Europe hasn’t grasped the real economic threat from Trump

 

Europe hasn’t grasped the real economic threat from Trump

 

It’s not industrial policy that the bloc has to worry about, it’s the rise of national capitalism.

 

Opinion

January 24, 2025 4:00 am CET

By Izabella Kaminska

Izabella Kaminska is senior finance editor at POLITICO

https://www.politico.eu/article/donald-trump-economic-policy-threat-europe-bidenomics-tariffs-trade/

 

In the economic showdown with America, Europe is gearing up to fight an enemy that no longer exists. It’s no longer the state-backed largesse of Bidenomics that Europe has to fear; it’s a far more dramatic liberalization of America’s model.

 

For decades, Europeans bought into a fiction that U.S. prosperity was built on free markets and entrepreneurial grit. Then, just over 10 years ago, they changed their minds.

 

It was the economist Mariana Mazzucato who helped explode that myth. In her 2013 book “The Entrepreneurial State,” she argued many of the most significant innovations in recent decades — the internet, GPS and smartphone technologies — were kick-started by government investment. The secret to industrial policy, she argued, was rooted in defense spending, targeted subsidies and state-driven innovation.

 

Then Bidenomics came along and delivered the final coup de grâce to Europe’s sense that America was some kind of free-market fairy tale. U.S. President Joe Biden’s $369 billion Inflation Reduction Act, which offered support to sustainable industries, in particular America’s electric vehicles, was seen in Europe as an egregious government-led attempt to steal investment away from the EU.

 

In response, the EU became more obsessed than ever with playing the same game of state-led industrial policy, focusing on European champions and rushing through subsidy approvals.

 

But as Europe now scrambles to build its own industrial strategy, it’s missing the rise of something far more disruptive. The game has changed again: The next phase of U.S. economic policy isn’t about subsidies, state-driven growth or sector preferential regulation — it’s about smashing that model to bits.

 

The era of Bidenomics is already being eclipsed by a new vision rooted in what could be called “national capitalism.” It’s a philosophy of radical liberalization that rejects state intervention, embraces privatization and leans heavily on market forces to reshape the economy — albeit within the confines of a protected system.

 

For some reason this message isn’t getting through to Brussels, which is stubbornly fighting yesterday’s war, wielding the statist tools of a fading era.

 

Key to the ongoing misdiagnosis is blindness to the true point and purpose of the tariffs U.S. President Donald Trump threatens to implement.

 

The tariffs aren’t being fueled by beggar-thy-neighbor trade objectives or crude protectionism; they’re resetting the rules of the game. Their purpose is to insulate the U.S. as it embarks on a radical market-oriented recalibration, stripping away the distortive, and often corruptive, influence of other countries’ state-driven economic models.

 

Consumed by knee-jerk reactions, officials in Brussels are failing to see this fundamental reorientation — even as Scott Bessent, set to become Trump’s treasury secretary, has been nothing but blunt.

 

“Free trade is to some degree in tension with free markets,” he wrote in an op-ed for The Economist last year, where he criticized decades of distortions caused by globalization. Bessent’s vision is a radical reset focused on ending domestic subsidies, confronting foreign distortions, and creating a level playing field where genuine market forces — not state interventions — dictate outcomes​.

 

As he explains: “Broad-based tariffs will be more effective than microeconomic interventions like industrial policy that generally rely on the government to pick winners and losers.”

 

Put simply, the U.S. has to build a wall against products from the global economy so that it can roll out a far more radical liberalization at home.

And evidence of this switch to liberalization is everywhere.

 

Beyond the headline-grabbing tax-cutting agenda, Trump’s America plans to eliminate subsidies for green energy and electric vehicles. It threatens key provisions of the Inflation Reduction Act. It will see fossil fuels compete on an equal footing, after years of being sidelined by preferential policies for renewables. The Trump camp has even floated privatizing the U.S. Postal Service, Fannie Mae and Freddie Mac, while proposing market-driven reforms in education and space exploration.

 

The newly inaugurated U.S. president’s approach to monopolies underscores this shift even further. His nomination of Andrew Ferguson to lead the Federal Trade Commission signals an aggressive antitrust agenda that puts competition first. “Without vigorous enforcement of our competition laws, our free-enterprise system would cease to be the miraculous engine for mass flourishing that has transformed the world,” Ferguson declared in the opening remarks of his confirmation hearing.

 

By comparison, Europe’s approach with the Digital Markets Act feels timid — a bureaucratic response to Big Tech’s power, not an effort to break it, in the mold of Teddy Roosevelt’s trust-busting.

 

This isn’t America doubling down on industrial policy — it’s America abandoning it.

 

Even in defense, long a cornerstone of U.S. industrial strategy, Trump’s agenda reflects the ethos of national capitalism. Pete Hegseth, the president’s nominee for secretary of defense, has clearly signaled he wants to break up entrenched relationships between the Pentagon and contractors. It’s a vision of open competition where smaller, nimbler firms can challenge the old guard.

 

“We must leverage market forces to prioritize competition and maximize innovation,” Hegseth wrote in reply to the Senate Armed Services Committee ahead of his confirmation hearing in January. And again, this stands in stark contrast to Europe’s defense strategy, which continues to shelter national champions under the guise of strategic autonomy.

 

Meanwhile, in finance, Trump’s scathing remarks about government-supported bank bailouts in 2023 have set the tone for what’s to come. His exploration of a bitcoin reserve — which advocates believe would make it impossible for central banks to prop up banks with money printing — indicates that the era of state-supported banks is likely over.

 

And yet, perhaps the most radical element of Trump’s vision is its reimagining of the social contract with the American people, wherein the protectionism of the state moves from micro- to macro-management.

 

Europe is missing how the battlefield has shifted. And the price of that miscalculation could be costly.