Europe's Existential Crisis

Thoughts on how to make Europe great.again, the ominous emergence of McKinley is a MAGA hero, could Trump be right on tariffs, the price of retaliation and time for Germany to put Europe First

Photo by Adam Smotkin on Unsplash

Like many of you I’m sure, I have been mesmerised all week by the return of Donald Trump to the White House. I thought I’d send out a few thoughts on things that have caught my eye as they relate to Europe and the global economy. I’m afraid I’ve put a few items behind a paywall. Please do subscribe if you can afford it and would like to support my work, but there is also a free trial offer available plus complimentary subscriptions for those who refer friends. I’ll return with a regular newsletter at the weekend looking at some of the extraordindary goings on elsewhere since the start of the year.

In this newsletter:

• Europe’s Existential Crisis: Does anyone care what it thinks?

• Rehabilitating McKinley: MAGA hero

• Could Trump be Right? The case for tariffs

• Cost of War: the price of retaliation

• Europe First! How Germany should deal with China

---

1. Europe’s Existential Crisis

Europeans may have breathed an initial sigh of relief after Donald Trump’s first day in office. The returning president may have failed to acknowledge America’s allies in his inaugural speech. But at least he didn’t explicitly threaten to slap Europe with tariffs, or annex its territory, or withdraw from Nato. There will have been further relief that he has since displayed an unexpected belligerence towards Russia. Nonetheless, many of his statements on the economic front will only have heightened fears that Europe is facing what Christine Lagarde, the European Central Bank president, has acknowledged is “an existential crisis”.

It’s not just that the president has signalled that tariffs on the European Union remain very much on the agenda, telling reporters that the EU was “very, very bad to us. So they’re going to be in for tariffs. It’s the only way ... you’re going to get fairness.” Nor that he has threatened to double tax rates for foreign nationals and companies that pose “punitive” taxes on US companies and has withdrawn America from an OECD-brokered global minimum corporation tax agreement. Nor that he is demanding changes to the way the EU regulates its tech or automotive sector, or increase its defence spending to 3 percent of GDP, though all of these will present profound economic and fiscal challenges.

The graver threat to Europe lies in Trump’s disdain for international law and the liberal rules-based system. Already he has pulled America out of the Paris Climate Accords (again) and the World Health Organisation, stated his intention to annex Panama and threatened 25 percent tariffs on Mexico and Canada that would fall foul of World Trade Organisation rules.

I agree with Martin Wolf in the Financial Times, that the most disturbing words in his inaugural speech was his statement that “from now on, America will be sovereign, independent and free”. It is hard to interpret that as anything other than confirmation that he has no intention of allowing himself to be constrained by international obligations.

There is a reason why Europeans were notably far more downbeat about Trump’s return that voters in the rest of the world, as revealed by this report by the European Council for Foreign Relations. Europeans not only still believe in the liberal rules-based order. They recognise that it is intrinsic to their security and prosperity.

The EU itself is a product of the liberal rules-based order whose entire web of internal and external relationships are built around international law. As a continent with scare natural resources, Europe in the post-colonial era has come to rely on the global rules-based trading system to supply its basic needs.

Until recently, this system has worked very well for Europe, not least because it could demand that countries wanting access to the largest and richest market in the world adopted its rulebook and values - the so-called Brussels effect which helped its own exports. As a new report from the Centre for European Reform notes, the result is that Europe is today the most open and trade intensive economy in the world. Trade as a percentage of GDP in the EU is almost twice as high as in the US and is significantly higher than for China.

Yet this liberal rules-based trading system has been under threat for some time. In this new world of geopolitical competition, alternative partners such as Russia and China can offer security and finance with fewer strings attached. The EU’s bossy insistence on using its trade deals to export its rulebooks, standards and values is becoming something of an obstacle to deal-making. Its relative attraction as a trading partner is in any case diminished by its shrinking share of GDP, now down to 16.5 percent from 28 percent in 1960.

Meanwhile America has been retreating itself from the rules-based trading system and with Trump appears no longer willing to act as its global defender. The risk is that a world in which countries can no longer rely on the market to supply their needs is one in which they increasingly look to secure their needs by other means. That is a world full of uncertainty, danger and conflict.

At least the scale of the challenge facing Europe is not lost on some of its leaders. Ursula von der Leyen, the European Commission president, captured well what is at stake in a speech in Davos this week:

The cooperative world order we imagined 25 years ago has not turned into reality. Instead, we have entered a new era of harsh geostrategic competition. The world's major economies are vying for access to raw materials, new technologies and global trade routes. From AI to clean tech, from quantum to space, from the Arctic to the South-China Sea – the race is on. As this competition intensifies, we will likely continue to see frequent use of economic tools, such as sanctions, export controls, and tariffs, that are intended to safeguard economic and national security.

Nonetheless von der Leyen’s strategy for dealing with these challenges, while clearly right, is not a complete answer and in any case is far from assured. She talked of the need for the EU to strengthen its internal market by deepening integration in sectors such as capital markets and energy. She also spoke of the need for the EU to try to preserve as much of the global trading system as possible and mitigate the impact of any US tariffs by seeking new trade deals with any willing partner, including China.

Even in a moment of harsh competition, we need to join forces. And Europe will keep seeking cooperation – not only with our long-time like-minded friends, but with any country we share interests with. Our message to the world is simple: if there are mutual benefits in sight, we are ready to engage with you.

Yet the reality is that the EU has been discussing plans for deeper single market integration in energy and financial services for over a decade. Plans for new EU trade deals have run into significant political opposition. The recently signed deal with the Mercosur counties of South America is being fiercely resisted by France and Poland. EU citizens may be reaching the limit of what they are prepared to pay through higher prices for imposing their own regulations in areas such a climate and deforestation to solve global problems.

Meanwhile, it was left to Volodmyr Zelensky, the Ukrainian president, to say the quiet bit out loud, pointing out in his own speech in Davos how in this harsh new world of geopolitical competition, where it seems might once again makes right, a Europe that cannot provide for its own security is one that risks irrelevancy:

Right now, all eyes are on Washington. But who’s actually watching Europe at the moment? That’s the key question for Europe…

Most of the world’s now thinking – so, what’s going happen to their relationship with America? What will happen to alliances? To support? To trade? How does President Trump plan to end wars?

But no-one is asking these kinds of questions about Europe. And we need to be honest about that. Will President Trump even notice Europe? Does he see NATO as necessary? And will he respect EU institutions?

Europe needs to learn how to fully take care of itself, so that the world can’t afford to ignore it.

For as long as I have been writing about Europe, I have considered it a good rule of thumb to bet that in any crisis, the centripetal will eventually but invariably beat the centrifugal, that the dynamics of integration are stronger than the forces of disintegration. But if Europe is to continue to project and protects its interests, the EU will need to become something that was never envisaged, to adapt to a at a pace that it has never managed before, for a world that it never imagined. Let’s hope that the current crop of EU leaders can rise to the moment.