This article originally appeared in the
on 26 January 2017.
It is difficult to understand why Donald Trump’s campaign promise to “Make
America Great Again” resounded so much with so many. True, the threat of
terrorism, rising inequality and job-killing digitalization have been
breeding anxiety for some time. However, on most metrics the U.S. economy
has been doing just fine and certainly better than Europe.
While the median U.S. household’s real income still stands below the
late-1990s peak, it has risen solidly over the past four years and will
soon make new highs. Americans still live in the biggest homes, drive the
largest cars and eat the thickest steaks. U.S. living standards, measured
by per capita GDP, are some of the highest in the world (aside from a few
special cases such as Luxembourg, Norway and Switzerland) and stand 50%
above those of Europe and Japan. American technology, films and music shape
people’s days and nights around the globe. The U.S. financial industry is
on a sounder and more profitable footing, its housing and service sectors
are the most vibrant, and its top universities are unrivalled. Carnage it
If any major economy in the world needs to be made great again, it is
Europe’s. Following a decent economic performance between the euro’s
creation and the global financial crisis, Europe has been stumbling through
a lost decade. Economic growth in the European Union has stagnated on
balance since 2008 and the unemployment rate remains twice as high as in
the U.S. As a consequence of the euro crisis, the banking sector is
balkanized and financial markets are fragmented. The move toward “ever
deeper union” has stalled; separatism and a new nationalism are on the
rise. Brexit appears to be a taste of things to come rather than an
isolated, idiosyncratic event.
Somewhat ironically, however, Donald Trump’s promise to put America first
might actually help make Europe great again.
First, while the new U.S. administration aims to discourage imports into
the U.S. and boost domestic production, European exporters should still be
able to increase their market share in the U.S. for some time. One reason
is that the dollar has strengthened and the euro has weakened since the
U.S. presidential election, increasing the competitiveness of European
exports. If the Federal Reserve follows through with the three policy rate
hikes envisaged by the
FOMC’s own projections
and the European Central Bank
keeps expanding its balance sheet
and taxing banks for their excess reserves, the dollar could strengthen
Moreover, higher consumer and business confidence, as well as higher stock
prices, could boost U.S. demand for both domestically and foreign produced
goods. Switching demand away from foreign to domestic goods could work
eventually, but in the near term, there simply isn’t enough quality and
capacity in U.S. manufacturing to fill the gap. Most of the “Make America
Great Again” hats that Trump supporters were sporting at the inauguration
were manufactured in China or Vietnam, and it will take a while, and a
major relative price change, before we see the more affluent Americans
favor Chevrolet, Lincoln, Chrysler and Jeep over BMW, Mercedes, Lexus and
Second, the prospect of a more protectionist U.S. administration, together
with existing local pressures from populist movements, will likely provoke
policy responses in Europe aimed at stimulating domestic demand and
potential growth. The external threat to Germany’s export-led growth model
is now palpable and this will help German Chancellor Angela Merkel to
overcome the opposition in her party to a more expansionary fiscal policy.
In addition, while the austerity rhetoric toward Greece is unlikely to
change significantly, we may see more leniency toward growth-oriented
fiscal policies elsewhere in the euro area.
Third, a more isolationist U.S. foreign and defense policy could catalyze a
new joint European defense initiative. Committing to a common defense
budget, financed by joint issuance, to counter actual or perceived external
threats is a much easier sell than other forms of fiscal union.
Taken together, relative to the optimism on the U.S. and the pessimism on
Europe that is priced into markets at this stage, Europe looks set to have
the bigger potential to surprise on the upside.
All said, Donald Trump may well succeed in making an already great America
even greater. But the chances are that in four or eight years’ time, more
Europeans than Americans will have reasons to say, “Thank you, Mr.