the US, including the largest exposure from US investment banking revenue at European banks. The US bank index has been up 15% since November 4 and Barclays is up 8%—the question is how much of this is priced in and what happens from here. We believe the positive market reaction to Trump 2.0 is justified given the likelihood of lower taxes (or at least not raised taxes), expected delay or further dilution of Basel 3 final rules, as well as potential tailwinds for investment banking activity. In Europe, we believe Barclays is the most exposed to these diverging US trends in 2025.

—Mathew Gilbert, [email protected]

More Politicised Mandates for Incoming European Competition Commissioner and the UK Competition and Markets Authority, a Positive for EU, UK Tech Companies

Winners	European and UK SMEs; European and UK tech companies, such as companies in the strategic chip making space – ASML (ASML.AS).
Losers	Non-EU companies seeking to acquire EU businesses in strategic sectors

Trump’s re-election means digital sovereignty and competitiveness will likely increase as priorities in a shifting geopolitical context. We expect this to also manifest through a more politicised and strategic approach to competition policy and merger review in both the EU and UK.

The Draghi Report Pushes to Prioritise EU Competitiveness in Digital Policy

In 2023, von der Leyen tasked former ECB chief Mario Draghi with preparing a report on Europe’s future competitiveness. In the report published in September 2024, Draghi emphasizes the need to close the digital innovation gap with the US and China. He also makes several recommendations to address economic challenges and strengthen Europe’s position globally.

We will likely see a more nuanced approach as ambitious regulations are fine-tuned over the years and a more strategic approach to competition law enforcement is adopted at the European level. Draghi highlights in the report that the EU lags in the digital revolution due to high regulatory compliance costs and regulatory barriers such as limited ability to use digital data and insufficient start-up investment. For example, data privacy rules under the General Data Protection Regulation were seen to undermine the development of integrated datasets essential for training artificial intelligence models.

Draghi has not recommended rolling back existing digital regulation—this would be at odds with the EC’s continued appetite for pre-emptive risk-based digital regulation. However, it does propose slowing the pace of new regulations and implementing competition law reforms.

New EU Merger Rules to Support European Champions and Consolidation

Capstone believes that EU merger review will become more selective and nuanced, with increased scrutiny of foreign companies acquiring European businesses and greater opportunities for European companies to scale up.

On 27 November, the European Parliament confirmed Ribera as the EU’s new commissioner for competition, succeeding Margrethe Vestager. The Draghi report will guide Ribera, but she will also take a direct steer from von der Leyen’s mission letter, in which the EC president says that the EU should be pursuing changes to competition policy. Ribera has been specifically tasked with reviewing the EU’s horizontal merger guidelines to give “adequate weight to European economic needs with respect to resilience, efficiency, and innovation,” simplifying state aid rules and addressing risks of killer acquisitions, specifically from foreign companies.

Ribera has voiced her commitment to reform and vowed to crack down on acquisitions that undermine innovation. Potential changes to competition policy enforcement include a new mechanism to capture below-threshold transactions, likely subjecting more acquisitions to scrutiny, and the introduction of an ‘innovation defence’ in updated horizontal merger guidelines, which would give smaller firms a new way to evidence the value of a merger. The ‘innovation defence’ is not envisaged to justify further market concentration and thus would unlikely benefit market leaders. Other new considerations in assessing mergers would include resilience as well as defence and security objectives.

UK CMA Increases Openness to Behavioural Remedies  

Capstone believes that in 2025, the Competition and Markets Authority (CMA) will be more open to discussing and accepting behavioural remedies when faced with competition concerns during merger investigations.

Following criticism from UK policymakers, including Prime Minister Sir Keir Starmer, the CMA has repeatedly committed to a strong focus on growth. Most recently, on 21 November, CMA Chief Executive Sarah Cardell confirmed plans to review merger remedies at the Chatham House Competition Policy 2024 conference. The review, slated to start early next year, will consider the proportionality of remedies against the objective of optimising economic growth and innovation.

In particular, the CMA will explore:

• When behavioural remedies might be appropriate (i.e., for regulated sectors)
• Scope for remedies that lock in genuine rivalry-enhancing efficiencies
• A role for remedies to preserve relevant customer benefits in order to offset anti-competitive effects
• How the CMA moves to effective and informed remedy discussions as quickly as possible.

