site.btaEU GDP to Shrink 0.5% due to US Trade Deal - Fiscal Council Chair

Macroeconomically, the trade deal between the US and the EU is expected to press the EU's annual gross domestic product down 0.5%, while the combined impact on the EU's fiscal balances could reach EUR 75-80 billion, Bulgarian Fiscal Council Chair Simeon Djankov wrote in his latest analysis published Thursday.

The analysis shows that direct annual losses from the 15% tariffs will likely amount to EUR 3-5 billion. A 0.5% drop in EU GDP, given a typical revenue elasticity of around 0.4%, would result in a 0.2% reduction in tax revenues as a GDP share. These translate into approximately EUR 30 billion annually in lost VAT, personal income tax, and corporation tax revenues across the EU. Total annual revenue losses are estimated at around EUR 34 billion, Djankov notes.

The losses are expected to vary from one Member State to another. Countries heavily dependent on exports, such as Germany, Ireland, the Netherlands, Belgium, and Italy, will experience the worst revenue shortfalls, while the impact on southern and eastern countries like Bulgaria will be less severe due to their smaller share of sales to the US.

Higher energy import costs are also expected to push domestic energy prices up. If governments reinstate the price caps used in 2022-2023, subsidies could cost an additional 0.3% - 0.5% of GDP, or about EUR 45 billion per year.

The combined fiscal impact for the EU amounts to EUR 75-80 billion annually, or roughly 0.4% - 0.5% of the bloc's GDP, the analysis concludes.

For major exporters like Germany, the Netherlands, and Ireland, the fiscal deficit could rise by 0.6% - 0.8% of GDP; for France, Spain, and Italy, by 0.3% - 0.5%; and for smaller Central and Eastern European countries like Bulgaria, by 0.1% - 0.2% of GDP.

The shock would push several countries above the 3% deficit threshold that they were previously just below. Brussels is expected to provide additional flexibility clauses linked to "exceptional circumstances" and to classify energy security expenditures as one-off costs, Djankov writes.