Even before Trump and his tariffs, Europe is in trouble

Political turmoil and dysfunction in the European Union’s two largest economies have come at the worst possible time for Europe.

With Donald Trump about to regain the US presidency and ready to impose tariffs of 10 to 20 per cent on America’s trading partners and stop the war in Ukraine, the collapses of the French government and the ruling German coalition have left the two most powerful states within the European Union rudderless.

Worsening their plight has been the combination of the pandemic and the Ukraine war.

Emmanuel Macron (left) and Olaf Scholz: Their countries’ political crises couldn’t come at a worse time.Credit: Getty

The pandemic blew holes in their budgets. The war has inflated energy prices, forced increased defence spending and spending on military and humanitarian aid to Ukraine, and has left both economies severely weakened.

President Emmanuel Macron’s government fell on Wednesday after an attempt by his prime minister of less than three months, Michel Barnier, to circumvent the legislature and effect major cuts to spending. That triggered a vote of no confidence in the government – the first in more than 60 years – which he lost when both the far-right and far-left supported it.

Effectively, France has no budget for 2025, although, under French law, it can roll forward the 2024 budget. Macron could propose a new prime minister but would risk a repeat of this week’s events. There can be no dissolution of the National Assembly or early election until next July, a year after the last poll.

The collapses of the French government and the ruling German coalition have left the two most powerful states within the European Union rudderless.

With France’s budget deficit for this year forecast to be 6.1 per cent of GDP – more than twice the EU’s 3 per cent limit – and the French economy slowing markedly, the failure of Barnier’s attempt to cut spending by €60 billion ($98 billion) and reduce the budget deficit to 5 per cent of GDP means France’s finances will continue to deteriorate.

In Germany, a brittle coalition government fell apart after Chancellor Olaf Scholz sacked his finance minister last month after a dispute over the nature of necessary economic reforms and, more immediately, how to fill in a massive hole in next year’s budget.

Europe’s largest economy - albeit one that is flat-lining at best – now has a lame-duck government with a lame-duck leader ahead of the snap election called for late February.

With Trump promising to slap on tariffs from his first day in office – January 20 – and also pledging to end the conflict in Ukraine, the timing of the destabilisation of the two key EU states leaves Europe vulnerable.

The US is the EU’s major export market. Last year, it had a €157 billion trade surplus with the US.

Trump’s tariffs threaten that trade either directly or by the leverage they might provide to coerce European companies into shifting their investment and operations to the US to avoid the tariffs and get behind the high tariff walls he plans to erect.

The economic weakness and political instability within Germany and France, at a time when the US economy is growing strongly, would provide additional incentives for European companies to have a bigger domestic presence in the US.

Trump has also threatened to impose a tariff rate of 60 per cent on China’s exports to the US. If that were to happen, the world’s factory floor would inevitably look for other markets for its goods, and Europe would be the biggest and most obvious target. This would create the prospect of a flood of cheap Chinese products that would decimate European industries.

Europe is far more trade-exposed than the US, so the kind of protectionism and isolationism that Trump espouses would be a far less palatable option for the EU.

It’s also split on trade issues.

Germany, which built its economy on high-value exports, wants borderless trade, while France and the southern EU states are, and historically have been, far more protectionist. Building any consensus about a common EU approach to trade issues won’t be straightforward.

The threat to the EU from Trump isn’t just his liking for trade wars but his promise to end the war in Ukraine in his first days in office. The only obvious way that could occur is by pressuring Ukraine to cede some of its territory to Russia, using the threat of a withdrawal of US weapons supplies and financial support to force it to the table.

The prospect of an outcome to the war that brought Russia’s military closer to their borders alarms the non-US NATO members. Even if the US stuck with the treaty, they face very significant increases in defence spending.

During his last term, Trump repeatedly threatened to withdraw from the alliance unless members significantly increased their contributions to their own defence.

They have stepped up – nearly three-quarters of them now spend more than 2 per cent of their GDP on defence – but a US-imposed deal on Ukraine would require an even bigger commitment, and a US withdrawal from NATO would force them to commit even more.

If a deal is done over Ukraine’s future, with Trump in the White House, the pressure to ramp up defence spending, help finance Ukraine’s rebuilding and develop common EU defence and foreign policies would be immense. France and Germany would be expected to lead the discussions even as their current politics have revealed deep fractures within their governments.

As if France needed any more complications, on Friday this week, a deal 25 years in the making is expected to be finalised with the signing of the EU’s biggest-ever trade deal.

The Mercosur (an anagram of the Spanish phrase for Southern Common Market) bloc and the EU are meeting in Uruguay to finalise the deal, which would remove the trade barriers for agricultural products from Brazil and other South American countries while giving Europe better access to critical minerals and a market of nearly 800 million people for its manufactured goods and its services.

France opposes the agreement, arguing that it sacrifices France’s farmers to benefit German car manufacturers, with French farmers at a competitive disadvantage to the South Americans because of Europe’s strict environmental and health laws and regulations. France’s farmers are a potent – and militant – political force and will add to the political and economic instability within France if the trade deal is signed.

Thus, there is a confluence of internal political developments within Europe that will come to a head next year even as the EU faces the renewed – and this time probably more substantial – threat of a rampant Trump.

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