“We Europeans are prepared to take countermeasures”
Ulrike Malmendier Photo: Sachverständigenrat Wirtschaft
Economist Ulrike Malmendier advises more European integration and supply chain diversification in response to new US economic policies, and tells us what Germany could learn from Biden’s Inflation Reduction Act.
Mrs. Malmendier, as a member of the German Council of Economic Experts, you regularly make recommendations to the German government. What economic policy strategies would you recommend to the emerging new German government in relation to US President Donald Trump’s policies to date?
President Trump’s approach to international relations is to see every interaction as a potential deal. In order to look as good as possible to such a negotiating partner, it is important to act from a position of strength. Above all, this means being in a good economic position and being economically independent.
In my opinion, the very important domestic and economic goal of finally returning to a growth phase after five years of stagnation is also of great geostrategic importance. The next government should do everything in its power to make the German economy fit for the future – and not subsidize existing industries or think back to our strategies of the 1980s. Future-oriented investments are also the best response to Trump’s trade policy and the new geopolitical situation. Economic policymakers should constantly ask themselves what is growth-oriented and what can strengthen Germany’s growth potential.
Secondly, I would like to emphasize that Germany cannot do this alone. To be able to negotiate successfully with an economic powerhouse like America, we must always have a European perspective. This means that it is now even more important than before to push ahead with a genuine common market for goods and services without frictional losses and drive forward the Capital Markets Union. We also need to think together about how to secure our energy supply as part of a European plan. A common approach is much more efficient.
Beyond Europe, I would also say that the international diversification of trade routes and supply chains, where we have been on a kind of fast track because of the Covid pandemic, should definitely be continued and expanded. A positive side effect of the geopolitical shifts is that free trade agreements such as Mercosur will hopefully now be easier to implement throughout Europe.
At the moment, the discussion about Trump’s economic and trade policy is dominated by the focus on new and additional US import tariffs on goods from Germany and Europe, but also from China, Mexico and Canada. The dangers of a renewed rise in inflation in the US due to higher import tariffs and even a possible recession do not seem to be deterring the President. How do you assess the EU Commission’s reaction to the US import tariffs on steel and aluminum products, which has announced countermeasures in two stages?
With regard to the issue we have just discussed, namely strengthening and demonstrating negotiating power, I think it is the right step to say: We Europeans are prepared to take countermeasures. They are appropriate according to the rules of the World Trade Organization (WTO). In this respect, the EU’s response so far has gone in the right direction.
At the same time, we must be aware that it would be best for the European economy and European economic growth if we could de-escalate. Incidentally, this would also be better for economic growth in the US. All the assessments and simulations that I have seen on this subject come to the conclusion that both the short-term effects on gross domestic product in the US and the longer-term growth and employment effects will be consistently negative.
The turbulence that has now occurred on the stock and bond markets is a clear indicator that Trump’s economic policy is leaving its mark. The fact that US Treasuries have lost value in tandem with the ups and downs of the stock market is highly unusual. Normally, in times of crisis or great uncertainty, they are the “safe haven” into which investors take refuge.
“When faced with economic uncertainty, company bosses cut back on their investments”
The market movements illustrate the negative impact of this economic policy uncertainty. When tariffs are threatened and then not imposed or withdrawn, it creates enormous uncertainty in the markets. All company bosses ask themselves how they should deal with this uncertainty and, in case of doubt, cut back on their investments. We can tell you a thing or two about this in Germany. We already had this problem in previous years, albeit to a much lesser extent, and yet it was one of the most frequently cited reasons for the reluctance to invest.
During his first term in office, President Trump repeatedly complained about the US trade deficit, particularly in relation to Germany and China. Could he be convinced by the argument that strong German companies with sites in the United States, especially in the automotive industry, not only provide employment and prosperity in America, but also make up an important share of US exports with their products for markets all over the world?
What does “convince” mean here? In general, he should welcome foreign companies, including the often negatively commented German automakers, to come to the U.S. and produce locally. That could also help with the trade deficit. But I don’t think it will make the Trump administration look more favorably on German exporters and prevent further tariff hikes.
