What Does the Trump Win Mean for the European Economy?

Though every presidential election comes with a degree of uncertainty, this one is unusual in the sense that the new president-elect actually values unpredictability. A Trump trial-and-error presidency has the potential to impede confidence and thus investment as well as unsettle global financial markets. Another layer of uncertainty is to what extent Trump will be able to implement his suggested proposals. Though the Republicans won the presidency and will continue to control the House of Representatives and Senate, Republicans might not back all of his plans – particularly his protectionist ideas or increased spending proposals.

The US is Europe’s most important trade and investment partner. Thus, a major concern will be the US’s commitment to free trade once Trump takes office in January. Trump’s aggressive protectionist stance, which focuses on pulling out of existing trade agreements and slapping tariffs on countries such as Mexico and China, as well as his opposition to the Trans-Pacific Partnership, indicates that he will not push for expanded trade deals. One victim of the current anti-trade and anti-globalization mood (seen not just in the US, but also in Europe) will be the Transatlantic Trade and Investment Partnership, which the US and EU have been negotiating since 2013.

The US is Europe’s most important trade and investment partner. Photo by Getty Images.
The US is Europe’s most important trade and investment partner. Photo by Getty Images.

Fiscal policy is another area of potential concern. Given Trump’s stated opposition to change in entitlement programs such Social Security, Medicare and Medicaid, combined with lower tax revenues and increased spending for defence and infrastructure, the US deficit and debt would soar under his current plans. Trump’s statements on the campaign trail about renegotiating the national debt with creditors raised eyebrows across the Atlantic and beyond. Though he backtracked and is unlikely to let the US default on its debt, perceptions matter in how markets react. The next president and Congress will face an early test over raising or suspending the debt ceiling by March 2017. Because European countries hold some US government debt, but more importantly rely on US government bonds as a benchmark of safety and reliability, Europe will be watching closely.

Overall, according to Moody’s Analytics, Trump’s proposals would lead to a recession, causing GDP to fall by 2.4% between 2018 and 2020, with 3.5 million job losses. In assessing what this could mean for Europe, it helps to bear in mind how fragile the state of the economy on the other side of the Atlantic is. A Trump-led economic downturn would come at a time of weak growth in Europe, where investor uncertainty is already high in the wake of Brexit and Italy is facing major difficulties in its banking sector. In short, a US recession would risk tipping the European economy back into one as well.

Europe needs a steady US economy and global economic leadership. But after the election, the waters of the US and global economy are looking a lot choppier.

Marianne Schneider-Petsinger, Geoeconomics Fellow, US and the Americas Programme.

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