After his remarkable political comeback, President Trump is still more than two months away from returning to the presidential office, but questions are already being raised regarding what impact his second term will have on Europe.
In a predictably radical yet for the European press representative article, Politico claims that Trump’s “victory spells environmental disaster.” They add that he will flood Europe with fossil fuels, and they lament his plans for tolls on imports from Europe and China. Furthermore, Trump’s interest in “more White House interference” with the Federal Reserve
could have huge implications for the stability of the global financial system, as well as the continued dominance of the dollar as the world’s reserve currency.
They even try to suggest that the deportation of illegal immigrants will cause inflation and higher interest rates in the U.S. economy, which in turn will “put pressure on the European Central Bank to follow.”
Except for various references to NATO and the U.S. policy toward the defense alliance, the Politico article is a good account of the consequences for Europe that the European press expects from Trump’s second presidential term. Therefore, it is also useful as a reference for where Europe is wrong about what they should expect once America’s 47th president takes office.
Let us ignore Politico’s baseless comment about an “environmental disaster” awaiting the world. This is not the place to argue the global warming myth; all we need to do is ask if anyone arguing for a connection between fossil fuels and rising global temperatures could please present one forecast regarding that connection, published in the past 50 years, that has turned out to be accurate.
As for the substantive part of Politico’s fossil fuel comment, Europe should definitely expect an increase in the global supply of oil and natural gas. This will help keep prices of those fuels down which, needless to say, will be beneficial for a European economy that is currently stressed by uncertainty in the supply and costs of energy. Specifically, as European consumers appear to have hit a peak point in their demand for electric vehicles—with demand likely to stagnate or even decline in the future—a decline in the fuel for traditional, internal combustion vehicles will bring cost relief to transportation, both commercially and privately.
We should not exaggerate either the pace at which this relief will materialize, or the size of its impact on the European economy. At the same time, gasoline prices in the European Union are in the range of $5-7 per gallon (compared to U.S. prices of typically $3-4 per gallon) and the purchasing power of European consumers is lower than that of their American peers. Even a modest reduction in fuel costs will have tangible positive effects on consumer finances.
Unfortunately, downward pressure on fuel prices is the only substantive positive economic effect that Europe can look forward to from a Trump presidency. It is likely to be overshadowed by two negative effects, one of which the Politico article touches upon: tariffs. Once we, again, remove the hyperbolic coating from their comment, they could theoretically have a point about rising costs for European companies to sell their products in America.
In practice, though, the impact of the tariffs is going to be limited and dependent on two variables. The first is European tariffs on U.S. exports: the only reason why President Trump has ever considered tariffs is that he does not accept that Europe and China put 2-3 times higher tariffs on U.S. exports to their markets than the tariffs imposed on trade in the opposite direction.
In short, Trump wants to level the playing field. If the Europeans lower their tariffs on products going eastward across the Atlantic Ocean, the tariffs on westbound shipments will also be lower.
Second, the impact of tariffs depends on the willingness of European companies to shift focus from exporting products from their home markets, and instead consider investing directly in production facilities on American soil. Historically, tariffs on imports to America have had a significant positive effect on foreign direct investments; if Europe’s governments insist on a tit-for-tat tariffs war, chances are good that European businesses will respond by simply moving production to America.
If they choose to do so, they will benefit from lower taxes, less onerous regulations, and a greater supply of skilled workers than is generally the case in Europe. Although their direct investment in America leads to no immediate job creation in Europe, there will be indirect benefits in the form of increased demand for parts made in Europe (as is often the case with German automakers building cars in America) and an overall boost to corporate profitability.
Plain and simple, Europe’s political leadership will have a great deal of control over to what extent new U.S. tariffs will impact their economy.
There is one last aspect of the Trump effect on Europe’s economy that Politico mentions but gets completely wrong. They try to make the case that Trump will be the catalyst of higher interest rates because he will expel illegal immigrants from America.
It is economically impossible that the removal of a couple of million illegals—many of whom are criminals—will have anything more than a microscopic effect on wages and labor supply in the U.S. economy. Therefore, the notion that this could lead to cost-push inflation (which would in turn trigger interest rate hikes by the Federal Reserve) is at best a case of sophomoric speculation.
The numbers just do not add up to make that happen.
Instead of higher interest rates, we should expect lower rates under Trump. He is well-known for wanting to have a more active say in the Federal Reserve’s monetary policy than presidents normally do; on this point, the Politico article is actually correct. But the reason why Trump wants to be more active is that he thinks the Fed should push interest rates lower, not higher.
Trump has two reasons for this: he wants to lower the cost of the federal government’s debt, and he wants households and businesses in general to have better access to cheap credit. If he were successful in convincing the Fed to take a lower-rate approach than they otherwise would, there would be downward pressure on interest rates in Europe as well. This in turn would help credit-strapped governments with a high debt-to-GDP ratio, and it would bring some cost relief to the private sector.
With that said, it is by no means certain that Trump will take an activist approach to the Fed. He has been criticized for trying to do so during his first presidential term, and hopefully—having seen the central bank eliminate inflation with its tightened monetary policy—he will have a more comprehensive understanding of the risks associated with a monetary expansion (which is tantamount to a reduction in interest rates).
If Trump tried to exercise more control over the Federal Reserve, he would get pushback from its current chairman Jerome Powell, and likely from other members of the Fed’s policy-making Open Market Committee. Trump could replace Powell, although that would generally be perceived as a ham-fisted attempt at exercising control for the sake of control. Trump is smarter than that.
However, the main reason why it is unlikely that Trump will bring much of a change to the relationship between the president’s office and the central bank is that the Fed has strengthened its reputation over the last four years—especially when it comes to fighting inflation. That success, in turn, has allowed them to prudently cut interest rates. Letting that process work its way out through the economy, in due course of time, is a politically much more expedient approach for the president. Since the end result is lower interest rates in both this case and under interventionism, President Trump is more likely to maintain the status quo vs. the Federal Reserve.
If he chooses to do so, there will be little if any impact from his presidency on interest rates in Europe.
Overall, Europe should expect some relief in energy prices, but not until later in Trump’s second term. They should also expect tit-for-tat changes in tariffs, which can be limited or eliminated by prudent European policy choices. Lastly, there is a moderate chance that President Trump will try to influence U.S. interest rates, and that this could lead to lower rates in Europe as well.
