Outside In

When Donald meets Angela: will his basic instincts prevail?

Almost certainly, Merkel will sit in the Oval Office as a spokesperson for the European Union as much as for Germany – though I sense Trump would prefer to see this as a bilateral discussion.

PUBLISHED : Monday, 13 March, 2017, 7:33am
UPDATED : Tuesday, 03 July, 2018, 7:59pm

Angela Merkel, as Europe’s longest-serving political leader, has been feted many times at the White House – but no meeting will be as uncomfortable as that on Tuesday with the neophyte Donald Trump.

Over his election campaign, and since taking office, it would have been hard for Trump to be more rude – though Germany is not alone in drawing fire from the intemperate Trump.

He attacked Merkel’s decision to absorb one million asylum seekers from conflict in Syria as “insane,” and predicted she would not be re-elected in national elections in September.

He has repeatedly attacked Germany for currency manipulation, claiming it makes German companies unfairly competitive in global markets: “They play the money market, they play the devaluation market, while we sit here like a bunch of dummies.” He has threatened to slap 35 per cent taxes on cars exported by BMW.

He has welcomed the potential break-up of the European Union following Britain’s Brexit vote, poured scorn on the value of Nato and its role in keeping peace across Europe over the past six decades, and made welcoming overtures to Russia’s Vladimir Putin despite deep anxiety among European leaders over what they see as Putin’s mischief-making.

As Europe’s most consummately diplomatic leader, Merkel is clearly flying into Washington out of duty rather than for any sense of pleasure.

Much can be explained by her recent comment: “No nation can solve the world’s problems alone. The great global crises can only be solved together.”

Through gritted teeth, she acknowledges that many of the deep challenges faced across the world today cannot be effectively tackled without US cooperation. She is hoping, perhaps against her deeper instinct, for Trump to provide evidence of international statesmanship.

In addition, she has a heavy agenda of pressing issues to address. These range from the management of the global refugee crisis, the fight against terrorism, ensuring global security, the role of Nato, and policies on Putin, to management of climate change, and the hornet’s nest of economic and trade challenges stirred by Trump.

Almost certainly, Merkel will sit in the Oval Office as a spokesperson for the European Union as much as for Germany – though I sense Trump would prefer to see this as a bilateral discussion.

While Trump will be looking back on campaign promises to fight bilateral trade wars aimed at making America great again, Merkel is likely to be paving the way for the G20 Summit in Hamburg in July, and will be reporting back to G20 Finance Ministers meeting in Germany in a day or two.

As with so much linked with the Trump administration, with the meeting less than 24 hours away, it is almost impossible to predict with any certainty how the conversation will go.

Over the weekend, reports have emerged of a war of words and ideas inside the White House over the issue of trade, with economic nationalists gathered around Peter Navarro and Steve Bannon pitched against technocrats led by former Goldman Sachs executive Gary Cohn.

If Navarro and Bannon prevail, Merkel can expect a feisty row over currency manipulation and trade deficits. Cohn would steer the conversation in a more conventional and pragmatic direction.

While thus far Trump’s instincts have been to side with his firebrand economic nationalists bent on “putting American first,” he can expect ferociously firm pushback on these issues.

First, and clearest, the Trump administration’s claims of German currency manipulation are preposterous and economically illiterate – not that this seems to concern Trump much. There can be no question that Germany’s fiercely competitive export manufacturers have gained immensely from the weakness of the Euro – down by almost 5.5 per cent against the US dollar in the past two years.

But to suggest that Germany’s government has played any part in engineering this weakness is complete nonsense.

Secondly, European Union rules are clear that management of the Euro is the independent responsibility of Mario Draghi’s European Central Bank. Complaining that German companies get unfair advantage from a weak Euro is like complaining that Californian tech exporters get unfair advantage from a weak dollar. Targeting Germany’s government is no more sensible than targeting California’s government.

Thirdly, the weakness of the Euro is directly linked to the profound weakness of the European economies, and to the massive bond-issuing programme in place for the past five years, underpinned by rock-bottom interest rates. While the Eurozone has at last begun to show signs of growth, aggregate real GDP of the EU economies at the end of 2016 was just 1.8 per cent above the first quarter of 2008. Real domestic demand in the EU is still 11 per cent below 2008.

Set Europe’s deep economic fragility against signs of reasonably robust US economic recovery and job growth – with a rise in the Fed’s interest rate predicted on Wednesday this week – and a fistful of powerfully stimulative policies being promised by the new Trump administration, and the surprise must be that the Euro is not weaker than it is.

If Trump can steer off hobby horse issues of currency and bilateral trade imbalances, there is actually a fruitful discussion to be had on long-recognised problems of management of the EU economy.

American and other economists have for years complained of the need for internal rebalancing of the EU economy, where extreme divergence between the strong northern European economies and those of the south has meant that the Euro is unreasonably weak for German exporters, but cripplingly overvalued for the EU’s weaker Mediterranean economies.

Despite his bilateralist instincts, Trump would also be well-advised to back paddle on his threats to punish Germany for its bilateral trade surplus, which currently stands at around US$65 billion. Not only have the measures he has mentioned – ranging from targeted tariffs on BMWs to a “border adjustment tax” – been attacked as illegal under World Trade Organisation rules, but they could easily trigger tariff retaliation and outright trade war.

It’s not just Merkel who would be relieved if Gary Cohn can pull Trump away from the illiterate and dangerous flirtations of his economic nationalists.

Both China and Japan – who also maintain huge trade surpluses with the US – may also breathe easier. Either way, the meeting this week needs to be watched with care. Let’s wait for the Tweets on Wednesday morning.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

Illustration: Lau Ka-kuen