There are reasons to be cheerful on Europe – but threats still loom large, none more so than Trump
The [EU’s] military, political and economic cooperation is being called into question by Trump’s nationalist and protectionist agenda
Europe’s vulnerable single currency area has been proving the doubters wrong of late.
Last week, Eurostat, the European Union’s statistics bureau, announced that the eurozone economy grew by nearly 2 per cent year-on-year in 2016, beating analysts’ expectations and showing how resilient the bloc has proved to the fallout from Britain’s unexpected decision in late June to vote to leave the EU.
The recovery appeared to gain further momentum in January following the publication of a purchasing managers’ index (PMI) survey from IHS Markit, a data provider, showing that eurozone manufacturing output expanded at its fastest pace in nearly six years last month, with optimism among manufacturers at its highest level since the acute phase of the eurozone crisis in mid-2012.
Yet Europe’s monetary union is now confronted with one its gravest threats since the euro was launched in 1999: the prospect of a severe deterioration in transatlantic relations following the election of Donald Trump as US president.
For the first time since the European Coal and Steel Community – the forerunner of the EU – was set up in the early 1950s, the military, political and economic cooperation that has underpinned the Atlantic alliance since the end of the Second World War is being called into question by Trump’s nationalist and protectionist agenda.
Even before he assumed the presidency on January 20, Trump raised hackles in European capitals by questioning the validity of the NATO alliance and sympathising with countries which want to leave the EU.
In a provocative interview with The Times of London and Bild, a German newspaper, on January 15, Trump said: “People, countries want their own identity and the UK wanted its own identity, but if they hadn’t been forced to take in all of the refugees, so many, with all the problems that it entails, I think you wouldn’t have a Brexit. I think people want their own identity, so if you ask me, others will leave [the EU].”
That Trump is tacitly supporting the further disintegration of the EU – a diametrically opposite policy to the one pursued by successive US administrations – at a time when there are mounting concerns about the growing influence of Russia across central and eastern Europe (in particular in the tiny Baltic states which are members of the EU) and when nationalist and populist parties in Europe now have sufficient support to win general elections has infuriated European leaders.
At a EU summit in Malta last Friday, Francois Hollande, France’s president, said “it is not [Trump’s] business to get involved in European life”.
Donald Tusk, the president of the European Council, even said before the summit that a Trump presidency poses as severe a risk to Europe’s stability as Russia’s aggression and China’s assertiveness.
While Tusk’s warnings seem somewhat alarmist, there is no question that the political and geo-political landscape across Europe has deteriorated significantly since the twin political shocks of Brexit and Trump’s triumph.
The question now is whether the Trump administration’s blatant euroscepticism is likely to exacerbate the vulnerabilities and weaknesses of Europe’s shaky monetary union.
Ever since Britain voted to leave the EU, European leaders have been at pains to depict Brexit as a one-off which, if anything, will force the eurozone to integrate more closely in order to avert a break-up of the bloc.
Although Britain is not part of the single currency area, there are fears that last year’s political convulsions increase the scope for a referendum on eurozone – and possibly EU – membership in other countries where eurosceptic and nationalist sentiment is rife, such as Italy and the Netherlands.
Last week, Goldman Sachs said in a note that “country risk [in the eurozone] is picking up and could increase further ahead of elections” in the Netherlands and France in the coming months.
The gap between the yield on Italian 10-year bonds and its benchmark German equivalent has widened 30 basis points just since the start of this year while France’s bond yields are rising because of mounting political uncertainty ahead of the country’s presidential election in April.
Yet this has significantly less to do with the “Trump effect” than with the prospect of the European Central Bank (ECB) winding down its programme of quantitative easing (QE).
The biggest risk to the stability of the eurozone stems from the normalisation of monetary policy after years of ultra-low (and in many cases negative) interest rates which have heavily distorted asset prices.
A Trump presidency merely raises the stakes for Europe further.