Geneva, Switzerland

Article of the week World November 3, 2024

Changes in Europe after the American election

Image Credit: ASSOCIATED PRESS | Virginia Mayo

“I will return like lightning.” This bold statement made by Donald Trump has captured the attention of many and may soon transition from mere rhetoric to a tangible reality. In recent times, the so-called “Trump Trade” has experienced significant growth, reflecting a renewed interest in investments associated with Trump’s potential re-election. Betting predictions that monitor the upcoming US election indicate that Trump’s chances of winning have surged dramatically, now exceeding 60%. Notably, in the latest polling data, Trump appears to have gained an edge over Kamala Harris, the current Vice President and Democratic candidate. The phenomenon known as “Trump Trade” encompasses a wide array of financial activities and market behaviors influenced by expectations surrounding Trump’s policies should he regain office. Wall Street traders and strategists are largely aligned in their assessments; they anticipate that if Trump were to be re-elected as president, his administration would likely pursue extremely loose fiscal policies aimed at stimulating economic growth. Additionally, there is an expectation for more extensive trade protectionism measures which could reshape international trade dynamics. As these speculations gain traction among investors and analysts alike, there are indications that such policy shifts could lead to substantial fluctuations in currency exchange rates.Industry specialists forecast a significant surge in the worth of the US dollar relative to various international currencies as a result of expected shifts in fiscal strategy during a subsequent term for President Trump. Furthermore, this wave of optimism linked to “Trump Trade” has also contributed to rising yields on US bonds across various maturities—a reflection of investor sentiment regarding future economic conditions.

Comprehensive statistical analyses from numerous betting agencies reveal that Trump’s probability of winning remains significantly higher than Harris’s within global betting prediction markets. The latest opinion polls corroborate this trend by showing him with a slight advantage over his opponent; however, it is important to note that many swing states—critical battlegrounds where elections can be won or lost—exhibit closely contested races between candidates.

In fact, political analysts suggest that these swing states may witness one of the most intense presidential election campaigns ever recorded in American history. As both parties mobilize resources and strategies tailored specifically for these pivotal regions, voter engagement levels are expected to rise sharply leading up to Election Day. The outcome within these areas will ultimately play a crucial role not only in determining who occupies the White House but also how various sectors—including finance—respond post-election based on perceived stability or volatility stemming from electoral results. Overall, while speculation continues about what might unfold during this election cycle—and particularly concerning Trump’s potential return—the implications for markets remain profound as participants navigate through evolving narratives shaped by public opinion and strategic positioning ahead of November’s vote.

At the same time, top investment institutions from Europe are gearing up for Donald Trump’s return to the White House, namely the 2024 US presidential election. The last time Mr Trump was elected president, European equities were the worst performers relative to their US counterparts of the past eight US administrations. This trading guide for European stocks on the US presidential election by European institutions has important implications for the direction of global stock markets during the US election, especially for Asian markets with export-dependent economies.

Not only has the US stock market performed well under Trump – outperformance relative to Europe has been unmatched for at least 30 years – but he has also delivered high returns for European stocks. The United States has long been the EU’s largest trading partner, with a staggering $952 billion in bilateral trade in 2023. A whopping 72 per cent of all companies in the S&P 500, the benchmark US stock index, derive their sales from their home market. In Europe, by contrast, only 40% of the sales of all the companies in the benchmark Stoxx Europe 600 index come from Europe, with most of the rest coming from the United States.

The memory of Trump’s trade war last term is still fresh, and Europe’s economy is in much worse shape than it was during Trump’s last term, making another trade war more difficult for Europe, the report said. European news channel 23 analysis, the current euro zone inflation slowdown, economic weakness, combined with increased political uncertainty, these are the reasons for the decline of the euro, while the upcoming US presidential election has made the market sentiment more uneasy, especially many bookmakers are now optimistic about the prospect of a Republican victory. The euro is likely to remain weak for quite some time after it fell below the important 1.08 mark against the dollar on Tuesday.In the wake of the International Monetary Fund adjusting its forecast for the eurozone’s economy to reflect slower growth, the euro has seen a decrease of more than 3 percent against the US dollar in the past month. At the same time, the currency has weakened, falling 0.77 percent when compared with the British pound, dropping 1.47 percent opposite the Swiss franc, and diminishing 1.54 percent in comparison to the Australian dollar.

