Week Ahead (28 July)

Monday, 28 July – European Commission to brief EU Ambassadors on Trade Framework struck with the US

The agreement struck between the EU and the US yesterday sets a 15% baseline tariff across all sectors – with the exception of steel and aluminium.  As anticipated, car tariffs were also reduced from 25% to 15% while some confusion remains over pharmaceuticals – the EU side has indicated they are part of the 15% while Trump indicated that a decision was yet to be taken.  Agreement also remain outstanding on spirits but there is better news for all aircraft and component parts, certain chemicals, certain generics, semiconductor equipment, certain agricultural products, natural resources and critical raw materials – all of which will be subject to zero tariffs. 

The Commission will brief EU Ambassadors today but there is already disquiet among Member States. French Prime Minister François Bayrou described the deal as the EU “resigning itself to submission” while French Trade Minister Laurent Saint-Martin told French media that “This deal is not balanced so we will have to keep working”. 

It is worth noting that much of the detail of this framework agreement remains to be settled in the coming weeks and months.  As both the UK and Japan have already learned, much of the difficult negotiating comes after the initial signing of the framework agreement.  Thus will this deal is not optimal from an EU perspective, it could get worse. 

Tuesday, 29 July – Deadline for Member States to signal their interest in SAFE loans

By tomorrow, Member States are expected to indicate whether they will participate in the Security Action For Europe (SAFE) defence loan programme, the €150 billion initiative launched by the European Commission to bolster EU-wide defence production, as part of its ReArm Europe plan.  The European Commission currently expects 20 EU Member States to participate. 

While the European Commission’s original intention was that beneficiary member states would have to carry out, in principle, common procurements involving at least two participating countries to qualify for the loans, at the insistence of Member States, led by France, the final agreement states that “In response to current geopolitical situation and urgent need for massive investment in defence equipment, SAFE will also allow procurement involving only one member state for a limited period of time” – expected to be until 29 May 2026 though we would expect this deadline to be extended. 

Eligible activities are divided into two categories of defence products:

1) ammunition and missiles; artillery systems, including deep precision strike capabilities; ground combat capabilities and their support systems, including soldier equipment and infantry weapons; critical infrastructure protection; cyber; military mobility including counter-mobility;

2) air and missile defence systems; maritime surface and underwater capabilities; drones and anti-drone systems; strategic enablers, such as, but not limited to, strategic airlift, air-to-air refuelling and C4ISTAR systems as well as space assets and services; space assets protection; artificial intelligence and electronic warfare.

Defence products belonging to category 2 will be subject to stricter eligibility conditions, requiring for the contractors to have the ability to decide on the definition, adaptation and evolution of the design of the defence product procured.

While Tuesday’s deadline is important insofar as it helps gauge interest and momentum behind the project, a more important deadline is 30 November which is the deadline for submission of requests for financial assistance and associated defence industry plans.

Friday, 1 August – EU AI Act provisions for general purpose systems take effect despite industry pushback

On 1 August, key provisions of the EU’s landmark AI Act will officially enter into force, as the European Commission decided to stick to the originally foreseen timeline despite intense industry lobbying and calls for delays.

In previous months, significant political and industry pressure emerged urging the Commission to consider postponing certain enforcement measures, notably rules affecting high-risk and general-purpose AI systems. This push was spearheaded by figures including Sweden’s Prime Minister Ulf Kristersson and digital ministers from France, Poland, and Czechia, who advocated for a "grace period" for businesses. Industry representatives, echoing warnings from Mario Draghi’s influential 2024 report, argued that prematurely enforcing standards could harm Europe's technological competitiveness.

However, earlier in July, the Commission rejected these requests, with spokesperson Thomas Regnier assuring that "There is no stop the clock. There is no grace period. There is no pause."

These remarks followed strong pushback from digital and consumer rights groups, including European Digital Rights (EDRi), BEUC, and the Center for Democracy and Technology, which warned the Commission against yielding to industry pressure.

More specifically, effective from 1 August, the AI Act introduces strict rules for high-risk AI applications, notably:

·        Mandatory conformity assessments and third-party audits for high-risk AI systems, such as facial recognition, biometric identification, and AI-driven hiring software.

·        Comprehensive risk management requirements, including detailed documentation, human oversight mechanisms, and data governance frameworks.

·        Obligatory incident reporting and corrective actions for providers of high-risk AI systems.

Simultaneously, lighter transparency obligations for limited-risk AI tools such as chatbots, emotion recognition, and AI-generated content will also become operational, primarily focused on disclosure requirements and user transparency.

Businesses operating in AI and tech sectors should prepare accordingly, as these new regulatory obligations will be actively enforced from this week.

The AI Act is structured in phases according to the level of risk associated with different AI applications. The previous phase, adopted on 1 August 2024, focused on banning "unacceptable risk" practices, such as social scoring systems and cognitive behavioral manipulation, establishing baseline transparency requirements. The subsequent and final phase will start on 1 August 2026 and will fully embed the risk-based regulatory framework, extending comprehensive enforcement across all AI categories, with enhanced monitoring, evaluation procedures, and broader regulatory oversight.

Friday, 1 August – Eurozone flash inflation estimate for July

Also on Friday, Eurostat will release the Eurozone flash inflation estimate for July. Markets are closely monitoring this data after June’s modest uptick, expecting headline inflation to remain stable around 2.0%.

June’s annual euro area inflation slightly increased to 2.0%, up from 1.9% in May. The largest contributor remained services (+3.3%, up from +3.2% in May), highlighting sustained domestic price pressures. Food, alcohol & tobacco moderated slightly to 3.1% (down from 3.2%), while non-energy industrial goods eased to 0.5% (down from 0.6%). Energy continued to exert downward pressure, though less strongly, at -2.7% (compared with -3.6% in May).

The release follows the ECB’s decision to maintain its benchmark interest rate steady at 2.15%, adopting a cautious stance amid growing uncertainty related to escalating EU–US trade tensions. ECB policymakers have adopted a wait-and-see approach, citing core inflation's persistence (remaining elevated at 2.3%) and robust services inflation as reasons to avoid premature easing. 

Yet external pressures loom large, especially with the Trump administration threatening to impose substantial tariffs of up to 30% on EU goods beginning 1 August. The ECB’s June macroeconomic projections assumed a significantly lower tariff scenario (around 10%), forecasting modest economic growth at 0.9% for 2025 and inflation stabilizing at target levels. The potential imposition of higher tariffs could significantly alter these projections, potentially forcing the ECB to reconsider further rate cuts in its next meeting in September. Even on current projections, ECB staff estimate inflation at 1.6% in 2026, which would suggest a rate cut would be required to bring inflation to target. 

Against this backdrop, July’s flash inflation data will provide crucial signals for the ECB Governing Council, gauging whether existing monetary policy remains appropriate or if further adjustments will be necessary in response to external risks and persistent domestic price pressures.