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NATO Summit - Defence spending to still rise significantly, even if 3.5% is unrealistic
NATO leaders today voted to officially raise the alliance’s defence spending target to 5% of GDP from 2% previously, comprised of 3.5% in core defence spending (the figure directly comparable to the previous 2% target) and 1.5% in infrastructure related to defence. With many countries likely to have already met the latter target, the really important number is the 3.5%, and it is here where there are major doubts over both the willingness but also the capability of meeting this target. Spain has a vague exemption from the target, while other countries openly doubted the target in the run up to the Summit.
The Week Ahead - 23 - 27 June 2025
These are the Key Macro Events for the upcoming week.
Impact of Israel-Iran on inflation and interest rates
Muted reaction so far of energy prices to Israel-Iran escalation - The escalating conflict between Israel and Iran has raised concerns over the last few days about potential disruption to global energy supply. As a result, a risk premium has been priced into oil prices, which has oscillated between 5 and 10 dollars p/b depending on the prospects for escalation versus de-escalation. The relatively muted reaction of prices reflects that the impact on energy supply has been limited so far. At the same time, outside of potential impacts of the conflict, supply is growing more quickly than demand and that is expected to remain the case this year and next.
The Week Ahead - 9 - 13 June 2025
These are the Key Macro Events for the upcoming week.
Sovereignty increases EU regulatory burden
Trade between European member states is less intensive than trade between the 50 American states. Consequently, the benefits of scale and specialization remain underutilized, resulting in lower productivity growth compared to the US. One reason for the disparity in trade intensity is the complex regulations that hinder the internal market. The complexity of European regulations is not primarily due to the inferiority of individual member states' regulations compared to those in the US, but rather the lack of harmonization among the member states. Simplifying rules, as the European Commission currently aims to do, does not necessarily resolve this issue. A truly unified, common market with low transaction costs becomes feasible when member states can no longer easily negotiate exemptions or establish additional rules. Therefore, member states will need to relinquish some sovereignty. Furthermore, new regulations should be consistently evaluated for effectiveness (do the rules achieve the intended outcomes?), efficiency (are these outcomes achieved at the lowest possible cost?), consistency (do the rules align with policies in other areas?), and enforceability (can compliance be effectively monitored?). This evaluation task was previously assigned to the European Commission. However, as the Commission's role has become more political, and compromises are often required to strike deals, it is less able to perform this task effectively. Consequently, this responsibility should be assigned to an independent body.
ECB likely has more to do, despite hints it is nearing the end
The ECB’s Governing Council decided to cut its policy rates by 25bp, taking the key deposit rate to 2%. The move was widely expected by analysts and priced in by financial markets. The comments in the press conference suggested that the Council considers it is nearing the end of its rate cut cycle. However, we think that further interest rate cuts are still likely. Indeed, we maintain the view that the ECB will cut policy rates further, with the deposit rate reaching 1.5% by September. The ECB’s more hawkish tone does raise the possibility that the rate reductions may take longer than that to materialise, with a pause possible at the next meeting.
What does the new 50% steel & aluminium tariff mean for Europe?
Today, the US is doubling its import tariff on steel and aluminium from 25% to 50%. Announcing this at a steel mill in Pennsylvania last Friday, President Trump indicated he wanted to make tariffs so high that US businesses would have no alternative but to buy from American suppliers. To quote the president, “[If] It's at 25% - they can get over that fence. At 50%, they can no longer get over the fence." The UK has a partial carve-out thanks to its trade deal with the US, and faces a lower 25% tariff. But the EU – still in negotiations with the US – faces the higher 50% tariff.
Eurozone inflation fall intensifies
Eurozone HICP flash inflation took a renewed leg lower in May, with headline inflation falling to 1.9% from 2.2% in April, and core inflation falling to 2.3% from 2.7%. Within that, services inflation fell sharply to a three year low of 3.2%, down from 4% in April.
The Week Ahead - 2 - 6 June 2025
These are the Key Macro Events for the upcoming week.
Eurozone - After solid momentum, tariffs to cause moderation
While a US-EU trade deal remains uncertain, US-China de-escalation is constructive for the EZ outlook. The recovery is subdued due to tariffs in the near term; fiscal policy raises growth outlook in 2026. Disinflationary forces mean the ECB is likely to cut rates further to 1.5% by September.