Our Opinion: 2024
Trump’s wake-up call for Europe
It was billed in advance as a nail-biting contest, but, in the end, the result was not even close. Donald Trump won a decisive victory in the US election. Whilst that has upset some people, there seems little doubt his restoration will boost an economy that was already doing very well to start with.
His tax cuts, for example, will be significant, even if there is a risk that they will push up a deficit that is already running at 6% of GDP. The corporate tax cut from the first term will be extended, helping the competitiveness of America’s biggest companies. And some of the stranger ideas that found their way into the Democratic manifesto, such as a plan to tax unrealised capital gains, will now be scrapped.
The significantly increased spending of the Biden years on subsidising microchip manufacturing, and building green infrastructure, will come under far closer scrutiny. There is already evidence that at least $500bn has been badly spent, and all the country will ever have to show for it will be a series of white elephants. Trump was not the great deregulator in his first term that he claimed to be, but many of the rules Biden has imposed will be repealed and the web giants will be freer from regulatory scrutiny.
The oil and gas industry, especially shale oil, which has made the US the biggest energy producer in the world, will receive a lot more support. And finally, the role of Elon Musk as an influential voice in the administration will be fascinating. Musk is almost as controversial as Trump. But there is no question he is a brilliant entrepreneur, and if anyone can work out how to cut government spending, he can. Put it all together and all this will turbocharge the economy.
There may be mistakes along the way. The threatened tariffs of 60% on China and 10% across the board will be a disaster for the global trading system if they are put into effect, and, just as seriously, will trigger a big spike in US inflation. And unless Musk can really deliver the cuts in government spending that he talks about, the tax cuts may well send the deficit spinning out of control and trigger a bond-market revolt. Likewise, political interference in the Federal Reserve may well panic investors who hold Dollars, and send the currency markets into turmoil. A lot will depend on Scott Bessent’s role as Treasury Secretary and whether he can rein in some of the president’s wilder ideas.
But the important point is that another spurt of rapid US growth will painfully expose the weakness of the UK, and the whole of the EU. Mario Draghi, the economist, academic, banker, statesman, and former Italian Prime Minister, was appointed to write a comprehensive report on EU Competitiveness. He points out that the difference in real GDP between the US and Europe has widened from 17% in 2002, to 30% now. With the US growing at three times the annual rate of all the major European economies, and with productivity rising more rapidly, that is only going to widen.
The UK, with huge increases in taxes on business already crushing investment, looks as if it will fall even further behind. A relatively modest gap between the US and Europe has widened alarmingly. It now seems inevitable that the difference in GDP will rise to more than 50% over the next few years, and perhaps even higher.
This should be the wake-up call the continent needs to finally work out that its economic model has failed. It needs to find a realistic path to net zero, given that energy costs in Europe are now twice those in the US, placing a crippling burden on what remains of manufacturing industry.
It needs to scale back welfare systems that have spiralled out of control and destroyed the incentives to work. And it needs to stop imposing more and more regulations and restrictions on business, given how few new companies it has managed to create compared with the US. Europe was already falling woefully behind the US, and that is only going to accelerate over the next four years.
The trouble is, there is very little evidence that either the UK or the rest of Europe is willing to change course.
23rd November 2024
