Greenland tariff threat raises trade, security risks for Europe: Fitch

US President Donald Trump on January 17 threatened to impose a 10 per cent tariff on Denmark and seven other European countries, with the levy set to take effect from February 1. The tariff would rise to 25 per cent from June 1 and remain in place until a deal is reached for the ‘complete and total purchase of Greenland’. These tariffs would be applied on top of existing duties, Fitch said in a press release.

The European Union’s (EU) initial response indicates a desire to avoid an escalatory trade spiral or further weakening of the US commitment to European defence. However, several European leaders suggested that the threat crossed a political line, underlining growing unease within the bloc.

Fitch noted that the legal basis for the proposed tariffs is uncertain. The most likely mechanism, the International Emergency Economic Powers Act, is currently under review by the US Supreme Court, with a ruling expected soon. If additional tariffs were deemed illegal under this law, alternative policy tools could still be deployed. The agency added that the tariffs would likely raise prices for US consumers, potentially fuelling domestic opposition, including from Republican lawmakers, given the wider geopolitical implications.

It estimates that a 10 per cent tariff could reduce European gross domestic product by around 0.5 per cent by end-2027 compared with its baseline forecast, while a rise to 25 per cent would roughly double the impact. Germany would be the most affected, with GDP potentially 0.8–0.9 per cent lower by end-2027 under a 10 per cent tariff shock, and around twice that under a 25 per cent scenario.

Even if US tariffs are imposed, Fitch currently expects the EU response to remain relatively restrained due to security considerations. Brussels has discussed activating tariff measures prepared last May that would target €95 billion of US imports, equivalent to around 0.4 per cent of US GDP. However, a stronger response is possible. French President Emmanuel Macron has suggested using the EU’s anti-coercion instrument, which could enable broader retaliation, including measures against services such as those provided by large US technology firms.

Beyond trade and growth, the rating agency identified the most significant sovereign credit risks as stemming from uncertainty over NATO’s long-term viability and the credibility of its collective defence commitments amid heightened geopolitical tensions, particularly linked to the war in Ukraine. While a major military escalation involving NATO members and Russia is considered very unlikely in the near term, it warned that hybrid activities could increase.

It already factors geopolitical risk into its ratings for Estonia, Latvia, and Lithuania, which are unlikely to see upgrades despite improvements in core credit metrics. Denmark’s AAA rating is expected to remain resilient, even in the unlikely event of territorial loss of Greenland, given its strong public finances and low government debt, though second-round political and strategic effects could pose longer-term risks.

Fitch added that tensions with the US are likely to intensify defence spending pressures across Europe. NATO members have agreed to lift defence spending towards 5 per cent of GDP in total and 3.5 per cent in core spending by 2035, up from a current EU median of about 2.1 per cent. Several eastern and northern European countries, along with Germany, are already accelerating defence outlays, and recent developments could further speed up this shift, while others may adopt a more gradual approach.

ALCHEMPro News Desk (SG)