Opinion - Europe Politics

Trump is accelerating Europe's political and economic reset

Key Points
  • Trump’s decision to stop Germany’s free-riding on trade and security has put an always uneasy French-German relationship into an open-ended and dangerous crisis.
  • President Emmanuel Macron’s desperate attempt to irrevocably anchor the French volatile body politic into the EU has been denied by German opposition to his proposals of re-founding the European project.
  • For now, the euro is safe. Germans want to make sure that remains an unquestionable prospect by putting their man at the helm of the European Central Bank.
U.S. President Donald Trump speaks with French President Emmanuel Macron in Paris, on Nov. 10, 2018.
Christophe Petit-Tesson | AFP | Getty Images

U.S. President Donald Trump takes them all on. After China and Japan, it's now the turn of the mighty European trade block led by Germany and France.

He railed during an address last Friday, according to Reuters: "They have trade barriers. They don't want our farm products, they don't want our cars. They send Mercedes-Benzes in here like they're cookies."

"They send BMWs here. We hardly tax them at all," he added, according to the news wire.

On the autos front, that's for Germany, which is petrified about its car exports to the U.S., where they now face import duties of only 2.5%, compared with up to 22% for American cars sold in Germany or other EU countries.

And the agricultural warning is for France, which excluded agricultural products from the EU's negotiating mandate for a limited trade agreement with the U.S.

France and Germany are now going through a very dangerous crisis in their ever precarious relationship, but their leaders are united in denouncing what they perceive as Washington's unfriendly disposition toward its key European allies.

Trump is fighting free-loaders

France, however, has no major bilateral problems with the U.S. to complain about. America's oldest European ally is unhappy about Trump's exit from agreements on climate change and Iran's internationally supervised nuclear activities — but that's about all.

And with its relatively small $16.2 billion surplus on last year's U.S. goods trade, Paris is way below the radar of American foreign trade officials.

Apart from all that, France's current leadership apparently does not see that Trump's lowering the boom on Germany will prevent Berlin from continuing to run roughshod over France and the rest of the EU.

Indeed, the U.S. has a number of problems with Germany.

First, there is Berlin's systematic and excessive trade surplus with the U.S. Last year, Germany's $68.3 billion surplus accounted for 40 percent of the EU's total net exports to America.

Second, Germany's average European trade surpluses of 163 billion euro over the last three years are taking a large amount of purchasing power and stifling economic growth in a market that is a destination for one-fourth of American exports.

Third, Washington knows that Berlin calls the trade shots at the EU Commission. And that's where the U.S. is going to fight an unyielding negotiating mandate with a trade block pocketing last year a $170 billion surplus on American goods trade.

Populists driving Europe's reset

Fourth, Germany is not facilitating American energy exports, and it is falling far short of defense spending (2% of GDP) to support the firepower of the Atlantic alliance.

Those are serious structural problems in the American-German relationship where neither side seems willing to make the necessary concessions to smooth things out.

No, regrettably, things are moving toward a major confrontation. Last week, the German Chancellor Angela Merkel warned that the EU has to come together to fight its own corner in a world order dominated by the U.S., China and Russia.

That was a restatement of Merkel's earlier view that Europe had to take its fate in its own hands. But her latest rallying cry was part of a campaign for the European parliamentary elections, where the Euro-skeptics (also known as populists, nationalists and xenophobes) are projected to win a third of the popular vote. That would be a large increase from one-fifth in previous elections, and it would give Euro-skeptics a blocking power against the declining formations of the European People's Party and the Alliance of Socialists and Democrats.

The irony is that the German leader suddenly realizes how much her country needs a united Europe.

One has to wonder, though, about the sincerity of that European zeal. Merkel has done so much to weaken Europe with calamitous fiscal austerity, economically lethal mercantilism, refusal to support and enhance Europe's growth and employment, the chaos of an open-door immigration policy and a rejection of reform measures designed to strengthen the EU and advance the epochal project of the European economic and political union.

Merkel has done all she could to kill the reformist drive of the French President Emmanuel Macron. She probably also killed his political career by squashing his proposals to re-found the European Union, making him look weak, subservient and too eager to accommodate German interests. That cost him an unending social unrest, a 68% disapproval rating, and the fact that his sworn opponents — the Euro-skeptic National Rally — are now polling 23.5% to Macron's party's 22.5%.

That has set the stage for an intractable French-German confrontation because Macron now has to compose with a rising wave of French Euro-skeptics and anti-German forces spanning the far-right and the left political spectrum, with a few nationalist groups in between. Some of them are even calling on Macron to resign because his election campaign platform on European ideas is getting less public support than the Euro-skeptics' strong advocacy of a nation state that can stand up to Germany.

Investment thoughts

The advent of the latest, perhaps terminal, crisis in an always uneasy French-German relationship was accelerated by Trump's decision to stop Germany's comfortable and decades-old free-riding on trade and security issues.

Germany is angry, worried and confused about the course ahead, but its populists still poll at only about 13%. France is very different: From left to far right and the shifting middle ground, Euro-skeptics account for nearly half of the French electorate. In the ongoing six-month social unrest, a low-polling president and his government are in a political minefield.

Macron's desperate attempt to firmly and irrevocably anchor the French volatile body politic into the EU has been denied by German opposition to his proposals of re-founding the European project of economic and political union. Macron is now adrift and forced by populists into an open-ended and dangerous confrontation with Germany.

The old belief that the ill-fated French-German couple would always fix Europe's problems has lived; the entire European project is currently listing in uncharted waters.

For now, the euro is safe. Germans want to make sure that remains an unquestionable prospect by putting their man — the current president of Germany's monetary authority — at the helm of the European Central Bank as a guardian of German public finances and people's savings.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.