Europe surges ahead, while the U.S. Economy struggles
A growing number of geopolitical analysts are concluding that Trump is likely to fundamentally reshape global power dynamics. His Make America Great Again (MAGA) philosophy is driven almost exclusively by financial considerations. Until recently, democratic values, human rights, and the rule of law were significant guiding principles in U.S. foreign policy, but that era appears to be over. Today, global power relations are increasingly defined by military and economic strength. Institutions such as the World Trade Organization, the World Health Organization, and USAID are being systematically abandoned by Washington. There is growing concern that the U.S. might also withdraw from the United Nations and the World Bank.
For internationally operating businesses, this alone creates significant uncertainty. Supply chains and sales channels may need to be restructured, while new U.S. import tariffs add another layer of unpredictability. Key questions remain: How high will tariffs be raised? How long will they last? Will affected countries retaliate with their own tariffs? Could this spiral into a full-blown trade war?
Equally important is whether U.S. businesses that bear the burden of these tariffs can pass the costs on to consumers. Surveys indicate that American consumers are increasingly worried about rising prices. Initial hopes that Trump would use tariffs merely as a bargaining tool are fading fast. Economic growth is now coming under pressure everywhere, with the U.S. particularly vulnerable due to its aggressive trade policies.
For Europe, the war in Ukraine adds another layer of uncertainty. Putin has repeatedly stated his ambition to restore as much of the former Soviet Union as possible and to reestablish Russia as a superpower. There is a growing fear that if Russia secures a victory in Ukraine, it may push further into other European countries. At the very least, Moscow is expected to use cyberattacks to weaken Western Europe.
Until recently, Ukraine appeared capable of holding its ground, but without U.S. support, this becomes impossible. European nations are deeply alarmed, as Trump appears willing not only to sacrifice Ukraine but also to distance himself from Western Europe. He has made no secret of his disdain for the EU and Brussels-based institutions, stating a preference for dealing with individual European nations rather than the bloc as a whole.
As a result, European countries are now accelerating efforts to collaborate more closely and build a robust, unified defense force. However, experts estimate that it will take at least 5 to 10 years to develop a credible military force, including ramping up domestic arms production and cybersecurity capabilities. The key question remains: Will Putin exploit this window of opportunity to advance further and sow discord across Europe?
What is clear is that Europe faces a prolonged period of uncertainty and rising government borrowing needs. This comes at a particularly challenging time, as aging populations are already straining public finances. The crucial question is whether Europe can sustain this additional burden.
Economic growth must accelerate to help absorb these costs. However, in times of uncertainty, such growth is difficult to achieve and requires structural reforms, including:
- Greater labor market flexibility
- Higher levels of workforce education and training
- Increased spending on infrastructure and R&D
- Tax incentives for companies developing new products
These measures, while necessary, require substantial upfront investments and are often politically contentious, particularly given the recent rise of populist movements across Europe.
While increased defense spending will provide a short-term economic boost, financial markets will question how it will be funded. Broadly speaking, there are four main options:
- Raising taxes – This risks slowing economic growth, making it an unattractive option.
- Cutting other expenditures – Achieving meaningful savings would require reducing social spending, which is politically unpopular.
- Expanding budget deficits – This could drive interest rates higher and raise investor concerns about debt sustainability.
- Monetary financing (money creation by the central bank) – This could lead to an inflationary environment.
We expect that European governments will initially rely on deficit spending, followed by an increasing reliance on monetary expansion. This would result in lower short-term interest rates initially, but over time, rates would inevitably rise. Long-term interest rates may start increasing sooner, though this could be temporarily offset by sluggish economic growth.
For investors, this scenario favors gold in the near term, while over the longer term, it could significantly weaken the euro. However, not for now (for more insights, see our Currency and Gold reports)
