European Parliament via Flickr
Shaking Off the European Hangover
Alexander Privitera
AGI Non-Resident Senior Fellow
Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.
Europe has a hangover, and it shows. Gone is the cocktail of defiance and apprehension that accompanied the first few months of the second Trump administration. The summer has unveiled a degree of dependence on the United States that even the continent’s eurosceptic nationalist populists find hard to swallow. The pictures of a genuflecting secretary general of NATO, the Dutch Mark Rutte, soon followed by the thumbs-up gestures with which the top EU delegation celebrated a one-sided trade deal in the White House, hit most Europeans in their pride. A recent poll shows that about 80 percent of French, Italians, Spaniards, and Germans disapprove of the way the bloc is dealing with the U.S. administration, Poles being a notable exception. It is a replay of what the public in the very same countries felt about the George W. Bush administration when it launched its military campaign in Iraq more than twenty years ago. With his characteristically good sense for timing, the U.S. president has rubbed salt into the European wound, publicly suggesting he is the de facto leader of Europe. On Ukraine and defense, but also and importantly on economic relations, he has certainly been the one taking the initiative. European leaders have been reactive, choosing to appease rather than to confront most of the provocations hurled at them.
But in her recent speech on the State of the Union, President of the European Commission Ursula von der Leyen has finally recognized that this strategy is backfiring. “There is no room, no time for nostalgia,” she said, “Europe must fight for its place in the world.” Welcome to a continent with a diminished sense of self. Ask anybody even remotely connected to the bloc’s institutions in Brussels and you will hear a litany of complaints about von der Leyen selling out on tariffs and how she is now belatedly trying to regain her footing or anger at national governments for being chronically distracted by domestic affairs. Realizing that European citizens are increasingly frustrated by a pervasive sense of paralysis, von der Leyen even declared that Europe now needs an institutional big bang, in other words, reforms that allow for speedier decision-making mechanisms and reduce the necessity for consensus in the council, the institution that represents member states. It’s her way of admitting that mainstream politics is no longer delivering, neither in Brussels nor at the national level. But it is also an attempt at elevating herself and her institution above the often narrow-sighted behavior of national governments. For that she only needs to look at her own country, Germany. Many politicians in Berlin, already frustrated and distracted by their own difficulties in shaking off years of economic stagnation and rising populism, have repeatedly blamed Brussels for overregulating their economy and are now again looking across the Rhine in worried disbelief as their main partner France burns through its prime ministers every time a government tries to address the question of rising public indebtedness. In Rome, the Meloni government, always fearful of rising debt costs, pays lip service to the need to spend more on rearming but so far has only committed very limited public resources to the task. The common EU budget proposal recently tabled by the commission has been characteristically criticized by the so-called frugal states, Germany among them, even though, if adopted, it would only marginally increase the bloc’s firepower to respond to its multiple challenges. Some economists now even suggest the euro crisis never went away.
The problem is that by serially appeasing Washington, von der Leyen and European governments have weakened their standing across Europe.
And yet, despite all this gloom, investors have kept their cool. It is true that borrowing costs for France have risen and by some measures have surpassed those of Greece and Italy, once dismissed as the weaker links, as the periphery of Europe. But so far there is no sign of panic. This may be due to the various mechanisms Europe has put in place since the euro crisis to avoid a repeat of that life-threatening challenge, but it is also a reflection of the fact that France is not the only important Western debt issuer with serious problems. Who is faring worse? Look no further than across the channel to the United Kingdom. And the United States is doing just as badly. The result is that within the monetary union, despite its sounder fiscal policies, this time Germany has not yet profited from the weakness of a major European partner. There has been no flight to safety away from peripheral countries, which this time include France. In other words, no echoes of a euro crisis. Instead, in recent months investors have increased their exposure to peripheral economies, Greece, Spain, even Italy. It is as if for now international money had chosen to disregard some of the glaring imperfections of the assets it is choosing to buy.
The fact is, issuing public debt has become more expensive everywhere in the West, highlighting common challenges, rather than the fiscal sustainability of one economic model versus another. It is certainly true that financing Europe’s welfare system and its need to increase defense spending will continue to weigh on public finances, especially if stronger growth remains elusive. It is for that reason that any delay or half-hearted implementation of the Draghi and Letta agendas could indeed have a chilling effect, as the modernization and further integration of the European economy they call for remain a precondition for stronger growth and the sustainability of high debt burdens.
At the same time, dismantling parts of the government while showering high earners with generous tax cuts will not help to put Washington’s fiscal house in order, either. Even if higher tariffs are a de facto national sales tax on foreign goods, they will fail to plug new and old fiscal holes even in the most benign of scenarios. According to the rating agency Fitch, tariffs can help to narrow the budget deficit in the short term, but only before the hit on economic growth materializes. The recent, softer U.S. data suggest that moment may be getting closer.
So perhaps the commission’s president was right when she pointed out to a skeptical audience of members of the European parliament that the United States and Europe need each other and even imperfect deals with the administration serve the purpose of constantly reminding the transatlantic partner that the best, most efficient way to confront today’s global challenges, economic and non, remains acting together.
The problem is that by serially appeasing Washington, von der Leyen and European governments have weakened their standing across Europe. Given Trump’s mixed track record in sticking to his own deals, for her and Europe, that could prove to be a costly lose-lose outcome.
