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June 19, 2019


What Trump is really saying

The political events in the US and the UK have a certain afternoon tabloid talk-show feel to them. Everybody is screaming at each other, you don’t know whether it will end in violent explosion, but you know it won’t end well. 

We will leave UK politics aside until something actually happens, and focus instead on what to make of Donald Trump’s accusation that Mario Draghi unfairly manipulated the euro. We were particularly amused by the assertion that yesterday’s rise in the German Dax index was unfair to Americans.

There is really no point in trying to discuss the merit of Trump's statements. The US would have had a better case against the EU during 2012-2015, when the eurozone saved itself from its crisis through the only instrument its member states have ever known: a competitive devaluation of the real exchange rate. But the US did not take action then.

Mario Draghi’s strong hint of potential further monetary easing is significant in its own right. See our separate story on this below. But it could have unintended consequences. It is potentially the spark that ignites a full transatlantic trade conflict. We think there is a reasonable chance that it will accelerate, or at the very least contribute to, a broader US trade war with the EU. This is no longer just about German cars. The notion of currency manipulation has a deep political and legal meaning in the US. If the US treasury were to classify a country as a currency manipulator, the US president would be free to impose sanctions. It is the financial equivalent of being classified an international terrorist.

We have learnt to discount what Trump is saying and threatening. At the same time, his threats are not meaningless. Western commentators tended to err by underestimating Trump’s threat. They sometimes overestimate him. It is, of course, possible that he may not act before the elections. He may conclude that just rhetoric will do the job. It is also possible that he loses the elections. What we do know is that Trump takes into account the impact of his decision on the stock market. But this cuts both ways. His recent actions on China did not cause the market backlash some people had predicted. We think that trade tariffs, sanctions against the NordStream 2 consortium, and other decisions to weaken the cohesion of the EU, would constitute an effective policy platform for Trump in the run-up to the 2020 elections. A tariff on expensive German cars is hardly going to persuade Michigan voters to vote for Joe Biden, or whoever the next US Democratic candidate will be. 

The damage Trump is doing to transatlantic relations is not only going to be large, but also lasting. Under Trump the US has progressively strengthened the use of financial instruments as first-order weapons in international diplomacy. That development already began under the previous administration, and is likely to go on after Trump. 

Europeans should also be careful in misreading the Democratic Party as multilateralist and pro free-trade. This is true for some of its centrist establishment figures, but not of the new breed of left-wing Democrats. One of Trump’s lasting impacts on US politics is to have elevated trade policy into a primary election-winning issue. No candidate will win the presidency by promising to undo Trump's trade policies. The real hardliner in the US-EU trade dispute is not Trump - except on German cars - but the US Congress. A cross-party majority rejects any notion of a bilateral trade deal that only includes goods but not agriculture. Since there is no way the EU can agree to open up its agriculture markets to US food imports, we see no chance of a revival of TTIP even under a Democratic president. Luxury cars aside, many of the trade issues raised by the Trump administration, on subsidies for commercial aircraft for example, will persist. So will US concerns about the  NordStream 2 project, which Trump recently threatened with sanctions. And so will US criticism of Germany’s failure to meet its Nato defence spending targets. 

And now consider the domestic politics of EU countries. After the next German elections, there can be no government without the Greens. Their position on climate change, trade in agriculture, and defence spending will shift the EU further away from the US.  

Our main conclusion is that Trump is the vulgar exponent of a transatlantic crisis that has much deeper roots. 

Our other stories

We also have stories on what Draghi is really saying; on the EU’s response to Turkish oil drilling off the coast of Cyprus; on how Iran exposes the weakness of the EU’s diplomacy; on liquidity in resolution; on Phillipe’s unemployment insurance reforms; and on Germany classifying information on right-wing extremism.

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