 "Europe braces for Trump's return: Trade, defence, and tech challenges loom")
By Lionel Laurent
After Covid-19 and Russia’s invasion of Ukraine, is Europe about to get its next existential shock in the shape of Donald Trump? From trade to defensce to tech, the combination of mercantilism and MAGA is going to hurt — but hopefully also jolt Europeans out of typical complacency.
The list of reasons for the European Union to worry is long. The open, trade-oriented 27-member union thrives in predictable, rules-based environments that put commerce first and conflict second. That’s butter for the Trumpian knife, with the incoming president preferring to move fast, apply pressure and transact bilaterally. Even before getting his feet under the Oval Office desk, he’s leaning on Ukraine’s Volodymyr Zelenskiy to cut a deal with Vladimir Putin to end the Russian invasion and threatening allies with a blanket 10 per cent tariff to redress deeply held grievances on trade. The combined effect would be a new security dilemma to Europe’s east, with EU defence nowhere near ready to pick up the slack of a US pivot to Asia, and a reduction of EU gross domestic product by 0.3 per cent by 2026 if tariffs happen, according to Citigroup Inc.
The unity keeping Europe together is also getting weaker. Unlike Mr Trump’s first term, which produced that remarkable image of Germany’s Angela Merkel and assorted G-7 partners staring down a defiant American president, the list of leaders able to rally support in the face of a fraying trans-Atlantic relationship is Post-It-sized. France’s Emmanuel Macron has gone from walking on water to getting drenched — and may not see out his second term. Ms Merkel’s successor, Olaf Scholz, is even more unpopular and faces elections in February. Europe’s far right is gaining and getting an unexpected boost from Elon Musk’s wealth and influence. Still, even if a coterie of Trump whisperers like Italy’s Giorgia Meloni and Hungary’s Viktor Orban sees their influence rise, everyone’s playing with a weak hand. Investors already concerned by the EU’s economic and tech lag relative to the US (and China) are voting with their wallets.
It is just about possible to glimpse a silver lining, or the contours of a response taking shape, amid the gloom. At a recent gathering of ministers and experts in the Italian Alps organised by Grand Continent, I was encouraged by the pragmatism of euro elites assessing the EU’s ability to plan and respond rather than simply calling for more utopian Hamilton moments. Trade, one area where the size of the EU market and its 440 million consumers gives the Brussels machine genuine sway, has seen war-gaming begin in earnest. This means identifying carrots to pre-emptively offer Mr Trump to rebalance a $201.6 billion EU-US surplus — such as buying more energy, goods, weapons — and retaliatory tariff sticks if they don’t work. This won’t be easy, given the scale of what Trump calls a “tremendous deficit,” but it’s doable. The next goal should be the kind of mindset shift that can hold a common pan-EU line if Mr Trump opts to divide and rule by offering concessions to individual countries.
On security, a truly defence-ready Europe still looks a distant prospect even after the biggest full-scale conflict on home soil since 1945. Yet here again, the size of its market may give it a voice at the table when it comes to Ukraine’s fate. It should seize the initiative to play a leading role in the country’s reconstruction, which could cost up to $486 billion over the next decade. On top of meeting existing pledges of €241 billion ($250.7 billion), Europe also has a card to play in the form of around $300 billion sanctioned Russian sovereign assets, which have been used creatively to help Kyiv without full confiscation. Looking for closer ties with the UK, a logical defence partner for the EU despite the bad blood of Brexit, should also bring a boost as Keir Starmer seeks support against Mr Trump’s tech-industrial-tariff complex.
Finally, the European economy, if it can escape terminal decline, might also serve as the thread between what Europe needs and what Mr Trump wants: A more autonomous and resilient continent that’s driven by its own consumers rather than exports to China or imports of Russian gas. Though it’s taken hits from its lack of technology giants and from a still-fragmented capital market, this is a market with household savings equivalent to €33.5 trillion and with strong companies. A stack of recent recommendations from Mario Draghi and Enrico Letta shows the way to unpicking red tape, knocking down silos and bulking up companies in fragmented sectors like telecoms. Interest-rate cuts from the European Central Bank can also drive demand and repair battered corporate and consumer confidence. Maybe some of the elements of MAGA, from de-bureaucratisation to countering China’s unfair trade practices, might be emulated in Europe.
Grabbing these opportunities will depend on the political instability at Europe’s core not getting worse. There is at least one reason to be optimistic: The current frontrunner to succeed Germany’s Scholz — Friedrich Merz — might be the key to unlocking approximately 0.7 per cent of GDP in extra spending by reforming the much-maligned debt brake, according to UBS, which would brighten prospects. Still, caution is warranted given what’s going on in France.
Maybe the best thing one can say about 2025 for Europe is that expectations could hardly be lower. While it’s Mr Trump’s own mood and the health of the US consumer that will decide most of how his blows land, Europeans shouldn’t forget their own (limited) ability to parry.