The day after US President Donald Trump’s election victory in November last year, I listened over breakfast to a European chief executive’s prediction of the boom that would follow: More deals and more investment would head to the US in anticipation of more growth; the Old Continent, stuck in a productivity and demographic tailspin, would struggle to close the gap.
Ten weeks into Trump’s second term, with trade-war fears surging as the US imposes tariffs on trading partners around the world, that memory feels like a parallel universe. The corporate US is hoarding cash, not splurging it. The dollar has fallen against major currencies, and the S&P 500 is down 4 percent and headed lower as of Wednesday night. Despite some banner investment pledges from billionaire Rodolphe Saade and carmaker Hyundai Motor Co, there has been an estimated year-on-year decline of between 7 and 14 percent in merger volumes in the US, which accounts for almost half of all transactions globally. Europe and Asia, meanwhile, have seen theirs grow.
It would be naive to imagine that animal spirits would snap back now that Trump has finally lifted the veil on tariffs of 20 percent on the EU, 24 percent on Japan and 34 percent on China. Bankers and executives say the ideology accompanying the smashing of trade ties, not just its quantum, is what makes the US a chillier market. They cite the attacks on rule of law, including executive orders targeting major legal firms; a long list of US grievances on trade from value-added tax to tech regulation that point to longer-term tensions; the crackdown on immigration sweeping up tourists; and McCarthyist demands to bend the knee on diversity, equality and inclusiveness beyond US soil.
Tariffs are just the tip of the iceberg threatening the US$2 trillion EU-US trade relationship, in other words. With US Vice President J.D. Vance threatening Greenland, Elon Musk supporting the German far right and Trump pausing enforcement of anti-bribery laws to help US “competitiveness,” some European executives are asking themselves if they could work with bulge-bracket Wall Street firms in the current climate. Leonardo SpA’s replacement of adviser Bank of America Corp with Deutsche Bank AG is only a taste of what might come as relationships get reviewed. Contract disputes would get tougher as cost inflation trickles through and as America First preferences become explicit. Trust in the US is fading.
To be clear: This is not capitalism developing a conscience. Diversity was never exactly a strong suit for European companies; nor could businesses really afford to drop the US economy as one might ditch a Tesla. The global scramble to persuade Trump to cut tariffs would be brutal and crowded.
Yet boardrooms cannot wish away a hostile and unpredictable environment that mixes mercantilism and MAGA — or McKinley and McCarthy. The focus now should be on finding defensive responses to economic pressure that go beyond the old playbook of manufacturing more in the US or passing on the cost of tariffs, which are starting to look inadequate given the threat of economic stagflation and the unpredictability of Trump. Tech would be a flashpoint, as suggested by officials working on protective measures in Brussels; if Europe has leverage, it is in the fact that it imports a lot of US services. S&P 500 firms derive about 30 percent of revenue from outside the US.
If an unreliable US is the new normal, Europe’s corporate and political leaders also have to develop a strategy in a world where few of the old certainties remain — China’s export markets, cheap Russian energy and US security guarantees are falling away piece by piece. It is high time that Europe focuses on building up its strengths as a single market of 440 million people with trillions in savings. It needs to work out who its geopolitical friends are, as well as bolster the euro as a true alternative to the US dollar and focus on domestic growth to become less reliant on trade. With so many European industries in the firing line right now, what is needed is a true top-down strategy of economic deterrence, as laid out in a recent paper by former French government adviser Shahin Vallee.
This would be easier said than done. Predictions of a US-led Trump boom have been wrong so far, but Europe’s track record of fragmenting and squabbling when the occasion calls for unity means that it is too early to know whether it can buck its own well-worn trend.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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