How Europe can meet Trump’s three challenges

Donald Trump is a man more of words than actions. Still, his administration’s recent rhetoric in three areas — currency, trade and taxation — is raising hackles across the European Union. Unity among EU member states is key to addressing the first two challenges in a way that safeguards the European economy. On the third, however, the EU should view it more as an opportunity than a threat.
The recent war of words over the dollar demonstrated the benefits of euro-zone cohesion. US Treasury Secretary Steven Mnuchin, speaking at the World Economic Forum in Davos, sent the greenback diving when he remarked that a cheap dollar would be good for US trade in the short run. Mnuchin later said his words had been misinterpreted (the dollar climbed back against the euro), but the gaffe left lingering questions over whether the Trump administration was departing from a long-held US position in support of a strong dollar.
The backlash from Europe was strong, and rightly so. Mario Draghi, president of the European Central Bank, said the move in the dollar was in part due to communication which did “not comply with the agreed terms of reference.” A day after, Benoit Coeure, a member of the ECB’s executive board, said the volatility was “not helpful” and warned that any discussion over currencies should take place at the G-7 or G-20. Bruno Le Maire, France’s finance minister, stated that he wanted currency levels to reflect fundamentals, adding he hoped this was “still” the position of the G-7.
The US administration has been much more careful since. This is a small win for Europe. Trump and Mnuchin have been warned that the dollar should not be seen as a tool which can be manipulated to boost exports. Coeure added that the ECB would be able to reassess its policy if volatility caused an “unwanted tightening of monetary policy.” The message was that Europe is not only talking, but remains ready to act if needed.
This show of unity over the US foreign exchange policy was helped by two factors: the fact that the euro zone has a strong institution in charge of monetary policy, and the unanimous view that the US breach of convention posed a threat to the European economy. The same applies in the realm of trade, another area where Trump administration rhetoric is increasingly targeting Europe.
Trump said last month that the trade situation with the EU was ‘very unfair’ and that these problems ‘may morph into something very big.’ This followed comments from Wilbur Ross, commerce secretary, who had said that trade wars aren’t new but that “US troops are now coming to the ramparts.”
That set off alarm bells in Brussels and around Europe. EU trade commissioner Cecilia Malmstrom was quick in responding to Ross’s rhetoric saying that talk of a trade war was “irresponsible.” Emmanuel Macron, Angela Merkel and Paolo Gentiloni, leaders of the euro zone’s three largest economies, have all recently warned against the risks of protectionism to the global economy.
Of course, European governments have shown recently that they too can be protectionist when it suits them. But the more consistent and united the EU remains on trade, the more effective it will be in countering any protectionism from the US.
Taxation, the third area where US policy has unsettled in Europe, requires a different approach from Europe. The Trump administration’s wide-ranging reform introduces measures to encourage US companies to return their cash piles, including a reduction in the corporate tax rate.
EU finance ministers responded by raising concerns over whether some of the measures amount to unfair competition. This is understandable: The US tax reform was rushed through Congress, and it is hardly surprising that European governments want assurances that their companies are not put at an unfair disadvantage. But accusing the US of “fiscal dumping” before the case is settled, as Le Maire did in Davos, may be going too far.
For one thing, the EU has no real leverage there. The EU is still far from being a political union, so taxation remains an important expression of sovereignty. Corporate rates within the union vary so widely, from low-tax Ireland (where most companies pay only 12.5 percent) to higher-taxed Germany, where the corporate tax rate is around 30 percent.
As the euro zone moves towards closer fiscal integration, it will be hard to leave taxation out of the mix entirely. But, for now, corporate tax rates will remain a distinctively national decision. So long as this is the case, it is hard to see Europe respond cooperatively to Trump’s tax challenge.
Instead, the EU could focus its energies elsewhere: There are many different ways to attract corporations, including having excellent infrastructure and a business-friendly environment. Europe doesn’t need to copy the US to stay competitive. And a more competitive US corporate sector should prompt some EU members to pursue long-delayed product market and administrative reforms to keep up.
Time will tell how effective the Trump tax reform is for the US. In the meantime, the EU needs to pick its battles carefully.

—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times