And now Europe faces the Trump test
US president’s comments point to protectionism that will reverse decades-long path to liberal economic order
ANALYSIS One of the biggest economic threats that Donald Trump, inaugurated as the 45th US president on Friday, carries is the element of uncertainty. The fact that nobody is really sure what policies he is going to implement and what he wants to achieve makes it difficult to assess what his presidency could mean for the global economy. His inauguration speech cleared up some of this uncertainty but did not banish any of the fears that the next four years will see economic upheaval that will severely test Europe, among others.
There had already been concerns in Europe about Trump’s economic policies before he took to the podium as rain fell on Capitol Hill on Friday.
Trump had said that he would like to withdraw the US from the North American Free Trade Agreement (NAFTA) and impose tariffs on some imports, possibly sparking a trade war. He also pledged a 1-trillion-dollar public investment program, which Greece’s Alternate Finance Minister Giorgos Houliarakis, among others, warned could have an impact on the US’s current account and lead to the dollar weakening against the euro.
The Greek official was also one of those who cautioned that the Federal Reserve could raise its interest rates if it deems Trump’s policies to be inflationary, leading to a tightening of liquidity around the world, not just in the US.
Last month, the Fed raised interest rates for only the second time since the 2007-09 financial crisis in the US, and last Wednesday, the Fed’s Chair Janet Yellen said it “makes sense” for the American central bank to gradually raise rates to avoid a “nasty surprise” such as “too much inflation, financial instability, or both” in the future. She warned that raising interest rates suddenly could risk tipping the US economy into recession.
Increases in American interest rates could lead to the dollar rising and offering greater return to investors, sparking an exchange rate contest with the euro, which hit a 14-year low against the US currency in December.
However, it is when one steps back from the mechanics of the global economy, and the intrinsic part the US plays within it, that the most serious warning signs can be seen.
Trump’s speech on Friday was light on the finer points of finance and big on broader economic concepts. The most conspicuous of these was the US president’s intention to adopt a more protectionist stance.
“From this moment on, it’s going to be America first,” he told a fairly sparse crowd. “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.
“We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”
If we can overlook the irony of an arch-capitalist pledging to use public money to become the “greatest job producer God has ever created” and the head of the world’s foremost market economy claiming growth will come through erecting barriers to competition, Trump’s comments on Friday are a serious cause for concern. Europe suddenly faces the possibility of being regarded as an adversary rather than a partner.
“Trump sees Europe, especially, as an economic rival to the US,” Miguel Otero-Iglesias, a senior analyst at the Elcano Royal Institute, told Kathimerini English Edition.
“This means that he will not be too concerned whether the EU or the eurozone fragment. He sees this as the defeat or weakening of a competitor,” he added.
While the world has experienced fluctuating interest rates and currency values over the last few decades, as well as enduring major financial and economic crises, it has not had to contend with protectionism driven by nationalist fervor since before the Second World War.
Every step the international community has taken since then has been designed to create an economic interconnection that also merges national interests, ensuring nobody has anything to gain by striking out on their own at the expense of others. Should Trump be true to his word, looming trade wars could threaten this liberal economic order.
The European Union, which has struggled to deal decisively with the crisis that broke out in its single currency area in 2010, is now facing a completely different type of challenge.
“Europe will have to adapt to a more inward-looking and protectionist US,” said Otero-Iglesias, who specializes in international political economy. “This means that it will have to fill the gap and become the upholder of the liberal order. It also means that it will have to develop its own type of capitalist model, based more on the social-democratic and Christian-democratic values of the continent.
“In other words, it would need to help build a more embedded liberalism. If it doesn’t, neo-nationalism will take over,” warned Otero-Iglesias.
Greece, facing an uncertain economic future anyway as long as its relationship with its creditors is not settled, is more vulnerable than most to this potential upheaval.
Defense Minister Panos Kammenos, who leads the junior coalition partner Independent Greeks, and Digital Policy Minister Nikos Pappas traveled to Washington for Trump’s inauguration. They spoke at an event held in honor of the Greek Americans in Trump’s administration and met with the new president’s chief of staff, Reince Priebus, who has Greek roots.
While acquainting oneself with the new faces in Washington makes diplomatic sense, there also seems to be a belief in Athens that the Greek Americans in the Trump team could play a significant role in shaping US policy toward Greece. Such a possibility should not be dismissed, but the tone and content of Trump’s inauguration speech suggests the factors that will be at play over the coming months and years will extend far beyond Greece’s borders and interests.
The signs so far suggest that the country’s decision makers will have to up their game and broaden their field of vision to be prepared for what may be coming. They will have to think big, or huge, as the new US president might say.
Demonstrators hold up banners during a protest against the inauguration of Donald Trump as US president outside the US Embassy in London.