A Trump victory in next month’s US presidential election could send the euro tumbling against the dollar. Some studies analyzed different scenarios for the impact of Trump’s policies on exchange rates after he returns to the White House: For example, Trump’s 10% tariff on all imports, combined with his 20% tariff on Chinese imports and tax cuts, may lead to an 8% to 10% decline in the euro against the US dollar; The euro could fall around 3% if only more tariffs were imposed on China.Based on the study, should Trump maintain his forceful stance on applying tariffs, this action is expected to escalate inflation within the U.S., consequently prompting the Federal Reserve to postpone reductions in interest rates. Such persistently elevated dollar interest rates are likely to exert significant strain on the euro’s value in currency markets. The heightened risk of a European recession could force the European Central Bank to cut interest rates further, putting further pressure on the euro while keeping EU exports competitive. Analysts at Deutsche Bank, jpmorgan Chase Private Bank and ING even warned that a flat euro and dollar exchange rate could not be ruled out in the future if Trump is elected and the trade war leads to higher inflation and the Federal Reserve raises interest rates.

Harris, for her part, although Harris emphasized a broadly similar policy platform to Biden during the campaign, there are some subtle differences on major international issues such as the Russia-Ukraine war. These differences could lead to a decline in European trust in the United States, affecting transatlantic relations ‌, and Harris’ policies, which have been blamed for a worsening border crisis and rising inflation, could also have a detrimental effect on Europe’s economic stability and trade relations ‌.

Economic nightmare a done deal? It’s too early to say for sure.Recently, President Viktor Orban of Hungary conveyed his warm regards to Donald Trump, the United States’ ex-commander-in-chief who is now vying for the upcoming presidential race, with aspirations for Trump’s success in securing the American presidency. Most European countries have mixed feelings about Harris, a Democrat, and Trump, a Republican. But, on balance, the countries that would prefer Mr Trump to win are the ones that do. Why? Let’s move on!

Again, the shift in attitude in Europe depends on the different European policies of Mr. Trump and Mr. Harris. In the past eight years, whether it is the Republican Trump or the Democratic Biden, in terms of different diplomatic styles, in fact, Europe has experienced it all. So what does Trump’s diplomatic style look like with Europe? In a word, the interests of the United States come first.Economically speaking, the administration under Trump has enhanced prospects for business investment via reductions in taxes and regulatory measures, resulting in a boost to economic expansion and job creation. For example, the Trump administration’s tax cuts, which lowered corporate and personal taxes, gave companies more money to invest and expand, which also benefited European companies based in the U.S., leading to economic growth ‌. In addition, the Trump administration has made business activities more efficient and the US economy more competitive by reducing regulations and simplifying the approval process.Assisting in enhancing the United States’ standing within the international marketplace, this consequently yields advantageous repercussions for the European economic landscape. A growing U.S. economy, for example, boosts European exports by boosting demand from its trading partners. While Mr. Trump’s trade policy has been protectionist in some respects, he has also emphasized the importance of fair trade. He has proposed renegotiating trade deals to reduce the unfair treatment of the United States in international trade. That effort has helped improve the global trading environment, which has had some positive effects on Europe’s economy,‌ and the Trump administration has attracted a flood of foreign investment by, among other things, streamlining the approval process and offering tax incentives. These investments not only boost economic growth in the United States, but also provide more market opportunities and collaboration opportunities for European companies.

However, the negative impact of Trump’s coming to power on the European economy cannot be ignored. Mr. Trump’s protectionist trade policies could lead to increased tariffs, affecting European exports to the United States. Steep tariffs on European products, for example, would make European companies less competitive in the U.S. market, affecting their exports and economic growth ‌. In terms of exchange rate risk, the aggressive economic policies of the Trump administration may lead to a stronger US dollar, which in turn affects the euro exchange rate. A weaker euro would increase the cost of imported goods in Europe, weighing on European consumers and businesses.

Regarding geopolitical and defense matters, despite European nations being compelled to contribute financially for security to the United States, President Trump mandated that their defense spending within NATO must exceed 2% of their gross domestic product, yet American forces stationed in Europe furnish the continent with military safeguarding. If Trump comes into office again next year, then it is estimated that Trump should increase the military spending of European countries to 3%.Nonetheless, when considering the grand scheme of international tactics, Trump believes that the United States should focus its military efforts in the Middle East rather than in the European regions of Russia and Ukraine, a position that coincides with the main concerns of most European countries. In this way, if Trump comes to power, it will be possible for Europe to stop the Russia-Ukraine conflict and use cheap Russian natural gas again without being so interested in Europe. Europe, like China, will face economic sanctions from the United States, and it will be possible for China and Europe to get closer economically again.Nonetheless, the administration under Trump has exhibited a firm stance on foreign relations, which, to a certain degree, has protected the United States’ national interests and maintained the equilibrium of its geopolitical landscape. Geopolitical stability helps reduce conflict and uncertainty, creating a more predictable environment for the global economy ‌.

