Erik Jones / Nov 2024
Photo: Shutterstock
The reelection of Donald Trump as President of the United States creates three major problems for Europe. Trump as candidate made it clear that he will raise tariffs. The only questions for Trump as president are how high he should set them and who can be excluded. Trump also promised to make peace in Russia’s war against Ukraine. For Trump as president, the questions are how much Ukraine will have to sacrifice and how quickly Europe can take responsibility for securing what’s left. This policy challenges Europeans insofar as an unjust settlement makes poor foundations for a lasting peace, and the investments required for European countries to make credible security commitments to Ukraine are going to be much more than most governments are eager to make.
Look deeper and the situation only becomes more complicated, again for three reasons. A second Trump administration is going to be at least as transactional in its policymaking as the first one was. By implication, Trump is likely to try to negotiate directly with European governments rather than collectively with the European Union. This piecemeal approach is going to complicate European decision making even on issues where the European Commission has clear competence, like trade.
Trump also tends to view Europe as a strategic competitor, particularly when looking at current account balances. This means his administration is more likely to link alliance politics with economic policy in ways that increase rather than decrease the pressure on European governments. Worse, Trump is likely to raise the rhetorical temperature in any conflict with Europe both quickly and aggressively. When Trump as candidate says he would let Russia ‘do whatever it wants’, that is one thing; when Trump as president says it, that is another.
The best way forward for Europeans is to work collectively to develop a comprehensive programme that can give the Trump administration less reason to invest in conflict across the Atlantic. Ideally, that programme will give the European Union something that it really needs to redress both its economic situation and the need to deepen support for Ukraine. Fortunately, that plan already exists in the overlap between the Letta and Draghi reports.
If European leaders could underscore their commitment to the recommendations made in those documents and show how doing so would rebalance economic relations with the United States and strengthen European security at the same time, that would create a powerful narrative for the incoming Trump administration that the European Union is already doing what they want. European leaders could also explain why and how it is important for the Trump administration to work with its allies rather than engaging in unnecessary conflict across the Atlantic.
Admittedly, this is going to be a hard sell both in European capitals and in the United States. But look at the policies before engaging in excessive eye-rolling. The main thrust of the Draghi report is to foster innovation while at the same time spurring investment in the digital and green transition. Draghi is explicit in noting that the success of this strategy hangs on using non-market instruments like credit guarantees, subsidies, and tax incentives.
This agenda gives many points of entry for trading exceptions across the Atlantic. It also brings together domestic and international economic policy instruments — read tariffs and other trade restrictions — in ways that mirror what we should expect to see from the Trump administration (and what we saw from the Biden administration, as Biden’s national security advisor, Jake Sullivan, pointed out in a recent speech at Brookings). This gives the Trump administration more reason to focus on Europe as a collective than to try to cut separate deals with individual member states.
The investment Draghi calls for will come at a cost. Draghi cites estimates that Europeans will need to invest an additional €800 billion annually to restore their industrial competitiveness. That scale of investment would reduce the European Union’s current account surplus with the outside world dramatically. Meanwhile, efforts to complete Europe’s capital markets union — advocated by Letta as well as Draghi — will both accelerate and lock into place the macroeconomic rebalancing.
The more Europeans use their savings efficiently within Europe, the less they will end up exporting capital, goods, and services to the rest of the world. The Trump administration will view this rebalancing as a turn away from ‘competitiveness’ insofar as Trump — like many Europeans — tends to confuse a current account surplus as a sign of strength. Hence Trump will view the successful implementation of the recommendations made by Draghi and Letta as a sign Europeans are less of a ‘threat’ to American prosperity.
That huge amount of investment will also involve an increase in European borrowing, either collectively or on a country-by-country basis. The debt will be used to finance the credit guarantees to spur private investment; it will also be necessary to cover the cost of subsidies and tax incentives. The amount of new borrowing will not be the same as the investment requirement, but it will be significant. Europeans are obviously struggling to agree on the wisdom of that recommendation.
The Trump administration will see an increase in borrowing less ambiguously and more as a sign of real commitment on the part of the European Union to change the structure of its economy. The Trump administration will be particularly favourable to additional borrowing in order to pay for defence procurement, including subsidies to build out and consolidate European defence industries.
The Draghi report places strong emphasis on this kind of defence industrial policy. In doing so, it provides a roadmap for European members of NATO to increase their defence spending as a share of gross domestic product without spending that money inefficiently or relying on procurement from the United States. There will be a transition period during which any increase in defence spending will fall on U.S. armaments, but the goal Draghi sets out is for Europe to become both more capable of providing for its own security and more self-sufficient in terms of military procurement. Both parts — the transition period and the long-term goal — can be sold by Trump as a victory resulting from his own tough bargaining. That messaging may sound like European weakness, but the result will be greater strategic autonomy and hence also European strength.
Again, this kind of investment is something the European Union sorely needs, with or without the election of Trump as U.S. President. Providing support for Ukraine is the most immediate concern. Developing sufficient military capacity to deter further Russian aggression and to stabilise the line of contact between Russia and Ukraine, and between Russia and the European Union is a longer term objective.
The Draghi report shows how both goals can be achieved. The Letta report explains how EU enlargement can make a positive contribution to this effort. The current candidates for EU membership bring important natural resources, human capital, new markets, and opportunities for investment. Helping those countries ensure their security will provide significant dividends in that respect. It will also reduce tensions across the Atlantic and perhaps even increase the likelihood that the United States will remain committed to the security of Europe both during the coming Trump administration and after.
A strong European commitment to embrace the policy agenda set out by Letta and Draghi will not eliminate all or even most of the tensions between the incoming Trump administration and the European Union. Relations with China are another point of tension that will require a separate balancing act. But the Letta-Draghi agenda will address issues related to trade and security that Donald Trump and his administration find important. That agenda also promises to strengthen the functioning of the internal market, the pace of industrial innovation, and the ability of the European Union to make its successful digital and green transition.
Along the way, this agenda will enhance European security and strengthen its strategic autonomy. Most important, Letta and Draghi offer a plan that is well articulated and ready (in large measure) to be agreed and implemented. Europeans worried about what a second Trump administration will bring should consider whether having a plan is better than not having one, particularly when we know that U.S. trade will become more protectionist, and Ukrainian security will be threatened. The reelection of Donald Trump poses a challenge for the European Union; commitment to the agenda set out by Letta and Draghi can offer an important part of the solution.
