.png)
9 hours ago
1
Forget the “Trump put”, as financial analysts called the bet that the US president’s policies would unleash a winning era for the nation’s stock markets. By Friday, the chat was of the “Merz spurt”.
The decision by Friedrich Merz, the German chancellor-in-waiting, to cut a deal on ditching Germany’s debt brake – still to be confirmed by the outgoing parliament – marked a seismic shift.
The EU country most associated with strict fiscal discipline is now contemplating what could in principle be unlimited borrowing to fund Europe’s defence.
Lifting the brake, widely regarded by experts as an unnecessarily tight constraint on public spending in an economy sorely in need of stimulus, cheered European markets.
Bond yields rose, as investors contemplated the extra borrowing Germany is now expected to undertake; but so did the euro and European stocks, on the assumption the move would be positive for growth.
Merz’s abrupt about-turn, after arguing for spending restraint during the recent election campaign, is part of a dramatic EU-wide push to “ReArm Europe” – a slogan it was depressing and disorientating to see on official communications last week, in the EU’s trademark blue and yellow branding.
The president of the European Commission, Ursula von der Leyen, suggested as much as €800bn (£671bn) could ultimately be mobilised to create a bulwark against Russia, as the US withdraws.
In other words, Donald Trump’s isolationist turn has had a dramatic galvanising effect on the EU, smashing through its cumbersome decision-making structures.
The German decision is the right one – although Merz’s insistence on trying to pass it in the outgoing parliament is hardly democratic best-practice.
As US markets turned sour last week against the backdrop of Trump’s chaotic trade policy, it may have been tempting for the Europeans to feel a touch of schadenfreude – an appropriately German word.
Yet while EU countries have rapidly drawn up plans to deal with the new, less cooperative US in the security sphere, they must also brace themselves for the impact of Trump’s other great project – smashing up the global trading system and rebuilding it in the US’s favour.
The barely credible fact that Trump had slapped 25% tariffs on Canada and Mexico, countries with which he negotiated a free trade agreement in his first term, almost got lost in the maelstrom of history-making news last week.
As Canadian liquor stores stripped their shelves of American bourbon, and US carmakers warned that prices could rocket, the president offered a temporary carve-out, and then a broader reprieve.
But the administration remains strongly wedded to the idea of tariffs. Trump even argued on Saturday that the prospect of a trade war with Canada and Mexico would spice up next year’s football World Cup, which the the two countries are jointly hosting with the US. “Tension is a good thing … It makes it much more exciting,” he said.
It is usually a mistake to try to read too much logic into Trump’s approach, which owes as much to personal gripes and grudges as to theory. But he and his henchmen do seem determined to ditch the rules-based world trading system, in favour of something much more Hobbesian.
Just as the administration is using the language of liberty and free speech to clothe its attacks on many aspects of US public life, the aim of the tariffs policy is apparently to enforce “fairness”.
after newsletter promotion
As the US Treasury secretary, Scott Bessent, put it on Friday: “What we are trying to do is make free trade fair trade, because the trading systems have become incredibly imbalanced. You see it with these gigantic trade deficits that we run.”
The next wave of import taxes is due to be imposed on steel, aluminium and derivative products – everything from vehicle parts to kitchen sinks – this Wednesday, and analysts at Global Trade Alert estimate that more than $20bn (£15.5bn) of EU exports will be affected.
When it comes to the “reciprocal” tariffs Trump has threatened to impose on 2 April, with higher rates for countries the US deems to be trading unfairly, the EU appears to be firmly in his sights.
Trump described the bloc in a typically bellicose statement on Friday as a “terrible abuser” of the current system.
Recent analysis by Aslak Berg at the Centre for European Reform, suggested a 20% tariff on all EU exports would lead to a decline in exports to the US of $200bn a year. “Given the weakness of the European economy, this would certainly cause a recession,” he said.
The EU has a toolkit of retaliatory instruments ready to go, including the ability to slap tariffs on US products, as it did in response to steel tariffs in Trump’s first term. These are understandably aimed at bringing Trump to the negotiating table, but in the interim they will just add to the chaos.
The UK appears to be out of the US president’s eyeline for the moment, after Keir Starmer’s trip to Washington, and Britain does not have the trade surplus in goods that Trump tends to read as a sign of some underlying inequity.
But the US may still zero in on other UK policies, such as the digital services tax, expected to raise £800m this year from tech companies – and as the Bank of England governor, Andrew Bailey, has made clear, Britain would not be immune to a global slowdown triggered by rising tariffs.
The most important news this last week was that Trump 2.0 has made Europe a much more dangerous place, but it would be a mistake to lose sight of the wrecking ball he continues to wield over the global trading system. The next few weeks and months look likely to be, as some headlines had it last week, “tariffying”.
