Many take comfort from the prospect of higher inflation and rising interest rates driven by the fiscal stimulus the President-elect promises to deliver. This will push the dollar up, endowing European exports with increased competitiveness. Yet the currency tailwind expectations might prove short lived as current debt levels curb any significant public deficit-led expansion. At the end of the day, the new US Administration may confine itself to cutting taxes and embarking on investment plans in partnership with substantial private capital. As social spending will probably see severe cuts, the overall stimulus might turn out to amount to much less than expected.
In any event, the dollar drive will not last long. As Donald Trump has voiced rather sanguine views on jobs, he will not readily accept that domestic industries lose market share when pressured by a stronger currency. His threats about raising trade barriers might materialise sooner than expected, leading to global economic disarray. Don’t count on a depressed euro to invigorate the economy. Instead a dangerous blind protectionism looms ahead.
Europe will also face the dismal prospect that higher rates could derail its current recovery efforts. Even if the Federal Reserve is able to implement a cautious roadmap to increase the short-term price of money, it will come under heavy pressure to tighten monetary policy. If only to prevent inflationary bouts and the risk of excessive fiscal expansion. Debt-laden governments and businesses will bear the brunt. Solvency concerns might once again resurface.
For the time being, little do we know about the economic strategy the new US Presidency might implement, as the winning candidate’s platform during the campaign can hardly rank as such. But his bullish remarks on trade send shivers down the spine. The world has reason to fear not only higher tariffs but also an interventionist conduct, with little respect for agreed rules. Europe might no longer enjoy a level playing field when doing business in the US. Its investments and exports might suffer blatant discrimination. And taking retaliatory action might engulf the developed economies in a nightmare scenario.
The so-called checks on arbitrary governmental action have a useful role only if those in office abide by these rules and principles. Mr Trump might sweep aside such subtleties and willingly trigger the executive powers endowing him with ample room to do almost everything he fancies, especially in the area of external relations. Europe has a lot to lose under his mandate for all the soothing messages he is currently conveying.
