1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 71
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Duty rate, September 2025
Varying within-Europe impact of U.S. tariffs
22.9%
25%
20%
15%
12.5%
13.8%
11.4%
10.7%
10%
5%
9.0%
8.2%
7.2%
4.3%
0.4%
6.7%
5.5%
0.1%
0%
Source: U.S. ITC, Scotia Wealth Management.
Trade and geopolitical tensions with the U.S. also come at an inopportune time for domestic
political stability in the E.U., with German and French leaders on fragile footing, that has also
dampened business and consumer confidence in the Eurozone’s major economies (and the bloc
as a whole). France has struggled with political paralysis since mid-2024 elections and a revolving
door of Prime Ministers (four over the past two years) as President Macron struggles with wide
left versus right divisions in the National Assembly. At the cost of suspending Macron’s unpopular
pension reform, PM Lecornu succeeded in getting the government’s social security through the
legislature in December, but now a battle on the 2026 state budget is in progress – keeping public
spending to a minimum, in the meantime. Expect more of the same over the coming year, and
with an eye to the 2027 presidential election – where the far-right’s Bardella looks like the
candidate to beat.
In Germany, the far-right AfD would tie Chancellor Merz’s CDS/CDU alliance (which has also seen
infighting of late) if federal elections were held today, according to polls. In March, state elections
will be held in Baden-Württenburg, Germany’s third most populous and third largest economy at
the state level. The CDU/CSU leads polls in the state and may replicate the current parliamentary
majority with the Greens following the vote, but a stronger than expected performance for the
AfD and/or a need to build a fragile three-way coalition in the assembly would undermine the
Chancellor’s position in the country’s capital. March elections in Rhineland-Palatinate, and
September votes in Berlin, Saxony-Anhalt, and Mecklenburg-Vorpommern will also test
Germany’s political (in)stability.
Elsewhere, April 2026 elections in Hungary will also be key for E.U. unity and the bloc’s stance or
reach in the Russia-Ukraine war, pinning further division under PM Orban’s Fidesz party or
rapprochement under Magyar’s Tisza that currently leads polls.
Uncertainty has also arisen in regard to monetary policy, as comfort with the ECB holding steady
with a 2.00% deposit facility rate has been shaken by speculation that the bloc may be closer to
a hike than to another rate cut. Our base case is that the ECB will hold at 2.00% over the forecast
period to end-2027 given relatively muted or target-conducive inflationary pressures –
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