At the beginning of his term in office, Donald Trump caused quite a political stir with the American government’s demand for ‘balanced trade’, but at its core, he was pursuing a goal that was entirely rational (as demonstrated here, among other places). Now he has gone too far. With his threat to impose even higher tariffs on precisely those European countries that openly support Greenland’s independence, he has left the realm of rationality.
Some Europeans have apparently understood that they must finally emancipate themselves if they want to be taken seriously. The French president wants to deploy an economic bazooka, which, however, consists mainly of trade measures. The Commission is at least talking about a European customs package, as the customs agreements originally negotiated with Trump, which provided for a flat-rate customs duty of 15 per cent on European imports without European countermeasures, will no longer be ratified.
But tariffs alone are short-sighted. Currency relations have a significant effect on trade flows. Last year, the US dollar depreciated by around 15 per cent against the euro. This increase in the cost of European imports for American consumers certainly had a much greater impact than the tariff measures implemented to date. But even the effects of the provisional agreements would be overshadowed by this.
Consequently, the European Central Bank must be involved in the countermeasures and ensure that the dollar does not depreciate further. The Bank can either lower European interest rates, which reduces the attractiveness of the euro on the foreign exchange markets, or it can intervene directly on the foreign exchange markets to weaken the euro. To do this, it must buy US dollars with euros, meaning it can enforce any desired exchange rate with its own (unlimited) currency.
More importantly, in order to be truly capable of acting, Europe must massively boost its internal growth. Interest rate cuts by the central bank are essential. In addition, however, the individual European states must also be enabled to make their economies less dependent on trade with the rest of the world through additional government demand and/or relief for private households.
A Europe that is growing by perhaps just one per cent this year and needs a lot of exports to do so is not a political power that Trump needs to take seriously. Only if European growth exceeds American growth, even though European trade surpluses are shrinking noticeably, will Trump realise that in the long run he has nothing to blackmail the continent with.
However, this stimulation of the European economy will not come about through the ‘structural reforms’ that are still being discussed and implemented in the capitals. ‘Improving competitiveness’ must also finally be removed from the political agenda. There is no chance against China anyway, and against the US, it is time to give up once and for all.
The state must directly stimulate demand in every single European country this spring by taking on far more debt than previously planned. Normal times are over. In recent years, the US has shown how much government stimulus through additional debt is needed to achieve a dynamic economy (as shown here). Europe must now follow suit or it will disappear into oblivion.
Trump only understands arguments that are backed up by political power. Europe can only gain political power through economic independence. Economic independence can only be achieved if the European single market flourishes. The European single market can only flourish if all countries ensure that consumption is stimulated, thereby kick-starting investment by companies.