US Threat of Greenland Tariffs Raises European Geopolitical Risks
The threat of Greenland-related US tariffs on European allies and European retaliatory measures will be subject to intense discussions, and implementation remains highly uncertain.
Fitch Ratings said it signifies a serious upsurge in transatlantic tensions, increasing pressure in Europe to raise defence spending, posing risks to trade and growth, and weakening deterrence against future Russian aggression.
US President Donald Trump threatened on 17 January a 10% tariff on Denmark and seven other European countries.
The tariffs, which Fitch Ratings assumes would be levied in addition to existing tariffs, would take effect on 1 February and rise to 25% on 1 June, remaining “until such time as a Deal is reached for the Complete and Total purchase of Greenland”.
The EU’s official response suggested that European leaders are anxious to avoid an escalatory spiral or further weakening of the US commitment to European defence, although some indicated that a line had been crossed by the Trump administration.
Implementation of US Greenland-related tariffs is uncertain. The authority under which Trump would issue the tariffs, most likely the International Emergency Economic Powers Act (IEEPA), is being reviewed by the US Supreme Court, and a decision may be imminent.
Were additional tariffs ruled illegal under IEEPA, it is possible other tools could be used to achieve a similar effect. The tariffs would also be likely to raise prices for US consumers amid cost-of-living concerns.
Congressional opposition, including from Republicans, could be stronger than to the Trump administration’s trade policy more generally, as it has more substantial geopolitical implications.
The economic impact of a 10% tariff on affected countries would vary with trade dependency. “Our initial estimate is that it could reduce European GDP by about 0.5% by end-2027 relative to our baseline, but an additional increase to 25% would imply roughly twice the GDP impact”.
Fitch said Germany, where it forecasts GDP growth of 1.2% this year and 1.4% in 2027 in its December Global Economic Outlook, would be hardest hit.
GDP would potentially be 0.8%-0.9% lower than would otherwise be the case by end-2027 under a 10% effective tariff rate rise and roughly double that for a 25% shock, Fitch stated.
“Even if the US tariffs were implemented, we currently assume the EU response would be fairly muted given security considerations”.
The EU is discussing activating tariff measures it prepared last May in response to US tariff announcements that would hit EUR95 billion (0.4% of US GDP) of imports from the US. But a more meaningful European response is possible.
The French president has suggested using the EU’s anti-coercion instrument, which would allow for much more extensive retaliatory measures, including on imports of services, for example regarding the large US tech firms.
Outside the trade and growth hit from tariffs, the main potential sovereign credit impact of the transatlantic tensions is from the implications for the viability of NATO and the credibility of its collective defence commitment at a time of heightened geopolitical risks for Europe, including from the war in Ukraine.
Tail-risk scenarios related to a potential escalation in Russian aggression, for example against the Baltic states, could become more likely, although Fitch believes a major escalation towards conflict between eastern NATO members and Russia beyond hybrid activity is very unlikely in the near term. However, hybrid operations could become more frequent.
Given the potential impact of such tail-risk scenarios and the increased risk of damaging hybrid warfare, Fitch said its analysts have already incorporate some degree of geopolitical risk in ratings of Estonia (A+/Stable), Latvia (A-/Stable) and Lithuania (A/Stable). These are unlikely to see upward movement at present despite improvements in their main credit metrics.
Denmark’s (AAA/Stable) sovereign credit metrics should be robust to any territorial loss of Greenland, given Greenland’s small economic size and Denmark’s strong public finances, including general government debt/GDP of less than 30%, although Denmark could be exposed to second-round political and geostrategic effects.
Fitch said tensions with the US will amplify defence spending pressures in Europe. NATO members have agreed to increase defence spending to 5% of GDP (total) and 3.5% (core) by 2035 from a current EU median of about 2.1%.
Several eastern and northern European countries and Germany are already increasing defence spending more rapidly and the latest developments could accelerate this process. For European countries not facing as direct geopolitical threats, defence spending may remain on a slower upward trend.
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