Former US President Donald Trump.
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By Lionel Laurent
Nothing is certain except death and taxes. The latter is on everyone’s mind in Europe, where France is embarking on an eye-watering round of belt-tightening worth €60 billion ($66.4 billion) to repair public finances. Italy is eyeing fresh levies on corporate profits and oil major TotalEnergies SA is criticizing UK tax plans. The effect will be bad for big firms and a dampener on growth, though hardly existential, at least in France, where it equates to an eight-point rise in the corporate-tax rate to around 33 per cent.
The bigger risk, arguably, is geopolitics (as the chart below suggests). Real wars and trade wars are heating up: Nearly 3,000 trade-restricting measures were imposed in 2023, an almost threefold increase since 2019. More could be on the way if Donald Trump wins US elections and delivers on his threat of tariffs galore. This is the shoe that has yet to drop for the European economy — which is more trade-reliant than the US or China — and its biggest firms as they exit the inflation shock.
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After all, Pax Americana and globalized trade were great for German cars and French handbags, with Bernard Arnault’s LVMH SE accounting for a greater share of French exports than the entire agricultural sector. Between 2000 and 2015, net exports accounted for almost one-third of German growth. But the strengths of a global supply chain are weaknesses in a more fragmented world where access to cheap energy, the Chinese consumer and the US security umbrella is no longer guaranteed. Germany’s economy has sputtered since Vladimir Putin attacked Ukraine in 2022, while protesting French farmers have made it hard to back trade deals like Mercosur.
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Europe’s slow appreciation of this new reality and divides over what to do were on full display at this week’s Berlin Global Dialogue. French President Emmanuel Macron, who like Germany’s Olaf Scholz, has been weakened by economic stagnation and rattled by a resurgent far right, made clear that 2022 was a turning point — not just because of Ukraine but the global green-tech subsidy race. He told Bloomberg’s Stephanie Flanders that the European Union had no choice but to level the playing field by “de-risking” from the US and also China, whose state-supported dominance in electric vehicles has the EU considering tariffs. Yet at the same event, German Economy Minister Robert Habeck pushed back against tariffs and said global trade was merely entering a “new phase.” This is the equivalent of hitting snooze.
A more urgent warning that should be heeded was issued this week by the European Central Bank’s Isabel Schnabel. She said in a speech that the “strong headwinds” facing Germany wouldn’t be solved by lowering interest rates alone. A less open and more politicized trading system, pricier energy and increased China competition could be the new normal, requiring more investment and innovation, not more austerity. “The times when globalization was boosting trade and growth may be behind us,” she said.
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Whether the wakeup process happens slowly or quickly depends a lot on who wins the US election next month; a Trump win would be far messier and more hostile. Technocratic cogs are already whirring in Brussels over how to plan for this possibility. There will be an attempt to turn on the charm, such as by finding the right “Trump-whisperer” like new NATO head Mark Rutte or Italian right-wing Premier Giorgia Meloni. There will also be an attempt to offer some kind of compromise for tariff-free trade in some areas. But things could get ugly, quickly. Instead of uniting Paris and Berlin as in previous crises, Trump might end up playing divide-and-rule. He’s done it before.
With the best will in the world, it looks impossible in the short term to Trump-proof or “de-risk” Europe. The bill for re-arming to match US defense spending of 3.3 per cent of gross domestic product equates to $2.8 trillion in extra spending, according to Bloomberg Economics. Investments needed to create a more autonomous EU in areas like energy are estimated at €800 billion a year, or around 4.5 per cent of GDP, according to Mario Draghi’s report on overhauling the European economy. These would be worth it in geopolitical terms, but are at odds with the reality of today’s European budgets — at least barring a mindset shift on deeper integration in Germany.
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Still, the hope has to be that the EU eventually realizes that raising taxes and tightening budgets aren’t growth levers as its population ages, populism surges and the world gets more dangerous. The likely approval of China EV tariffs will be one indication of whether reality is sinking in; the US election will be another. “Everything now is shaken,” Macron said in Berlin. More volatility is almost certain.