A proper European Union (EU) growth strategy might deal better with a protectionist US administration than engaging in retaliatory action. “Green growth” – e.g. via electrification – would be in the EU’s economic interest given the magnitude of the income transfers to the rest of the world Europe’s imports of fossil fuel entail, says Gilles Moëc, Group Chief Economist at AXA Investment Managers.
The appointment of Scott Bessent – generally seen as a pragmatist – at the US Treasury, after the more radical Howard Lutnick at the Department of Commerce, suggests that Donald Trump may not have made a firm decision on how far he wants to dial up the pressure on tariffs.
As many US economists – including mainstream ones – Bessent’s main bone of contention with Europe is the lack of demand there, which restricts the capacity to build up a mutually beneficial trade relationship.
Developing a proper growth strategy in the EU would not necessarily protect Europe fully from the US protectionist temptations, but it could be a more fruitful strategy, down the line, than merely engaging in retaliatory action, even if it is carefully targeted.
Empirical evidence collected across the US at the time of the first trade war with China suggests that even where economic losses from the Chinese retaliation were locally tangible, this did not alter the political dynamics in favour of protectionist policies.
The energy transition could be a key area for such EU growth strategy. This may sound surprising given the current gloom on climate change mitigation. But we think it is worth re-stating that decarbonising is in the economic interest of Europe when one considers the massive income transfers to the rest of the world from the net imports of fossil fuels – notably to the US – and the long-term cost to investment of the volatility which they entail.
Further progress on electrification would reduce Europe’s fossil fuel bill. This would come with a daunting investment effort, but rather than seeing it purely as a cost, we should balance it against the tangible economic benefits.
Politics in France and Germany are not conducive for now to the kind of institutional upheaval which is required. In the meantime, the ECB will continue to be crucial to the European outlook.
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