European Council – October 2016. The EU Heads of State or Government met on 20 October 2016 in Brussels. The leaders discussed relations with Russia and the situation in Syria. From left to right: Lars Lokke Rasmussen, Danish Prime Minister, Angela Merkel, German Federal Chancellor, Xavier Bettel, Luxembourg Prime Minister. In the background Teresa May, Prime Minister of Britain is seen. Shoot location: Brussels – Belgium. Shoot date: 20/10/2016. Copyright: European Union.
Germany, and more generally the EU, is now preparing in earnest to confront the groundbreaking changes in their relations with Trump’s America. Last week, both the German Chancellor Angela Merkel and her Federal minister for Finance Wolfgang Schauble, made direct and indirect statements about the policies now needed for Germany and the European Union. On Thursday 12 January, Merkel quite openly referred to the new strategy needed in EU defense and security, after the US seems to distance itself from Europe. Last Saturday she went even further and ‘advised’ the US to stick to multilateral cooperation and avoid trade protectionism. The risks in this domain grow every day and will culminate after 20 January.
Schauble in his turn indirectly said that the European Central Bank should abandon its over-relaxed monetary policy this year. The obvious aim of that is restore the strength of the euro in relation to the dollar. Currently, the exchange rate between the two monies is very close to parity, thus having greatly devalued the dollar value of the German reserves denominated in euro. Let’s check in detail why Germany is alarmed with what is happening on the other side of the Atlantic Ocean.
The US upsets Europe
For one thing, it’s the changes the new American administration is about to bring in international trade relations. Europe and more precisely, Germany, is a major exporter to the US, in this way supporting employment and welfare at home. The US is the first export market for Germany and the EU. With Transatlantic Trade and Investments Partnership agreement being briefly repudiated by the new American administration, the German and the European exports to the US are now sailing in uncharted waters. More than one Trump team member advising the President elect on trade are against multilateral trade agreements, obviously preferring bilateral negotiations. Britain is the first willing candidate in this respect.
Actually, last week, Teresa May the British PM, alarmed the business community of her country and Europe in general by clearly opting for a hard Brexit. She said that Britain will certainly leave the European Union and will not opt to remain in the EU single market. Instead, London will look to strike bilateral trade agreements all over the world. In this perspective, the first choice is of course Washington.
Killing the TTIP and the TPP
In more detail now, according to Reuters, a Trump adviser said that the Trans- Pacific Partnership on trade and investments, “or a multilateral agreement that looks like TPP but is called something else, is emphatically dead.” The same source said that the new administration will long for bilateral trade agreements abandoning the multilateral pacts. Britain was not mentioned, but the latest comments by May about choosing the hard Brexit option point to the direction of the US.
In view of all that, this past week Merkel twice touched upon the issue of the multifaceted transatlantic cooperation. In the first instance, on an official visit to the neighboring Luxembourg last Thursday, she urged the EU member states to boost their defense and security efforts and spending, because the US do not any more guarantee European space. In fact, she said there is no “guarantee of perpetuity” for Europe from the US.
Europe to pay more
After WWII, the NATO alliance under the US leadership has undertaken such guarantees in relation to conventional forces, while the US offers Europe nuclear coverage, obviously against Russia. Presently, the Europeans are alarmed with Russia, more so after Trump appears ready to cooperate with Moscow. In an interview to the Wall Street Journal he “suggested he would be open to lifting sanctions on Russia”. In the spring of 2014, Russia had blatantly annexed Ukrainian soil, when it occupied the Crimean peninsula. From that day on the EU froze its relations with Moscow, with the Ukrainian question still open and Russia de facto controlling the eastern Russian speaking provinces. No wonder then if Germany feels more vulnerable vis-à-vis Russia in the era of Trump.
As for Schauble, his worries are obviously related to the parity between the euro and the dollar. No to forget, that the single European currency has in the past reached unbelievable highs with the dollar at exchange rates reaching 163 American cents. Against that background the present exchange rates oscillate around 106 dollar cents. The less expensive the euro, the lower the dollar value of Germany’s reserves, thus more expensive acquisition of American assets by German companies. The more characteristic example in this line last year was the acquisition of the cutting edge biotechnology company Monsanto by Bayern for $60 billion. Monsanto is the leader in the genetically modified seeds market in key products like soya and maize. One can easily calculate the difference of the cost of this deal in euro terms, if the rate was 1.63 in favor of the euro and not 1.06.
Asking for a cheaper dollar
However, the new US administration favors more increases of Fed’s basic interest rates, to further suppress the value of the euro versus the dollar. Last Week, Schauble speaking in an interview with the Sueddeutsche Zeitung daily, in order to counter this prospect came out strongly against the currently applied extraordinary monetary measures of the European Central Bank.
As a matter of fact, he demanded this policy to be reversed within the year, despite the enormous difficulties of such a task. Obviously, an increase of euro interest rates and the reverse of ECB’s quantitative easing would act as a strong support for the euro in relation to the dollar. If unchanged, the current policies may lead to a full parity between the two moneys in some months, (presently the euro/dollar exchange rate is around 1.06), or even worse for Germany, to the region below the unit.
In conclusion, there is no doubt that Germany has in earnest started building its defenses vis-à-vis Trump’s America. Not that Berlin was happy with Barack Obama’s governance, but as it turns out those were the good years. Clearly, the new US administration is preparing to amplify Europe’s problems on two central issues; trade and security.
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