There is a spring in the step of EU officialdom these days — at least compared to the funereal mood a few months ago — as US President Donald Trump’s tariff war and attacks on rule-of-law push Europeans to huddle closer and investors to seek refuge in the euro. The question is just how far even the springiest step could go in achieving necessary change, with Germany facing a third straight year of stagnation and former Italian prime minister and European Central Bank president Mario Draghi’s warnings of slow agony still ringing in technocrats’ ears.
Trump’s frontal assault on the US$1.5 trillion transatlantic relationship has certainly done a better job of proving the EU’s worth than 1,000 white papers could. His attacks on NATO and Ukraine are boosting solidarity among members, with even traditionally pro-US Denmark shedding its euroskepticism in the wake of pressure over Greenland. The odds of Norway’s and Iceland’s membership are also shifting. Even the UK is moving closer to Brussels as the special relationship wilts.
As the EU’s single market of 440 million holds its own against Trump, member states are also more willing to break national taboos for the greater good. Germany’s new coalition is dragging the country out of austerity with a 500 billion euro-plus package (US$569 billion) for infrastructure and defense. It also delivered a recent mic-drop moment by pushing to ease EU fiscal rules it once championed. Meanwhile, France is willing to consider reshaping continental defense with an expanded nuclear deterrent, which appeals to Poland, as the US cozies up to Russia.
At a time when the tide of investment and research is turning to Europe’s benefit, it has become easier to big-up its stability, predictability and equality relative to the US.
“We have no bros and no oligarchs,” European Commission President Ursula von der Leyen said recently, as the executive body scrambles to unlock funding and other incentives to attract scientists shunned by the Trump administration.
The US dollar has shed about 9 percent of its value this year against a basket of world currencies, while the euro has strengthened by about 5 percent. Defense stocks like Rheinmetall AG have been on a tear.
Yet the EU still looks poorly prepared for the storm ahead. Its economy is twice as reliant on external trade as the US’, with Germany particularly vulnerable given its dependence on the US for more than 10 percent of its exports like autos and pharmaceuticals, according to Bloomberg Economics. The IMF’s latest projections see Germany’s output flatlining this year — and, considering the high uncertainty, there is a chance that Germany’s economy shrinks for the third straight year, according to ING economist Charlotte de Montpellier.
On top of the job losses and popular discontent a tariff war with Trump would bring, there is also a risk the EU finds itself waging a trade war on two fronts as China steps up its export engine and redirects a flood of goods to Europe.
The test of the coming summer of trade pain is not whether the EU could rush to seal a deal with Trump in 90 days, as LVMH’s billionaire boss Bernard Arnault seems to think. It is whether it starts to implement Draghi’s year-old recipe for success by bulking up fragmented domestic industries, creating a real single market for banks and integrating its disparate capital markets.
New markets and alliances abroad would help; yet, as IMF managing director Kristalina Georgieva said, only the combination of more spending and more integration would lift growth and improve Europe’s resilience. Since it would take time to put new spending plans into action, perhaps it is not reassuring that the new German government’s policies still lack substance in areas like pensions or cutting red tape.
As good as Europe looks amid the US-led chaos, attracting talent and investment while blunting the appeal of populists at home would require a whole new level of unity.
“We cannot stop halfway,” European Central Bank President Christine Lagarde said earlier this month.
Her own institution is rising to the challenge of relaxing monetary policy to spur demand; it is high time governments started knocking down their own barriers to growth, which Draghi, Lagarde’s predecessor, equates to a 45 percent tariff on goods and a 110 percent levy on services.
If that means addressing another taboo — the need for more qualified majority voting among the 27 EU nations — so be it. It would be another welcome, if painful, jolt delivered by Trump’s antics.
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 reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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