And how would a few years under Democratic President Joe Biden be for Europe? Europe has seen it, too. Mr. Biden has focused more than Mr. Trump on rallying Allies to deal with China and Russia. So in his four years in office, Biden has gradually repaired alliances with European countries, and has said little about Trump’s demand for protection money from European countries. But while Mr. Biden rallied his European Allies, he also stoked the conflict there. Europe is also suffering from Biden’s efforts to consume Russia in a hot conflict and to create fear in Europe through the Russia-Ukraine conflict, which has led to a flood of European capital flowing back to the United States and thus sucking the European economy dry. And if Biden’s successor Harris wins the presidency, there is a good chance that Harris will continue Biden’s policies, especially when it comes to addressing global challenges. In addition, Harris is likely to take a similar approach to the Biden administration on Africa policy, but her mandate is broader on immigration policy. Despite Harris’s moderate approach to Europe during the campaign, there are still doubts among European politicians and the media about her policies. An article in French newspaper Le Figaro suggests that European politicians are torn between fear of Trump’s hard-line policies and reservations about whether Harris can really change the status quo. The article argues that even if Harris is elected, Europe’s situation will not change fundamentally, so it should abandon its illusions about the United States and strengthen its own independence and self-sufficiency.

More important for the United States and Europe is Harris’s “fairness of outcomes” policy, which may undermine the survival of the fittest and may weaken the natural selection process of the market, reducing overall economic efficiency. Harris economic policy focused on lowering the cost of essentials and fighting price gouging. Many of the price controls represented by Harris’s efforts to push for the first federal bill in U.S. history prohibiting food and consumer price fraud, such as restrictions on food and consumer prices, can distort market signals and affect the balance between supply and demand.

For instance, one potential consequence of Harris’s regulation of food pricing may be the shuttering of supermarkets in impoverished neighborhoods, which would worsen the issue of inadequate access to fresh food.” The profits of food producers decrease, resulting in reduced product variety and lower quality. Small food producers and retailers go out of business, market concentration increases, etc. This could lead to shortages in the supply of certain goods, and tight regulations on firms could discourage innovation and investment, which could affect the dynamic efficiency of the economy and negatively affect European firms based in the United States and those that trade with the United States. Second, pressure on fiscal spending has risen sharply. If Harris is elected, his focus on implementing these “equitable outcomes” policies will undoubtedly require huge fiscal expenditures, which could put even more pressure on the already large U.S. national debt. Despite projections from the Congressional Budget Office (CBO)

The primary deficit in fiscal 2025 would fall to 3.1 percent from 3.9 percent in fiscal 2024, but Harris’ policy proposals could lead to a significant increase in that forecast. Her recently proposed policies, including “down-payment support” for first-time buyers and tax credits for child support, would push up government spending. In addition, Harris would likely renew the Biden administration’s college student loan forgiveness program, which was a significant factor in the larger-than-expected increase in the fiscal year 2024 deficit.A considerable increase in governmental spending might result in inflationary tendencies, which means that if the government decides to implement an expansive fiscal strategy, the infusion of additional funds into the banking network could substantially boost bank reserves. The supply of credit expands, leading to increased inflationary pressures.Being among the globe’s most expansive economic powers, the issue of inflation within the United States is expected to ripple across borders via global commerce and fiscal pathways. This inflationary trend may curb the appetite for American imports, potentially dampening the economic expansion of nations and areas dependent on exporting goods to the United States. In terms of monetary policy, in order to combat the inflationary pressure brought about by fiscal expansion, the social interest rate level may stay at a high level for a long time to combat the medium and long-term rise of this inflation center. The high interest rate of the US dollar caused by various policies will put great pressure on the euro exchange rate.

Ultimately, the potential impact of Harris’s policy on “equal results” may be significant on a worldwide scale. Given the United States’ status as a leading economic power, its policy shifts frequently cause ripple effects internationally. A large fiscal stimulus could cause the dollar to depreciate, affecting global financial markets. A resurgence of inflation or a debt crisis in the United States could threaten global economic stability and affect European countries closely linked to the United States.

