Pains from Maganomics. Especially for the Eurozone

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Trump's economic agenda includes a variety of sometimes reckless and not always coherent measures. Reducing tax rates, Draconian cuts in government spending and downsizing the role of the state, mass deportation of immigrants, threats to the Fed's independence and protectionism, up to a 60 percent tariff on products from China. Overall, Maganomics seems to respond mainly to political positioning needs typical of election campaigns, rather than a credible and well thought-out plan. Even an economist as close to the president as Arthur Laffer called the measures promised by Trump a good ‘way to guarantee World War III’. Therefore, they are unlikely to be implemented completely and all at once by the next administration. However, when in doubt, it is worth reflecting on the potential consequences for the Eurozone, whose cohesion is already cyclically threatened by sovereignisms. 

It is easy to see that Maganomics will not be good for Europe. First, customs duties would put the manufacturing industry, especially in Germany, in a difficult position. The effect would be accompanied by increased competition in other markets due to even more protectionism against China, which in turn will have to recalibrate its industrial and trade policies to export products that can no longer penetrate the US market. As if that were not enough, protectionism is always a harbinger of retaliation. If other countries also raise barriers, exporting European products may become even more difficult. 

The resulting crisis in international demand would have negative effects on employment and tax revenues, while stimulating the need for compensation policies for those most affected, with a potentially detrimental effect on public debt. For countries with healthy public finances, such as Germany, deficit spending will not be a problem. In other parts of the Eurozone, on the other hand, feeding the debt would entail quite a few difficulties.

 With the tax cuts, Trump hopes to achieve an expansionary effect, with consumer demand supposedly being channelled towards US products by protectionist policies. In the admittedly unlikely event of an expansion of US demand, the Fed could find itself implementing restrictive policies, with an interest rate hike. Such a dynamic would run counter to the rate cut that could be expected in Europe as a result of falling demand. 

The energy policies and tariffs on imports from Canada promised by Trump could also have deflationary consequences in the Eurozone, due to the plausible increase in global energy supply, especially in the medium term, when Canada might recalibrate its infrastructure to make it functional for possible exports to Asia and Europe.

Given the uncertainty surrounding the implementation of Trumpian measures, it is very difficult to predict which dynamic will prevail. In any scenario, government action will be constrained by both demand trends and the past condition of national public finances. However, political-electoral aspects will also play a role. European populists, who in some cases lead their own countries, will draw new energy from Trumpian proposals, and may want to implement potentially risky policies to secure electoral gains in the short term. Even if national dynamics will be dampened by the lack of monetary sovereignty and fiscal coordination, some political parties may more forcefully call for increases in public deficit spending to buffer the possible recessionary effects of the global demand contraction, as well as protectionist policies to gain the favour of small local businesses, which are not very export-oriented (and not very aware of the effect of duties on increasing production costs).

A tightening of the anti-immigration propaganda, which proved so effective in the US elections, can be expected to have a deleterious effect on domestic labour supply, especially by the most skilled workers - more sensitive to the political climate and long-term economic prospects. Overall, European companies will face a potentially more hostile international market due to the trade war and a domestic market potentially depressed by falling demand and the possible increase in the cost of skilled labour. 

In sum, Maganomics seems to be a harbinger of potential shocks and significant uncertainty, phenomena never particularly welcome by the economy. In principle, the ECB and governments will have to be more prudent and pragmatic than ever, basing their decisions primarily on the economic conditions of the Eurozone, whose growth is likely to weaken further, and on the health of national public finances.