Filenews 27 December 2024 - by Laurence Laurent
After the Covid-19 pandemic and Russia's invasion of Ukraine, Europe is potentially facing a new existential shock, this time in the form of Donald Trump. From trade to defence to technology, the combination of mercantilism and MAGA will hurt it – but it will also hopefully shake Europeans out of their typical complacency.
There is a long list of reasons why the European Union should be concerned. The open, trade-oriented Union of 27 thrives on predictable, rules-based environments that put trade first and conflict second. That's butter on Trump's bread, with the incoming president preferring to move fast, apply pressure and trade bilaterally. Before even sitting in the Oval Office, he is pushing Ukrainian President Volodymyr Zelensky to reach a deal with Vladimir Putin to end the Russian invasion and threatening allies with a 10 percent general tariff to correct deep-rooted grievances about trade. The result would be a new security dilemma in Europe's east, with EU defense not ready to fill the gap of a U.S. pivot to Asia, and a 0.3 percent decline in EU GDP by 2026 if tariffs are eventually imposed, according to Citigroup.
The unity holding Europe together is also getting weaker. Unlike Trump's first term, during which Germany's Angela Merkel and various Group of Seven (G-7) partners faced off against a defiant U.S. president, the list of leaders who can garner support for a decaying transatlantic relationship is limited. France's Emmanuel Macron, who once "walked on water," is now wet — and may not be able to complete his second term. Merkel's successor, Olaf Scholz, is even more unpopular and is preparing for elections in February. Europe's far right is gaining ground and receiving an unexpected boost from Elon Musk's wealth and influence. Still, even if a bunch of Trump advisers, such as Italy's Giorgia Meloni and Hungary's Viktor Orban, see their influence grow, they are all playing with a weak card. Investors already worried about the EU's economic and technological lag with the US (and China) are voting with their wallets, as the graph above shows.
We can, however, discern a tiny glimmer of optimism, or at least the outline of an answer, amid widespread pessimism. At a recent meeting of ministers and experts in the Italian Alps organised by the Grand Continent, I was encouraged by the pragmatism of European elites who assessed the EU's ability to plan and respond rather than simply asking for utopian proposals. Trade, an area where the size of the EU market and its 440 million consumers give the Brussels machine real power, is the spearhead. That means Europe can cajole Trump to balance the $201.6 billion EU-US surplus — with carrots like buying more energy, goods, weapons — and retaliate with tariff sticks if they don't work. That won't be easy, given the scale of what Trump calls a "huge deficit," but it's doable. The next goal should be a change of mindset that can hold together a common pan-European line if Trump chooses to divide and govern by offering concessions individually to countries.
In terms of security, the idea of a Europe at full defence readiness is still a distant prospect, even after the largest full-scale conflict on its soil since 1945. However, here too, the size of its market may offer it a strong card on the table when it comes to the fate of Ukraine. It should take the initiative to play a leading role in the reconstruction of the country, which could cost up to $486 billion over the next decade. In addition to fulfilling existing pledges of 241 billion euros ($250.7 billion), Europe also has a card to play in the form of some $300 billion of sanctioned Russian state assets, which have been used creatively to help Kiev without being fully confiscated. Seeking closer ties with the UK, a sensible defence partner for the EU despite deteriorating relations due to Brexit, should also give it a boost as Keir Starmer seeks support against Trump's technology-industry-tariff triptych. Musk's image at Mar-a-Lago with Nigel Farage and Nick Candy of the Reform, which Musk may fund, should not become the new definition of a "special relationship."
Finally, the European economy, if it can escape final decline, could also act as the link between what Europe needs and Trump's demands: a more autonomous and resilient continent driven by its own consumers rather than exports to China or imports of Russian gas. Although it has been hit by a lack of tech giants and a still fragmented capital market, it is a market with €33.5 trillion in household savings and strong companies from ASML Holding NV to Airbus SE. A series of recent recommendations by Mario Draghi and Enrico Letta points the way to removing red tape and empowering companies in fragmented sectors such as telecoms. Interest rate cuts by the European Central Bank can also boost demand and restore shattered corporate and consumer confidence. Perhaps Europe could emulate some of the elements of MAGA, from debureaucratization to tackling China's unfair trade practices.
Seizing these opportunities will depend on whether political instability at Europe's core is contained and not exacerbated. There's at least one reason to be optimistic: The current frontrunner to succeed Germany's Scholz — Friedrich Merz — may be key to unlocking about 0.7 percent of GDP in additional spending through reform of the long-suffering debt brake, according to UBS, which would improve the outlook. Nevertheless, caution is needed, given the situation in France.
Perhaps the best thing to say about 2025 for Europe is that expectations could hardly be lower. While Trump's own mood and the health of U.S. consumer sentiment will ultimately determine the blows unleashed by the next president, Europeans should not forget their own (limited) ability to fend them off.
Editing – Performance: Lydia Roumpopoulou
