Is Trump about to make Europe not so great again? It feels like it
Experts say his ‘crazy’ policies are wrecking world trade and could spell end of the euro
To many Europeans, Donald Trump is a faintly ludicrous, orange-hued figure with mad hair. But somehow, share buyers around the world had managed to convince themselves that the new US president would not only make America great again but drag the rest of the world along with it.
The Dow Jones Index of US shares topped 20,000 for the first time last week – mainly down to the ‘Trump’ factor.
Buyers believed he was going to cut red tape and taxes while ‘splashing the cash’ on military hardware, roads, bridges, tunnels and of course his famous wall on the Mexican border.
This week, however, Trump shook that confidence with his chaotic clampdown on immigration that made investors think that maybe he’s not such a genius after all.
In just over a couple of weeks in office, the new president’s behaviour has been, well, a little bit nuts.
So now the markets are convulsed in post-Trumpian angst – and shares followed suit with falls in the first half of this week.
‘Nobody knows what he’s going to say next,’ says economist Alan McQuaid, chief economist with Merrion Capital.
‘He’s getting on everyone’s back: the Mexicans, the Germans and now the Australians… he seems to be having a go at everyone. That’s why the rally has been short-lived. We have to wait and see. I’d be cautious until clarity emerges.’
Market dealers had previously hailed Trump as the new economic messiah – because it suited them to ramp up share prices. Yet economists took a less Trumptinted view, pointing out that his policies of wrecking world trade are the exact opposite to those that have driven global growth for decades.
Free trade has driven forward growth around the world and – until Trump and Brexit – was almost universally seen as the economic way forward.
Adding to the confusion is the fact that Donald’s plans don’t seem to add up. He’s proposing
spending splurges – along with a contradictory cut in taxes, while claiming he will massively boost the US economy but weaken the dollar.
‘Some policies are simply not consistent. People are totally confused and worry that he is liable to do something stupid. While the numbers coming out on the US economy are good, his crazy rhetoric is spooking the markets,’ says McQuaid.
‘The danger is if he starts annoying the Chinese, they will starting dumping US government bonds (of which they own about $1trillion), which would push up market rates.’
Speaking to news network CNBC, author and hedge-fund manager Jim Rickards predicted that Trump’s economic stimulus plans will not work out, leading to a ‘head-on collision’ between perception and reality.
‘Trump’s proposed tax cuts will hit government revenue while Congress is likely to block his stimulus plans as the US debt is already high at $20trillion,’ he says.
‘Either we’re going to have a recession or a stock market correction,’ says the writer of apocalyptic financial books The Death Of Money and The Road To Ruin.
While Rickard’s views are controversial, many experts share his anxiety about where we are heading.
US share values relative to profits are, after all, topping heights last seen only a few times in history: the 1929 crash, the 2000 internet bubble, and the last financial crisis of 2007.
Things aren’t exactly rosy on this side of the Atlantic either.
Europe could be heading for its worst political and financial upheaval in decades.
Populist and far-right candidates, who have pledged to hold referendums on EU membership, are performing strongly in Italy, France and the Netherlands with elections looming in those countries.
‘The National Front’s Marine Le Pen is topping the polls in France. If she gets in, there will be carnage (on the financial markets),’ says McQuaid.
Leading some polls in Italy is the Eurosceptic Five Star Party, headed by comedian Beppe Grillo. Meanwhile, Italian banks, labouring under €360bn in bad loans, need a bailout that nobody can afford – not even the oncemighty European Central Bank.
In a recent poll by major consultancy Sentix, 22% of analysts and investors firmly believed the euro would break up within one year, with Italy likeliest to exit – followed by Greece, where another debt crisis is looming.
Poor Greece is lumbered by so much debt that it lurches from crisis to crisis only to be forced to take on even more debt in order to (temporarily) pay its bills. How long can that keep going on?
Not much longer, according to Nobel Prize-winning economist Joseph Stiglitz. He wrote recently in Fortune magazine: ‘It may be only a matter of time before Europe looks back on the euro as an interesting, well-intentioned experiment that failed – at great cost to the citizens of Europe and their democracies.’
Former top ECB official Jürgen Stark also recently told the Telegraph that it was time to ‘think the unthinkable’ and that the eurozone ‘must break up if its members are to thrive again’.
The ECB itself is in no position to start throwing money around in the event of another crisis, whether it’s triggered by dodgy politicians or dodgy banks.
It has just printed €1trillion in a desperate, and largely failed, attempt to revive the European economy.
Like other central banks, who have tried similar policies for years, it’s now almost out of ammunition.
And Rickards believes this will make the next financial crisis the ‘mother of them all’.
Next time there will be restrictions on ATM withdrawals in many countries – not just Greece and Cyprus – as cash runs dry, he predicts.
Rickards recommends buying gold to brace ourselves for the inevitable financial ‘reckoning’ that could come as soon as 2018.
Most commentators don’t foresee such a doomsday scenario, although Alan McQuaid admits: ‘It could happen.
‘We can’t afford to be complacent. We’re heading for choppy waters.
‘But I think it will work out in the end. Merkel will get back in. Le Pen won’t win. The euro will survive. Fingers crossed!’