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The U.S. move away from its traditional allies in Europe raises geopolitical risks to sovereign credit ratings, and may weigh on economic growth, Moody’s Ratings said in a new report released last week.

The rating agency said that recent U.S. actions, including its vote last week against a U.N. resolution condemning Russia’s invasion of Ukraine, signalled an apparent shift away from Europe and NATO, which increases risk in the region.

“U.S. disengagement from Europe and NATO is likely to create conditions for more intense Russian aggression, for example in the form of increased attacks on key telecommunications, energy or financial infrastructure through cyberattacks or sabotage of physical infrastructure,” Moody’s said.

This increased risk has negative implications for sovereign credit ratings in the region, as the prospect of higher defence spending weighs on government balance sheets.

Additionally, “security concerns that weaken consumer and business confidence are likely to weigh on economic growth that, in many cases, is already weak,” it said.

While the negative macroeconomic effects aren’t currently expected to be material, Moody’s said that geopolitical risks could increase further if, for example, the U.S. pulls a large number of its troops out of Europe — intensifying the pressure on governments in the region to rapidly ramp up defence spending.

“The negative effect of battered confidence on economic growth would likely be amplified, reducing private consumption and investment spending,” it said.

The combination of weaker growth and larger fiscal deficits would also then make it tougher for governments to stabilize their debt burdens, Moody’s noted.

Alongside its shifting approach to global security, other U.S. policy changes, particularly in areas such as trade, immigration and regulation, may pose significant headwinds to the global economy, it suggested.

Indeed, in a separate report, the rating agency said that the potential U.S. policy shifts, “could create a more difficult global economic environment.”

Heightened policy uncertainty, “will dampen business investment,” it said, and adds significant risk to economic forecasts.

“Financial markets remain buoyant and are potentially underpricing the possibility of escalating trade frictions and weaker economic outcomes,” it said.

Collectively, the G20 economies are forecast to grow by 2.5% in 2025 and 2026, Moody’s said — down from the 3.2% growth they averaged before the pandemic.

Against this backdrop, monetary policy will diverge further among the G20, it noted.

While the U.S. Federal Reserve Board is expected to keep rates unchanged for now, Moody’s expects rate cuts to resume in September and December. At the same time, the European Central Bank (ECB) is expected to cut rates three to four more times this year, and the Bank of Japan is seen hiking rates, it said.