As mentioned above, Harris, the Democratic candidate, if elected president, she will adopt a similar policy platform to Biden, although there may be subtle differences on some major international issues ‌. Europe does not expect Harris’s election to meet all the continent’s security needs and reverse its industrial policy, given the many challenges and differences that remain in transatlantic relations and the considerable uncertainty about whether the economic crisis is lurking in the background. However, it cannot be ignored that Harris’ policy stance tends to promote the development of clean and renewable energy, which may give the European market a certain rebound. These industries have been suppressed under the influence of Trump’s policies, and the market’s expectation of Harris’ election may bring different opportunities for future economic growth ‌. Moreover, Harris’s election could strengthen an essential ingredient of transatlantic ties: trust. But it would be a mistake for Europe to see this relationship of trust as a new reason not to work on the economic and security fronts ‌ because the world now faces the risk that America’s dominance will be eroded by declining power, that its legitimacy as a hegemon will be squandered by politicians in Washington and the big names on Wall Street. The moral power of the United States has been basically lost, and it can only manage to maintain its hegemonic position and maintain the world order through military and other strong means.

Therefore, in the different policies of Trump and Biden on Europe in the past eight years, four years each, European countries can give precise answers about whether they want the Democrats or the Republicans back.Naturally, there are nations including the United Kingdom and Poland among others, that would favor Harris taking over from Biden. Conversely, the majority of European nations that favor sovereignty within the continent, including France, Germany, and Hungary, are inclined to support a victory for Trump. Because if Trump comes back, on the one hand, he will force European countries to pay protection money and launch a trade war against Europe economically. But on the other hand, Trump will also shift the focus of the US hot war conflict from the Russia-Ukraine conflict to the Middle East. While the European economy is under sanctions from the United States, there is still a window for China. And if Biden’s successor Harris is elected president of the United States, then the treatment of Europe will certainly continue to appear good, but in fact worse diplomacy towards Europe. Amidst the escalating rivalry among China, the United States, and Russia, Europe finds itself precariously situated amongst the trio. Navigating the dynamics of this power struggle proves exceedingly challenging. Historically, post-World War II, the United States exerted substantial influence over Europe, effectively governing its trajectory. The U.S. offered both incentives and threats to European nations, a dual approach that has not gone unnoticed by those countries.

In the global “election year”, the political and business circles in Europe are worried about the future trend of hot issues such as the Russia-Ukraine conflict, the US election and trans-Atlantic relations, and the anxiety is significantly increased. When the “fragmentation” and “rightist shift” of European politics became increasingly apparent, the EU’s policy priorities gradually showed the tone of ensuring security and strong competition, and the conservative color of economy and trade continued to rise. However, the EU institutions have launched a series of protectionist measures, which has not transmitted positive energy to the European business community, and almost all industries have experienced varying degrees of layoffs. Against this backdrop, the European economy urgently needs an injection of stability.

Faced with this situation, Europe needs to take a series of proactive measures to reduce potential risks:

Strengthen internal economic integration: European countries should further deepen the integration of their internal markets and promote trade and investment among member states. This would not only increase economic resilience, but also strengthen collective resilience to external shocks.

Looking for diversified markets: To reduce dependence on the US market, diversified economic partnerships are the key.By enhancing commercial and financial collaborations with various nations and territories, Europe has the potential to mitigate its reliance on a solitary market and, consequently, diminish the fiscal vulnerabilities stemming from shifts in American policy. Europe can proactively delve into burgeoning markets across Asia, Latin America, and Africa to diversify its export risk profile.

Promote the transformation of the green economy: Increase investment in green technologies and renewable energy to promote economic transformation. This will not only help fight climate change, but also give a head start in emerging fields. Energy is an important basis for the economy, and Europe should also strengthen energy security and reduce its dependence on oil and other energy sources. This includes increasing diversification of energy imports and reducing dependence on a single energy supplier to deal with a possible energy crisis ‌.

(Strengthening financial stability: The ECB needs to maintain an accommodative monetary policy while guarding against systemic risks in financial markets. If Trump is re-elected, he may continue to pursue protectionist trade policies, including tariffs. Europe needs to prepare in advance and develop response measures, including finding alternative markets and increasing domestic production capacity ‌.

By YIQI WEN

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