By Michael Every of Rabobank
Summit... and nothin'?
Monday’s US Presidents Day was also European Presidents and Prime Ministers Day, the latter at an emergency summit to discuss defence. Absent were Ukraine -- ironic as Europe complains of being left out by the US -- and Turkey, with the second-largest army in NATO.
EU Commission President von der Leyen was rhetorical: “Today in Paris we reaffirmed that Ukraine deserves peace through strength. Peace respectful of its independence, sovereignty, territorial integrity, with strong security guarantees. Europe carries its full share of the military assistance to Ukraine. At the same time, we need a surge in defence in Europe.” The EU Council president said Europe should negotiate with Russia and design new European security architecture.
Then, as the FT put it, ‘European leaders clash over sending troops to Ukraine’: sadly, this is the only kind of clash EU leaders excel at. Almost everyone rejected sending their own troops to support Ukraine, except the UK, who can’t do much physically or financially. Even Poland won’t, as it looks to spend 6% of GDP on defence, because it might need them at home - or in the Baltics, if EU officials fearing President Trump might pull back US troops stationed there are right.
This might seem "a quarrel in a faraway land between people of which we know nothing" to Western Europeans in markets thinking they *are* Europe, but the topic is a potential existential threat to fellow EU and Eurozone members. That used to require ‘Whatever It Takes’: but because that doesn’t now (directly) involve rate cuts and QE, it’s not as interesting(?)
The lack of action at Monday’s summit means markets may think Europe won’t change. However, the idea of Eurobonds has been floated again; let’s see what happens after the German election; and what Europe doing nothing as the US makes clear it won’t do anything, and Russia makes clear it will do something, does for the European economy and markets over time. In short, things are going to change. It’s just when and how.
To put things in perspective, the Telegraph reports Weimar-esque terms being set for Ukraine by the US, with a huge claim on its economy as quid pro quo for aid. There is also more musing if President Trump is serious about annexing Canada, with comments from his chief economic advisor suggest he may be. Moreover, Trump just reiterated:
“On Trade, I have decided, for purposes of Fairness, that I will charge a RECIPROCAL Tariff meaning, whatever Countries charge the USA, we will charge them - No more, no less!
For purposes of this US Policy, we will consider Countries that use the VAT System, which is far more punitive than a Tariff, to be similar to that of a Tariff. Sending merchandise, product, or anything by any other name through another Country, for purposes of unfairly harming America, will not be accepted. In addition, we will make provision for subsidies provided by Countries in order to take Economic advantage of the US. Likewise, provisions will be made for Nonmonetary Tariffs and Trade Barriers that some Countries charge in order to keep our product out of their domain or, if they do not even let US businesses operate. We are able to accurately determine the cost of these Nonmonetary Trade Barriers. It is fair to all, no other Country can complain and, in some cases, if a Country feels that the US would be getting too high a Tariff, all they have to do is reduce or terminate their Tariff against us. There are no Tariffs if you manufacture or build your product in the US.”
What is described above is complex in application but simple in conception: “A LEVEL PLAYING FIELD FOR AMERICAN WORKERS,” and “RECIPROCITY.” Of course, a level tariff playing field won’t remove the structural US trade deficit given it’s caused by broader deliberate economic statecraft choices by others which force up their net savings and net exports vs the US: that structural conclusion is likely to be drawn on 1 April by other Trump trade investigations.
‘Just’ reciprocal tariffs will be hugely disruptive to the global trading system and financial flows. Not seeing that risk shows as little understanding of how that system works as of its history and how it was only built by force of arms in the first place. And, yes, there is an obvious link back to events in Europe and Ukraine there.
Which are about to be discussed, absent European and Ukrainian representation, in Saudi Arabia by the US and Russia. What else will be on the table at these talks? Who else might be on the menu?
Some note that the US, Russia, and Saudi are also the world’s three largest energy producers – and that Europe lacks domestic energy sources; and that gold continues to flow to the US and from other Western economies. That’s as market discussions continue about what a new, ideal US-dictated global trading and financial structure would look like; and some talk of ‘debt for defence’; even Fed governors like Waller underline they favour the creation of new crypto assets to cement the dollar’s global role; I’ve pointed out the strategic logic of financialized ‘Fartcraft’ to help shift the US towards a ‘Warcraft’ economy; and some reports suggest Russia is trying to create a centralised trading platform for Global South commodity trade. Simply, we are talking about historic, paradigm-shifting events that directly impact the shape, currency, and geography in which markets operate.
This is not like the post-9/11 Afghanistan and Iraq Wars and the War on Terror, which, after initial geopolitical shock, wreaked havoc on the Middle East but were hardly felt by everyone in Western economies and trading floors beyond changes in airport security. I can recall when Saddam’s statue fell in Baghdad and the TV news was immediately changed back to Bloomberg on the trading floor I was on. I was flabbergasted, “What about the effects on Iraq and the region? Doesn’t that matter?!” There was a collective shrug, and everyone went back to looking at tiny movements in lines on screens. And they were ‘right’.
This time, however, what is happening involves the West – and certainly Eastern Europe, which will matter for Western European trading floors if they don’t want to see things around them topple. Ironically, however, that may still involve a lot of market conventions, and even markets' present key role, being toppled.
Going back to my concept of US ‘Grand Macro Strategy’, the framework of Trump’s second-term economic statecraft is emerging: at best, it is the toughest of tough love to force the West to change vs. what the US sees as its rivals; at worst, it is an echo of early-20th, 19th, and 18th century US history in its neo-Hamiltonian, mercantilist, and even neo-imperialist “manifest destiny” approach.
Lines on maps are moving; lines on screens certainly will.