This indicates that the CMA is shifting away from its historically strict approach to merger review, where it consistently favoured structural remedies over exploring and enforcing behavioural ones. The anticipated new approach is likely motivated by political pressures and the backlash over Microsoft’s $75 billion acquisition of video game publisher Activision Blizzard. The provisional approval of the telecom tie-up between Vodafone and Three, based on investment commitments (a behavioural remedy), also signals a new, more flexible approach.

—Eva Borbely, [email protected]

Trump 2.0 to Drive a Proliferation of Digital Services Taxes, a Negative for US Big Tech

Winners	N/A
Losers	US-based tech firms including Netflix (NFLX), Amazon (AMZN), Alphabet (GOOG), Apple (AAPL)

EU and Other Jurisdictions Anticipated to Introduce DSTs as Global Tax Agreement Unlikely

The incoming Trump administration makes proposals by the Organisation for Economic Co-operation and Development (OECD) that shift taxing rights from countries where the profits are generated to jurisdictions where the sales are made to final customers highly unlikely to be implemented. This is because the US will lose taxing rights—and tax revenues—over large US-based multinationals, benefiting smaller countries where revenues are generated. We believe this will reignite a debate at the EU and individual EU Member State levels to introduce digital services taxes (DSTs) to claim certain tax revenues from multinationals outside the US.

US lawmakers have deterred DSTs—which are considered discriminatory for US firms—mainly through threats to impose tariffs on goods from abroad (e.g., Netflix, Apple, Microsoft, Amazon, etc.). This has been effective: For example, proposals from March 2018 by the EC to introduce an EU-wide DST were abandoned because Germany refused to support the proposal out of fear of retaliatory tariffs on German cars.

It was agreed that the EU-wide effort should be paused, and the OECD should consider progress. However, several EU Member States introduced a low single-digit tax on the revenues—not profits—generated by certain activities, including online streaming services, digital advertising, and the sale of user data. France is considering a move to increase the tax rate to 5% from 3% as part of its 2025 Budget, which would raise an additional €50 million. Italy proposed on 15 October to lower the threshold for its DST.

On 21 October 2021, four EU countries (Austria, France, Italy, Spain), the UK, and the US agreed on a compromise for a transitional approach to existing DSTs. EU nations were not required to withdraw their DSTs but agreed that the excess would be creditable if tax payments were higher under the DST than under OECD Pillar I. In exchange, the US Trade Representative (USTR) agreed on 8 November 2021 to terminate proposed Section 301 trade sanctions and committed to not imposing further trade actions, such as trade tariffs. It further terminated trade sanctions on Brazil, India, Indonesia, Turkey, the Czech Republic, and the EU.

Overview of Suspended Section 301 Trade Tariffs Following the Introduction of DSTs

Country	Goods Covered	Status
Austria	Copper, circuit assemblies, grand pianos, stemware, and drinking glasses	Suspended
France	Cosmetics, leather goods, handbags, soaps
India	Jewelry, shrimp, furniture
Italy	Handbags, gloves, suits, ties, footwear, caviar
Spain	Seafood, belts, handbags, hats, footwear, glassware
Turkey	Rugs, carpets, ceramic tiles, jewelry
UK	Furniture, cosmetics, shampoo, toys

Source: USTR

On 15 February 2024, the initial deal brokered in October 2021 was extended to 30 June 2024. It was left open-ended whether further extensions would be possible.

Countries outside of Europe have similar taxes in place. Canada is the most recent example of a jurisdiction that introduced DSTs—coming into effect in 2025 with retroactive effect until January 2022—as it becomes less likely that Pillar 1 will be implemented.

With the Trump administration taking over for the next four years, consensus on the OECD reform becomes even more remote. As a result, we expect DSTs to become more common, not just in Europe but globally. India, where most Facebook users are located, may expand its “equalisation levy”, a form of DST. The EU will likely revive plans to introduce an EU-wide DST, largely based on its 2018 proposals. If that is unattainable, we expect several EU countries that currently do not have a DST to introduce one. Faced with a 10%-20% tariff on exporting to the US, Germany may seek to offset any negative impact.

The firms negatively impacted by these developments are large tech firms such as Netflix, Facebook, Alphabet, and Apple. We believe a tax on revenues instead of profits—even though low single digit—is an underappreciated risk for these companies.

—Sebastiaan Bierens, [email protected]

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