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Trump chaos and Merz’s economic plan: an opportunity for Europe?

Patrick_Artus
Patrick Artus
Economic Advisor to Ossiam and Member of Cercle des Économistes
Key takeaways
  • The United States under Donald Trump presents Europe with major challenges: protectionism, global warming and militarisation.
  • To counter protectionism, Europe can develop a free trade strategy with Latin American countries, Canada and other global players.
  • Europe must continue its decarbonisation efforts, which will give it a technological advantage and enable it to support GDP overall.
  • European countries may be required to provide for their own defence, which has prompted Friedrich Merz to call for a change in the budgetary rules in Germany.
  • €300bn of European savings are currently invested in the US, which will change if Europe uses these savings to its advantage in the future.

The inau­gu­ra­tion of Don­ald Trump as Pres­i­dent of the Unit­ed States has caused var­i­ous types of dis­rup­tion. First of all, a pro­tec­tion­ist pol­i­cy with sharp increas­es in cus­toms duties, the scale and scope of which are still uncer­tain and fluc­tu­at­ing. For the moment, this involves cus­toms duties of 25% on steel and alu­mini­um imports, and addi­tion­al cus­toms duties of 10% on US imports from Chi­na, but Trump has announced the intro­duc­tion of much more glob­al cus­toms duties. Then there is the with­draw­al of the Unit­ed States from the Paris Agree­ment and the end of aid for the ener­gy tran­si­tion, again in the Unit­ed States, with the desire to devel­op fos­sil fuels. Also, the pos­si­bil­i­ty that poli­cies aimed at sharply depre­ci­at­ing the dol­lar against oth­er cur­ren­cies may be imple­ment­ed: the chair­man of the White House Coun­cil of Eco­nom­ic Advis­ers, Stephen Miran, has advo­cat­ed an end to the dol­lar’s role as a reserve currency.

There is real uncer­tain­ty about the future of the mil­i­tary pro­tec­tion pro­vid­ed by the Unit­ed States for Europe, and many Euro­pean coun­tries have there­fore decid­ed to increase their mil­i­tary spend­ing. Final­ly, it must be recog­nised that the val­ues of Trump­ist Amer­i­ca (those defend­ed in par­tic­u­lar by Vice-Pres­i­dent J.D. Vance) diverge from the val­ues of Europe, par­tic­u­lar­ly with regard to the role of reli­gion, the def­i­n­i­tion of democ­ra­cy and free­dom of expres­sion, the sep­a­ra­tion of pow­ers between the judi­cia­ry and the exec­u­tive, and the treat­ment of minorities. 

The three main prob­lems that Europe will face are there­fore: 1) US pro­tec­tion­ism, 2) the US deci­sion to stop sup­port­ing the ener­gy tran­si­tion, and 3) the end of the coun­try’s mil­i­tary involve­ment in the defence of Europe… Does Europe have the capac­i­ty to respond to these challenges?

American protectionism and the question of policies against global warming

Exports of goods from the Euro­pean Union to the Unit­ed States rep­re­sent 2.8% of the Euro­pean Union’s gross domes­tic prod­uct. If we add exports of goods and exports of ser­vices, we arrive at 4% of the EU’s GDP. How­ev­er, there has been no ques­tion so far of putting cus­toms duties on ser­vices. If these exports of goods from Europe to the Unit­ed States are affect­ed by pro­tec­tion­ist mea­sures, the solu­tion for Europe will be to devel­op trade and pro­mote a free trade strat­e­gy with Cana­da, Latin Amer­i­can coun­tries, the Unit­ed King­dom, South­east Asian coun­tries and India (the Unit­ed States accounts for 18% of the Euro­pean Union’s exports of goods). The world of free trade, respect­ing the rules of the World Trade Organ­i­sa­tion, would stand in oppo­si­tion to the Unit­ed States.

With regard to cli­mate and envi­ron­men­tal poli­cies, Europe must con­tin­ue its efforts to reduce its green­house gas emis­sions. In 2023, the Euro­pean Union’s CO2 emis­sions reached 2.6 tril­lion tonnes and those of the Unit­ed States 4.7 tril­lion tonnes. Two argu­ments favour the con­tin­u­a­tion of the decar­bon­i­sa­tion effort in Europe. On the one hand, the most recent analy­ses show a very strong link between the plan­et’s tem­per­a­ture and the growth of glob­al GDP (Adrien Bilal and his co-authors show that a 1% rise in the plan­et’s aver­age tem­per­a­ture would reduce glob­al GDP by 12%); this link is so strong that reduc­ing CO2 emis­sion­sin Europe alone would be effec­tive in sup­port­ing glob­al GDP. On the oth­er hand, oth­er coun­tries are real­is­ing the scale of the dis­rup­tion caused by cli­mate change (droughts, fires, hur­ri­canes, etc.) and will have to decar­bonise their economies, but with a delay com­pared to the decar­bon­i­sa­tion achieved in Europe, which will there­fore have a tech­no­log­i­cal advan­tage thanks to its ear­ly response to cli­mate change.

Defending Europe

The third prob­lem is the need for Euro­pean coun­tries to defend them­selves. This need has led the future Ger­man chan­cel­lor, Friedrich Merz, to push for a change in the bud­getary rules in Ger­many. The lim­it set for the fed­er­al pub­lic deficit (0.35% of GDP) will not include the por­tion of mil­i­tary spend­ing above 1% of Ger­many’s GDP. In addi­tion, an invest­ment plan of €500bn over 10 years is planned, cen­tred on the ren­o­va­tion of infra­struc­tures (ener­gy, trans­port) and eco­log­i­cal transition.

Europe can increase its pub­lic spend­ing today while main­tain­ing an exter­nal sur­plus (a cur­rent account sur­plus), as it cur­rent­ly has a sur­plus of almost 3% of its gross domes­tic prod­uct. It is con­ceiv­able that Ger­many’s pub­lic deficit will increase by around 2 GDP points, that the mil­i­tary spend­ing of all Euro­pean coun­tries could rise from 1.9% of GDP to 3.4% of GDP, which is the lev­el of US mil­i­tary spend­ing, and that this increase could be financed with­out dif­fi­cul­ty using the Euro­pean sav­ings surplus.

In con­clu­sion, it should be not­ed that this trend will be very unfavourable to the Unit­ed States. Today, €300bn of Euro­pean sav­ings are invest­ed in the Unit­ed States; if Europe uses this sav­ings sur­plus to ren­o­vate its infra­struc­ture and increase its mil­i­tary spend­ing, it will no longer be avail­able to be loaned to the Unit­ed States, which will expe­ri­ence a cri­sis in its exter­nal financ­ing and will have to dras­ti­cal­ly reduce its exter­nal deficit, which would imply a slow­down in growth and a sharp rise in inter­est rates.

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