Macro Perspectives

Making Europe Great Again

President Donald Trump’s promise to put America first might actually help make Europe great again.

This article originally appeared in the Financial Times on 26 January 2017.

It is difficult to understand why Donald Trump’s campaign promise to “Make America Great Again” resounded so much with so many. True, the threat of terrorism, rising inequality and job-killing digitalization have been breeding anxiety for some time. However, on most metrics the U.S. economy has been doing just fine and certainly better than Europe.

While the median U.S. household’s real income still stands below the late-1990s peak, it has risen solidly over the past four years and will soon make new highs. Americans still live in the biggest homes, drive the largest cars and eat the thickest steaks. U.S. living standards, measured by per capita GDP, are some of the highest in the world (aside from a few special cases such as Luxembourg, Norway and Switzerland) and stand 50% above those of Europe and Japan. American technology, films and music shape people’s days and nights around the globe. The U.S. financial industry is on a sounder and more profitable footing, its housing and service sectors are the most vibrant, and its top universities are unrivalled. Carnage it is not.

If any major economy in the world needs to be made great again, it is Europe’s. Following a decent economic performance between the euro’s creation and the global financial crisis, Europe has been stumbling through a lost decade. Economic growth in the European Union has stagnated on balance since 2008 and the unemployment rate remains twice as high as in the U.S. As a consequence of the euro crisis, the banking sector is balkanized and financial markets are fragmented. The move toward “ever deeper union” has stalled; separatism and a new nationalism are on the rise. Brexit appears to be a taste of things to come rather than an isolated, idiosyncratic event.

Somewhat ironically, however, Donald Trump’s promise to put America first might actually help make Europe great again.

First, while the new U.S. administration aims to discourage imports into the U.S. and boost domestic production, European exporters should still be able to increase their market share in the U.S. for some time. One reason is that the dollar has strengthened and the euro has weakened since the U.S. presidential election, increasing the competitiveness of European exports. If the Federal Reserve follows through with the three policy rate hikes envisaged by the FOMC’s own projections and the European Central Bank keeps expanding its balance sheet and taxing banks for their excess reserves, the dollar could strengthen even further.

Moreover, higher consumer and business confidence, as well as higher stock prices, could boost U.S. demand for both domestically and foreign produced goods. Switching demand away from foreign to domestic goods could work eventually, but in the near term, there simply isn’t enough quality and capacity in U.S. manufacturing to fill the gap. Most of the “Make America Great Again” hats that Trump supporters were sporting at the inauguration were manufactured in China or Vietnam, and it will take a while, and a major relative price change, before we see the more affluent Americans favor Chevrolet, Lincoln, Chrysler and Jeep over BMW, Mercedes, Lexus and Range Rover.

Second, the prospect of a more protectionist U.S. administration, together with existing local pressures from populist movements, will likely provoke policy responses in Europe aimed at stimulating domestic demand and potential growth. The external threat to Germany’s export-led growth model is now palpable and this will help German Chancellor Angela Merkel to overcome the opposition in her party to a more expansionary fiscal policy. In addition, while the austerity rhetoric toward Greece is unlikely to change significantly, we may see more leniency toward growth-oriented fiscal policies elsewhere in the euro area.

Third, a more isolationist U.S. foreign and defense policy could catalyze a new joint European defense initiative. Committing to a common defense budget, financed by joint issuance, to counter actual or perceived external threats is a much easier sell than other forms of fiscal union.

Taken together, relative to the optimism on the U.S. and the pessimism on Europe that is priced into markets at this stage, Europe looks set to have the bigger potential to surprise on the upside.

All said, Donald Trump may well succeed in making an already great America even greater. But the chances are that in four or eight years’ time, more Europeans than Americans will have reasons to say, “Thank you, Mr. President!”

The Author

Joachim Fels

Global Economic Advisor

View Profile

Latest Insights



Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517), PIMCO Europe, Ltd Amsterdam Branch (Company No. 24319743), and PIMCO Europe Ltd- Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Amsterdam and Italy Branches are additionally regulated by the AFM and CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act, respectively. PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH(Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The services and products provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services and products provided by PIMCO Switzerland GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) offers products and services to both wholesale and retail clients as defined in the Corporations Act 2001 (limited to general financial product advice in the case of retail clients). This communication is provided for general information only without taking into account the objectives, financial situation or needs of any particular investors. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No.382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates, and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Edifício Internacional Rio Praia do Flamengo, 154 1° andar, Rio de Janeiro – RJ Brasil 22210-906.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. This material was originally published by Financial Times. Date of original publication 26 January 2017.