×

Op-Ed: Trump will find a confident and prosperous Europe

Millennial tourists
Michael Heffernan | Getty Images

Europe's political and economic outlook is getting brighter.

The crucially important French elections went earlier this month to safer, more predictable, decidedly reformist and pro-European political forces.

Germany's governing center-right parties are beating back the leftist challengers, and are firmly on course for a resounding victory in next September's elections.

A triumphant return a few weeks ago of Italy's tough talking former Prime Minister Matteo Renzi at the head of the Democratic Party (PD) virtually guarantees his victory in elections that have to be held no later than May 20, 2018.

The Florentine "scrapper" ("rotomatore," his hometown moniker) is a passionate European with intellect and political heft that will balance out the French-German debate about Europe and its relations with East European "partnerships," Africa and the Middle East.

Germany, France and Italy account for two-thirds of the euro area economy.

With the ECB's very effective monetary policies, all these political changes are being reflected in rising valuations of euro-denominated assets.

Over the last thirty days – roughly the time since these events occurred – the euro area equity prices (Euro stoxx 50) rose 5 percent, more than double the 2 percent gain on the Dow. During the same interval, the euro strengthened 4.2 percent against the dollar, and 3.3 percent in trade-weighted terms.

Get euro labor for Germany

The euro area's growth, employment, foreign trade and price stability are also looking good.

Preliminary estimates for the first quarter of this year show that the economic activity rose 1.7 percent from the year earlier, indicating a continuation of steady growth dynamics observed in the second half of 2016. A strong acceleration in the volume of retail trade during the quarter to an annual rate of 2.3 percent in March is a sure sign that the growth momentum remains sound.

Unemployment in March (the latest data point available) was down to 9.5 percent, marking the lowest level over the last eight years, and a significant decline from 10.2 percent in March 2016.

It is a real puzzle that huge labor shortages in Germany cannot help to bring down unemployment rates in countries like France (10.1 percent), Italy (11.7 percent) and Spain (18.2 percent). German data show that 1.06 million job vacancies were recorded in the first three months of this year, an increase of 75 thousand job offers from the same interval of 2016.

Why aren't Germans hiring more of their hard-put fellow Europeans? There is supposed to be free movement of labor within the single market, with the same, or very similar, manpower regulations, and educational and professional standards. It seems to me that this is an area where Germany and its euro partners should make urgent progress instead of wasting time debating sterile and grandiose integration projects.

In the area of global trade, the euro area remains a world class powerhouse. Its exports in the first quarter of this year rose 10 percent from the year earlier to 536.5 billion euros, generating a quarterly surplus of 46.7 billion euros. A stronger economic growth was also reflected in a 9 percent annual increase in trade transactions within the euro area to a quarterly total of 461.2 billion euros.

Price inflation less energy came in at 1.3 percent last month, suggesting that there is still room for an accommodative monetary stance. About 47 percent of the headline price inflation in April – 1.9 percent – was accounted for by sharply rising energy costs.

Germany won't pay

The euro area public finances are relatively sound. Budget deficits have been cut from the record-high 6.3 percent of GDP in 2009 to 1.5 percent last year. Spain and France still have some work to do to bring the deficits below the monetary union's upper limit of 3 percent of GDP.

Public debt of 89.3 percent of GDP is a much more serious issue, not only because it is significantly above the mandated limit of 60 percent of GDP, but also because its range of 68.3 percent in Germany and 132.6 percent in Italy is unsustainably huge.

This quick picture shows that – thanks to the ECB's supportive monetary policy – the euro area has come a long way along the path of recovery from a financial meltdown, aggravated by a calamitous fiscal austerity. Countries like France, Italy and Spain – half of the euro area economy – have to work harder to bring down their very high unemployment rates; they also have to cut their budget deficits and their excessively high public debt.

That is why Germans feel uncomfortable about the urgent talk on "re-founding the EU" (no less), instead of addressing much more important issues of jobs, incomes and public finances. The German Chancellor Angela Merkel has not dismissed the "re-founding" call out of hand. But in what sounded like a tongue-in-cheek comment, she said she would look into it if "we know what has to be re-founded, and whether that is necessary."

A much blunter response still keeps coming from the German media, reflecting the official views that might be impolitic to air by the federal government. And this is the message: Germany will not pay for reforms individual countries have to do, and Germany won't bear the financial burden of euro area reforms to bail out the countries that don't want to do their job.

More controversially, though, Germany -- running a huge trade surplus of nearly $300 billion -- is allegedly refusing to rev up its economy to stabilize the monetary union. A stronger growth in Germany would raise the euro area's aggregate demand and help other member countries to reduce unemployment and budget deficits.

These are the difficult issues facing the strained French-German relationship.

Investment thoughts

France and Germany have many things to talk about to set the monetary union on a firmer footing. That would be an important step toward an EU of lasting peace, increasing prosperity and, yes, solidarity to create a more cohesive social, economic and political entity.

That talk is off for now. France has to get next month a stable parliamentary majority to govern. Germans, for their part, have to get a new administration after next September's elections.

President Trump is stepping into that sort of European inter-regnum. He would be well advised to invite the all-powerful German chancellor to the "long lunch" he has scheduled in Brussels with the French president.

That "long lunch" talk should be an opportunity for the U.S. president to review with France and Germany, the two leading military and political allies, acute security problems in Ukraine, the Balkans, Syria, Iraq, Afghanistan, North Africa, the Korean Peninsula and East China Sea. The president knows that China and Russia will also be the proverbial "elephants in the room."

The good work done by the ECB and euro area governments in building up the ongoing economic recovery has staying power. It, therefore, amply deserves investors' attention. The French and the Germans will come to terms and begin to work together. Experience has taught them that anything else would not serve their national interests.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.