President Trump

After the UK vote for Brexit on 23 June, Trump’s triumph this is the second major upset victory for anti-establishment populists in the Western world this year. It does not bode well for votes to come elsewhere, including some key votes in Europe. The echoes of the populism and protectionism of the late 1920s and 1930s are still faint, but they are now a little less faint than before.

Trump’s outspoken and erratic behaviour during and before his election campaign raises serious concerns that he may upset US foreign policy, weaken NATO and brand China as a “currency manipulator” in a prelude to a potential trade war against China. If so, this would matter more for Europe than the US. Europe needs a firm commitment to NATO to deter further attacks of Russia’s Putin on neighbouring countries and is heavily dependent on world trade and hence on respect for the rules that underpin world trade.

The US has had controversial commanders-in-chief before. In Europe, Ronald Reagan had been widely perceived as a risk to peace before he came to office. He turned out to be one of the more successful US presidents instead. However, Reagan had been an accomplished governor of California first whereas Trump has no executive experience in public office. Also, Reagan represented the sunny optimism of hope rather than the politics of anger espoused by Trump. Whether the concerns about president Trump will turn out be vastly overdone will be impossible to know for a while.

The US political system is full of checks and balances. For most issues, a president has to work closely with Congress that passes laws and takes tax-and-spending decisions. Trump won’t have the money to build his wall against Mexico, and Congress will probably not grant him much for such a destructive purpose. The powers of the president are strongest in foreign policy, some aspects of trade policy and domestic regulations.

Because of his somewhat erratic behaviour, a lack of detail in his policy platform and fiscal promises that simply do not add up, projecting what a president Trump may really get done is difficult.

Once elected, US presidents frequently get side-tracked or run into political obstacles and tend not to follow their campaign platforms. Political compromise and the heavy weight of the Washington bureaucracy dilute proposals. But whether a more presidential and diplomatic Trump will emerge is an open question, to put it mildly. His acceptance speech struck a conciliatory note. But that is part of the US ritual and not necessarily a guide to his actual behaviour once he moves into the White House on 20 January 2017.

Having won on election promises that will be virtually impossible to keep, Trump runs the risk that his voters may be seriously disappointed by the very meagre results, if any, that he may be able to deliver. The US policy debate could remain rancorous as a result, to phrase it in a charitable way.

Whereas some of his regulatory and tax proposals could strengthen the US supply side somewhat if implemented, Trump’s strongly protectionist leanings could significantly damage trend growth in the US and some of its trading partners over time if he really does what he has said about trade with Mexico and China. It could also set a bad example for other countries and trigger a more general wave of protectionism across the world.

Trump has called for a change in leadership at the Fed. He says he likes hawks. However, Janet Yellen’s 4-year term as Chair runs through February 2018. While Trump could ask Yellen to step down or publicly criticise her leadership at the Fed, she would not be required to resign. We expect her to choose to serve out her term as Chair even under adverse circumstances. Doing otherwise may jeopardise the Fed’s credibility as an independent central bank. At the moment, there are already two vacancies in the Fed’s Board of Governors. Obama has nominated two candidates to fill the posts, but the Senate Banking Committee (SBC) has postponed confirmation hearings so far. Expect Trump to nominate two different candidates and get them confirmed fast once he enters office.

But this will probably not impact Fed policies much for long. The Fed will continue to set policy in relation to US economic conditions and the outlook for inflation. Whether appointed by a Democratic or a Republican president, Fed members tend act independently once in office. They will always weigh the outlook for US growth and inflation upon setting Fed policy, learning by experience and adjusting their stance if it turns out that they may have been too accommodative or too restrictive in past decisions. The impact on Europe of any temporary tilt in Fed policies coming from potentially hawkish Trump appointees to the chair and board of the Fed would likely be limited and temporary.

All in all, the triumph of Trump ushers in a period of heightened uncertainties and risks for Europe. This holds especially for aspects of foreign and trade policy that matter a lot to the nations of Europe that depend on trade and sit close to an economically wounded but militarily capable Russian bear.

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