The US-EU economic battle
Over 2020, the US and EU are likely to come into conflict on a number of issues. Will it end with tariffs?
Donald Trump spoke out at Davos, condemning the people he called the "perennial prophets of doom" for forecasting climate and other disasters. He said they "are the heirs of yesterday's foolish fortune tellers. They want us to do badly".
He did not name the EU or individual European countries, but the implication was clear. His Democrat opponents may well have also been in his mind, but the EU is following the green policies he condemns in his domestic opponents. He took the US out of the international climate change agreements and made extracting much more oil and gas a central policy for growth.
All about re-election
The President remains intensely focused on getting elected for a second term. He wants to make a traditional pitch for re-election, claiming he created the conditions for the economic recovery. He regularly chronicles the big gains in the stock market, the 2.4 million extra jobs and the rises in wages that have occurred since 2016.
These, he tells his audience, are the result of his policies, of the tax cuts, the trade disputes, the deregulations that he has put through. His critics have to accept that the economy has grown, and jobs have been gained on his watch, but seek to play down the achievement by saying the rate of growth has not been fast by past standards and debt has increased more than they like. They point out that tariffs and trade disputes lower activity and dent confidence.
The EU takes a different view to the US on growth. It points to the disruption tariffs create in world markets, and dislike the way the US operates unilaterally rather than through world organisations on a multilateral basis. It condemns Mr Trump for not joining the Paris Agreement on cutting carbon dioxide, complain about US corporations not paying enough tax – and seek tougher action in moving away from coal, oil and gas. It bases its model for growth on a green revolution, seeking big investment in renewables, electric cars, new heating technologies and the rest.
So far, the Euro-area economy has performed weakly, with a bigger slowdown than the US. At its heart has been a manufacturing recession in Germany and elsewhere, led by a big fall in car sales and profits as the policies against diesels have come into effect.
The Fed spent 2018 tightening – much to the President's disgust. He was worried that monetary policy would offset the benefits of tax cuts and fiscal relaxation. Meanwhile, the European Central Bank kept interest rates at zero and restarted quantitative easing. President Trump complained that he wanted the same zero rates in the US that the EU enjoyed. At the turn of 2019 the Fed was forced by the adverse market reaction to their policies to begin cutting rates again. The US economy slowed but continued to grow considerably faster than the EU.
Over 2020, we will see more of this dispute played out between the two large advanced economies, the US and the Euro-area. It is likely the US will continue to grow faster, whilst the Eurozone will face larger costs trying to reorient its economy in a hurry from fossil fuels to electricity from renewables. Investors, however, are looking to place more emphasis on shares that help with cutting carbon dioxide and wish to sell or downgrade oil, gas and coal companies.
The irony is that the US is also well ahead in quoted companies that benefit from the green revolution, whilst technology shares generally could fare well as many of them have quite good green ratings themselves. There is also the danger that President Trump will decide to impose tariffs in EU cars after all, which would be an unhelpful addition to the trade disputes.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.