In the recent US midterm elections, the Democratic Party has secured majorities in both the House of Representatives and the Senate. This significant political shift raises questions about President Donald Trump's ability to govern and whether he will become a "lame duck," particularly regarding his impact on the economies of the United States and Germany. Experts suggest that despite this electoral defeat, Trump's influence over trade policy remains substantial.
Economists do not anticipate an immediate improvement in trade relations or a reduction in tariffs. Thomas Gitzel, Chief Economist at VP Bank, argues that with difficult domestic majorities, the President may focus more on foreign policy and rely heavily on executive orders rather than legislation. Consequently, tariffs and trade conflicts could move back to the forefront. The Institute of German Economic Research (IW) reinforces this view, stating that German companies should expect the current direction of economic and customs policy to remain unchanged at least until January 2029. IW Director Michael Hüther notes that because Trump imposes tariffs via decree rather than law, these measures will continue to hinder the German economy, creating political uncertainty for Germany's most important trading partner.
Trump retains significant power even with a Democratic Congress, including the ability to veto legislation. Overriding such a veto would require a two-thirds majority in both chambers, a threshold that is extremely difficult to achieve. Furthermore, Achim Wambach, President of the ZEW, warns against expecting a fundamental return to free trade under a Democratic majority. He points out that protectionism is not unique to the Trump administration, noting a broad bipartisan consensus in Washington regarding trade policy toward China and measures to protect domestic industry.
The electoral loss also limits the Trump administration's ability to stimulate the US economy through stimulus programs. Holger Schmieding, Chief Economist at Berenberg Bank, predicts that slowed investment growth in artificial intelligence and restrictive immigration policies will cause US economic growth to weaken significantly to around 1.5 percent by 2028. This slowdown implies that the US will contribute less to global economic growth, a trend that will inevitably affect export-dependent economies like Germany's. Clemens Fuest of the Ifo Institute adds that while further deregulation or tax cuts are unlikely, neither is a shift toward higher taxes or social spending, meaning Europe cannot expect relief in trade with America.
Rising living costs played a decisive role in the Republican defeat, driven largely by high fuel prices resulting from the Iran conflict initiated by Trump. Schmieding anticipates increasing pressure on the President from within his own party to resolve the Iran issue and lower gasoline prices. A likely outcome is a US-Iran agreement following potential final bombardment rounds, which would reopen the Strait of Hormuz. This development could cause oil prices, currently above $100 per barrel for Brent crude due to the Middle East war, to decline. Schmieding forecasts Brent crude prices falling to $75 by the end of 2027 and averaging $65 in 2028, benefiting consumers on both sides of the Atlantic.
Financial markets initially reacted with slight losses, particularly in tech stocks. The LBBW bank expects a weaker dollar and lower yields on US government bonds due to reduced Republican maneuvering room regarding the budget. Marcel Fratzscher of the DIW suggests it will be harder for Trump to restructure institutions like the Federal Reserve. However, Gitzel advises investors not to overinterpret the initial market reaction, noting that historically, stock markets have gained an average of 10 percent in the 100 days following midterms, regardless of which party holds Congress.
The Democratic victory also signals potential changes for regulation, cryptocurrency, and AI data centers. The tech sector may face stricter regulations as resistance to massive AI data centers grows due to concerns over rising energy and water prices among residents. Even some Republican politicians have imposed moratoriums on new construction, and Democratic governors like Gina Hinojosa in Texas are expected to pursue a harder course. In response to these challenges, Elon Musk has suggested building computing capacity in orbit via SpaceX, though the feasibility remains uncertain.
The crypto industry also faces a changed landscape, as committees in the US Congress where Democrats now hold sway have traditionally been more skeptical of digital currency than Republicans. Industry observers expect parliamentary initiatives for industry-friendly rules, such as the "CLARITY Act," to face greater hurdles. Despite these concerns, crypto assets did not crash; Bitcoin briefly dipped below $76,000 before recovering toward $78,000, while other digital currencies like Ether, Solana, and BNB recorded moderate gains.
Sources: Handelsblatt.