Investors have warned of Europe's vulnerability to Donald Trump's “America First” policies, as they compare the continent's economic struggles to the animal instincts unleashed in the United States under the new president.
Trump's plans to deregulate and cut taxes sparked a wave of enthusiasm from several US executives at the World Economic Forum in Davos this week, while the S&P 500 on Wall Street finished close to a new record high on Wednesday.
But the mood regarding Europe was much gloomier, with an executive at a major US bank warning of “peak pessimism” about the continent. The threat of US tariffs on Europe exacerbated concerns among executives and politicians at the Swiss meeting, who warned that the rising US economic tide may fail to boost sentiment on the other side of the Atlantic.
Christine Lagarde, President of the European Central Bank, said it was “not pessimistic” to say that Europe was facing an “existential crisis.”
Lagarde said in a panel discussion that Europeans must be realistic. “We are now getting this huge push, because there is another big player in the global economy that is organizing things in a different way, and threatening some of the partners and players that this country used to work with.”
IMF forecasts for this month Economic prospects have improved sharply for the United States This year, growth of 2.7 percent is expected, which is much higher than the euro zone's expected growth of 1 percent.
The IMF said that Germany, the largest economy in the currency area, had experienced two years of contraction and was expected to grow by just 0.3 percent this year. At the same time the United States took Record share of new cross-border investment projects In the 12 months to November, according to preliminary data from fDI Markets, a company owned by FT.
The head of a large sovereign wealth fund said: “It is largely agreed that things are going well for America, and it looks really negative for Europe.” “People are concerned about Germany and France’s lack of leadership, the advancement of the far right, the regulation of artificial intelligence, and the strength of the union.
“The question is: Is there enough of a sense of crisis to push Europe to come together? I don't think so.”
The main risk in the United States is that Trump's agenda will end up stoking inflation and preventing the Fed from cutting interest rates. The International Monetary Fund warned of the risk of higher prices if Trump overstimulates the US economy while limiting the supply side of the economy through his campaign against immigration. She said last week that a “boom and bust cycle” could follow in the long term because of his financial deregulation campaign.
But economists say such concerns are outweighed by the bullish outlook in the short term.
“There's been a big increase in animal spirits. You can see that in corporate sentiment, consumer sentiment. There's also an increasing possibility that taxes won't be higher in 2026. That would be very good for demand,” said Mike Medeiros, a macro strategist at Wellington Management. “total”.
Although stronger US demand will benefit countries that rely heavily on exports to the United States, investors in Davos spoke of the risk that growth in Europe could fall short of already dismal forecasts.
They added that fiscal pressures in countries such as France and the UK may make them vulnerable to a further jump in long-term borrowing costs due to US tax cuts.
“The sovereign debt issue is really important. You see what it is Done for the UK “It happened a few weeks ago and the restrictions it imposed,” said Kasim Kutay, CEO of Novo Holdings, Novo Nordisk's $187 billion investment vehicle.
Ursula von der Leyen, President of the European Commission, told the World Economic Forum that the EU and the United States must negotiate to maintain trade relations, given that with their trade amounting to 1.5 trillion euros and huge transatlantic investments, “there is a lot at stake for both.” “The two sides.” .
Brussels hopes that threats of heavy tariffs will serve as a prelude to deals that avoid some of those barriers, as happened in Trump's first term. But the gap with Brussels was clear this week when Trump announced the US Departure from the Paris Climate AgreementIt is a cornerstone of European Union and World Health Organization policy.
Valdis Dombrovskis, the European Union's economic commissioner, said the European economy had shown “resilience” in the face of shocks such as Covid-19 and rising energy prices in the wake of Russia's invasion of Ukraine. But he acknowledged that a deeper fragmentation of the global economic system would be “very costly for the EU, given that the EU is a trading superpower.”
On the other hand, the US deregulation drive may further weaken European competitiveness if governments fail to organize an effective response.
One major global investor said they felt von der Leyen was underestimating how difficult it would be to harness and motivate a group of countries with widely varying views.
“There needs to be a more honest debate about EU bureaucracy, obsessive regulation and the diverging views between a large number of countries,” they said.
Regulating technology and artificial intelligence will be a key test, executives said.
“The only thing that will ensure that the continent will retreat further into museum status is just taking a dogmatic and conservative approach to curation and not being open to the fact that perhaps as technology evolves, Europe needs to evolve with it.” said one technology executive.
Carlos Cuerpo, Spain's economy minister, told the Financial Times he had come to Davos to counter the view that Europe was dying, touting his country's excellent record, having outperformed the US last year with growth estimated at 3.1 percent and record job creation. .
“We are fighting this perception, because it is important that there is a positive message coming from the European Union,” he said. He stressed the urgent need to move forward with “our roadmap,” referring to the competitiveness report prepared by former European Central Bank President Mario Draghi.
But European officials struggled to get that positive message across to executives at the Swiss resort. “The sentiment here is how negative European CEOs are about Europe,” the US banking executive said. “There's a stark contrast to the United States, where it's all about animal spirits and ecstasy.”
Asked whether Trump's election represents a wake-up call for Europe, Lagarde replied: “I respectfully believe so.”
Additional reporting by Stephen Morris and Arash Masoudi in Davos and Claire Jones in Washington
Data visualization by Stephanie Stacey, Keith Fry, Ray Douglas, and Alan Smith
