Friedrich Merz, set to become German Chancellor in May, cautioned that Donald Trump’s tariff policies may accelerate a global financial crisis. He advocated for a new U.S.-EU free trade agreement featuring “zero percent tariffs on everything.”
While the EU proposed a “zero-for-zero” tariff agreement on industrial goods, Trump rejected it and urged Europe to increase purchases of U.S. energy. Merz indicated that Europe must explore other markets if the U.S. retreats from global trade. He expressed concern that Trump’s policies heighten the likelihood of an impending financial crisis and emphasised the need for a strong European response.
Merz’s Economic Concerns
Merz’s warning is not simply political theatre—it’s grounded in practical economics. He’s aligning with a view that sees current U.S. trade strategies, particularly the reassertion of tariffs, as destabilising. His remarks about a financial crisis are likely rooted in the idea that increased tariffs can reduce global trade flows, strain transatlantic partnerships, and undermine supply chains that rely on predictable and open market access. This sort of disruption can rapidly filter through to financial markets, with volatility rising as investors reassess exposure to sectors most affected by tariffs, like industrials and energy.
His emphasis on a comprehensive free trade agreement isn’t just about boosting exports or lowering consumer prices. It’s a vehicle aimed at reducing uncertainty and stabilising long-term expectations for both sovereign and corporate actors. The EU’s earlier proposal, which was more limited and focused on industrial goods, met resistance largely because it didn’t adequately serve U.S. strategic energy goals. That rejection from Washington changes the direction of trade strategy on both sides of the Atlantic and puts pressure on us to adapt quickly.
From this, one might extrapolate that near-term exposures to European industrial sectors could come under stress, particularly those with a large share of exports tied to U.S. demand. The shift in rhetoric from expanding cooperation to seeking alternatives implies we should expect possible repricing of cross-border manufacturing risk. This will not occur evenly; companies most reliant on transatlantic volume could see more rapid revaluations. Volatility will come not in a single wave, but across varied timelines as political developments crystallise into policy.
Financial Market Implications
We should stay alert to new data on export volumes, eurozone PMI trends, and energy import diversification strategies. Markets will price not the policy alone but the anticipated response from firms and consumers. The most direct consequences will be seen in products narrowing their margins due to simultaneous cost inflation and tariff hikes, leading to squeezed earnings forecasts.
Moreover, as trade relationships stretch outward from traditional western alignment to newer markets, currency pegs and financing flows linked to those shifts could start to behave less predictably. Those of us watching derivatives tied to interest rates or FX should be especially attentive. Unexpected swings in euro-dollar sentiment, for example, could create dislocations if hedging assumptions fail to account for knocked-on capital flight or shifts in reserve currency preference.
The point Merz indirectly raises—without spelling it out—taps into a broader idea: when trust in trade frameworks frays, counterparty behaviour becomes harder to model. Pricing options on political stability or continuity of agreements was once uncommon; now it appears more rooted in rational strategy. Those pricing CDS or basket volatility should take note of this, especially for multinationals operating across affected lanes.
Though calendar spreads may tempt with apparent stability in spot rates, the undercurrents suggest we should be cautious with our carry assumptions. Sudden repricings are often cued by a single headline that changes sentiment—such moves may not be easily reversed. It’s that fragility which we must price into forward-looking positions, balancing drawdown probabilities against shrinking windows for reactive repositioning.
