Europe
fears end of liberal Western economic order
Donald
Trump’s unexpected victory in the U.S. presidential election raises
the risk that the fragile European recovery could also be in for a
major shock.
By PIERRE
BRIANÇON 11/9/16, 7:08 PM CET Updated 11/10/16, 5:52 AM CET
PARIS — On the
heels of the surprise news of Donald Trump’s election as U.S.
president, European policymakers and central bankers were bracing for
another shock that “could well make the euro crisis and Brexit look
like minor bumps in our economic history,” according to a French
finance ministry official who asked not to be named.
But reflecting the
relative calm with which the financial markets reacted — most major
European stock markets were down less than 1 percent by day’s end —
others also noted that worrying as they are, some elements in the
president-elect’s program, such as a projected higher U.S. budget
deficit, might help mitigate the hit on Europe’s fragile recovery.
There was little
doubt, however, that hits there would be, both in the short term due
to Trump’s election and in the long term as a consequence of his
presidency. Beyond that, doubts about Trump’s readiness to exert
America’s economic leadership — notably by supporting
international institutions such as the International Monetary Fund —
will take global uncertainty “to levels rarely seen,” another
European policymaker noted.
That creates a
difficult policy challenge for European leaders: They know they must
devise counter-measures to the Trump hurricane, but are ill-equipped
to decide anything before they have an idea of its force.
U.S. Markets React
To Donald Trump Election To Presidency
In the short term,
volatility will be the order of the day as market operators and
bankers react to any potential nominees for the future cabinet —
notably who will serve as Treasury secretary or U.S. trade
representative. They will minutely scrutinize any statement from the
Trump’s transition team as to their intentions and order of
priorities once the new president takes over in January.
In the longer term,
the two dangers for the global economy stand out: Trump’s trade
agenda and his immigration policy.
Slapping tariffs on
imports from Mexico and China would raise domestic inflation and hit
European exporters. This would be even more so if the latter have to
face a fall in the dollar’s value against the euro or sterling.
Meanwhile, forcing
undocumented immigrants to leave (Trump has suggested deporting 11.3
million of them over two years) would raise labor costs and endanger
businesses relying most on cheap labor — think farms and
restaurants.
Nightmare scenario?
The impact on the
U.S. economy, ricocheting on Europe’s, will then depend on whether
Trump is able to implement his agenda in full. Economists at Moody’s,
the ratings agency, estimate that full implementation of the
president-elect’s platform would trigger a long recession lasting
until the end of his term, shrinking the economy with 3.5 million
jobs lost and the unemployment rate up from 5 percent today to 7
percent in 2020.
For Europe, that
would mean a nightmare scenario. In the latest projection by the
International Monetary Fund, growth of the eurozone GDP, already down
to 1.7 percent in 2016, was expected to slow down more to 1.5 percent
next year. But that was on the back of a U.S. economy picking up,
from 1.6 percent this year to 2.2 percent in 2017.
Factor in a bigger
U.S. slowdown, and it’s easy to see how Europe is threatened with
recession as well. Forget about the Transatlantic Trade and
Investment Partnership, “which didn’t stand much of a chance
anyway even in a Clinton administration,” the European policymaker
noted. Even current trade relations may be impacted for the worse in
a “Trumpissimo” presidency.
Europe’s
recession, in turn, would resurrect the continent’s banking
problems it thought it was slowly solving, as noted by Simon Johnson,
a professor at the Massachusetts Institute of Technology and former
chief economist of the IMF.
Trump, however, may
not be able to implement his agenda in full, as Moody’s duly noted.
Under that “Trump lite” scenario, the U.S. Congress succeeds in
moderating Trump’s ardor, both in his hostility to free trade and
on the massive tax cuts he has advocated for the well-to-do.
The Trump problem
may change the assumptions under which Western central banks have
operated since the 2008 financial crisis.
But that scenario
isn’t a rosy one for Europe either, because it would simply send
the U.S. into stagnation, instead of recession.
Another potential
danger, according to economist Simon Tilford, the deputy director of
London-based Center for European Reform, comes from the veiled
threats Trump has uttered towards the independence of the Federal
Reserve, the U.S. central bank.
“You clearly see a
scenario where instead of moderating Trump, the House and the Senate
fall behind him, and there the implications for Europe could be
pretty serious,” he said.
The Trump problem
may also change the assumptions under which Western central banks
have operated since the 2008 financial crisis. “Will they start
worrying about a possible inflation comeback and raise rates faster
than planned, or will they focus on an upcoming slowdown and keep
their loose monetary policies?” a former eurozone central banker
wondered.
More fundamentally,
the French government aide noted, there is a risk that “the liberal
order that presided over the Western world since World War II” has
lost its main architect and support.
“What I’m afraid
of now is European governments trying to find all kinds of excuses to
tackle the effects of the Trump tsunami, such as suspending reforms
or going their separate ways if their national banks are seriously
shaken.”
For now, markets
remain sanguine. But “they’re never good at assessing political
risk,” Tilford said. And quite a few investors want to remember
another Trump than the radical populist European leaders are fearing.
In a note to
clients, Stefan Kreuzkamp, chief investment officer of Deutsche Asset
Management, recalls a statement from Trump last May: “Anything I
say right now — look, I’m not the president, everything is a
suggestion … I’m totally flexible on very, very many issues.”
For Europeans, the
only sliver of hope is in that self-confessed flexibility.
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