In Germany, politicians and business leaders are still mourning the failure of the EU-US TTIP free trade agreement. What is, in contrast, your interim assessment of the Trade and Technology Council (TTC), which is seeking transatlantic progress on standards and regulatory cooperation in certain industrial sectors?
I am pleased that these efforts are still being made, meaning that the idea of simplifying international trade has not been completely abandoned, and that work to reduce existing frictions is continuing. But the concrete results that we would have liked to see at this point in time are still lacking and I fear that the new political environment will not make it any easier.
However, a good side effect of the TTC is that we better understand that the willingness to accommodate American producers and products in terms of standards, standardization and regulation is a good bargaining chip with Trump. It is definitely worth using this aspect more actively.
One of the most far-reaching pieces of legislation from President Biden’s time in office is the Inflation Reduction Act (IRA), which promotes green technologies in the US through subsidies and tax breaks worth around 370 billion US dollars, thereby triggering even greater investment. It is not yet entirely clear how Trump will proceed with the IRA. Should Germany set up its own subsidy programs along the lines of the IRA?
Let me start by saying that the Americans would claim that the IRA is in some ways modeled on the European Green Deal and its subsidies. But the question remains. I see a model function, namely the way the subsidies have been implemented in the US. The so-called investment and production tax credits are particularly exciting, because they give companies incentives to make targeted investments in the subsidized areas.
The good thing about the IRA’s tax credit system is the planning certainty – companies do not have to submit complicated applications and then wait to see whether they will receive funding. With tax credits, the funding is clear from the start. This increases the willingness of companies to invest immediately in response to economic stimulus and quickly leads to positive effects. Regardless of whether green technology is promoted or not, I very much hope that the Germans and Europeans will continue to think about how such an instrument could be implemented.
Concerning the question whether the IRA could be a role model for Europe in the sense of large-scale industrial policy: As a market economist, I have mixed feelings about politicians choosing a particular industry and then massively promoting it. Compared to a top-down industrial policy, market participants usually know better which sector to enter in a big way. But I also have to say that in the case of the IRA, i.e. green technologies, we are talking about so-called public goods – the environment and the climate. Here, the market economy does not usually come up with solutions so easily. That’s a good reason to say: let’s give it a political boost.
“As a behavioral economist, I know how important it is that the financial support goes hand in hand with a psychological signal”
The second reason why the IRA could be a more concrete role model for Germany right now is that it could send a strong signal that our country is making progress in a specific, ideally future-oriented area. Similar to what President Macron tried to signal with his AI summit: Something big is now happening in France in the field of artificial intelligence. That could help us.
As a behavioral economist in particular, I know how important it is that the actual financial support goes hand in hand with this kind of psychological signal. In other words, we should think about which perhaps still risky technologies Germany could play a leading role in. The focus must be on the question: How do we make the economy fit for the future, how do we introduce future-oriented skills to the workforce, and how do we help to promote future-oriented technologies in Germany not only at the “start-up” level but also at the “scale-up” level, so that we finally achieve economic growth again?
The US national debt currently stands at around 35 trillion US dollars. According to one estimate, Trump’s economic plans would mean a further increase in national debt of up to eight trillion US dollars over the next ten years. What risks does this pose for the stability of the international financial system?
First of all, it is a danger for the United States. The interest costs for the US national debt continue to rise and now exceed the military budget. There are also inflationary effects. American government bonds could therefore also lose their status as a safe haven. It is to President Trump’s credit that he has recognized this problem and is trying to tackle it – even if the success of the DOGE savings falls far short of expectations.
I agree that these developments are not good for the stability of the international financial system either. But I would also say that this is an opportunity for Europe. The euro could become a stronger reserve currency. The European financial system could become more important, the capital markets in Europe could be deepened. This is clearly linked to what we discussed earlier, which is that we need to invest in new technologies for the future.
I would like nothing more than for us Europeans to take an important and positive step forward with this change in U.S. trade and economic policy and to strengthen the single market and the capital markets. I very much hope that we can seize and maintain the momentum.
The interview was conducted by Robin Fehrenbach and subsequently translated from German.
Ulrike Malmendier is a behavioral economist, policy advisor, and professor of financial economics at the Haas School of Business at the University of California, Berkeley. She is a member of the German Council of Economic Experts, a scientific advisory body for economic policymakers and the public.