The bond market spoke; US President Donald Trump blinked. The lettuce theory of former British prime minister Liz Truss holds true: No leader, not even one who has shrugged off assassination attempts and a fraud trial, can remain steadfast in the face of a policy-induced meltdown that punishes voters it aims to protect. The question is: What now?
What is clear from markets is that the 90-day reprieve from worst-case tariffs on “any country, except for China” is by no means a back-to-square-one moment. The US dollar’s haven status has been hurt, while Bloomberg Economics still expects stagflation in the US and a hit to growth in the EU.
The US remains a place where policy uncertainty is high, where tariffs can jump by double digits in days and where social-media influencers wield power over generals. This uncertainty is what deters investment and hurts economic confidence, rather than just tariffs.
And while the euro has held up as a relative island of calm, it is hardly a back-to-square-one moment for US allies like the EU either. Trump’s crowd has spent the past 90 days (and more) making clear to Europeans it has no interest in keeping up existing security commitments without more in return — especially if there is not going to be a change on China trade. Why would the next 90 days be any different? If Trump surrounds himself with new advisers who wield scalpels rather than flamethrowers, expect even more pressure on tech rules, China derisking and NATO spending — and more dividing and conquering of European allies. Clinging to the idea that Trumpism is a passing phase did not work the first time and will not work now.
This 90-day reprieve could work to Europe’s advantage. Trump and his entourage have done Europe a favor: They have kept the continent together so far by hitting the EU with a blanket tariff, proved there is no “Brexit benefit” by throwing UK Prime Minister Keir Starmer under the bus and devalued trust in the US’ international commitments. It is time to focus on preserving that EU unity against a trade-led economic storm that could exacerbate divisions and fuel populists already riding high in France and Germany.
The aim should be to build support for issuing joint debt — perhaps 15 percent of GDP — and unlocking trillions in savings so that Europe can invest in its own security and technology, said Miguel Otero, an analyst at Spain’s Elcano Royal Institute. As Stephen Miran, chair of Trump’s Council of Economic Advisers, has made clear, US provision of public goods is not a permanent state of affairs.
The challenge is not just about rebalancing relations with the US, but taking a more clear-eyed stance on China, which is hoping to make new inroads into Europe as a tariff war with the US intensifies. While less unpredictable than Trump, China has been exerting pressure on Europe in other ways as its stimulus-boosted export machine outruns European chipmakers, chemical firms and automakers like BMW AG. This is another reason for Europe to pursue an investment jolt at home rather than swap one dependency for another; Chinese automaker BYD Co’s American depositary receipts rose on Thursday on a Handelsblatt report of EU-China electric-vehicle tariff talks.
For now, EU leaders seem relieved at being able to simply do their own tariff “pause”: Retaliatory tariffs that would further harm US$1.5 trillion in bilateral trade are being shelved and Polish Prime Minister Donald Tusk is calling for a responsible transatlantic approach. Spanish Prime Minister Pedro Sanchez, while leaving the door open to more China investment, is also optimistic on talks with Trump. The sunny weather is adding to the sense that maybe the EU has dodged the worst, but the status quo is on borrowed time.
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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