Surprise! Why Europe could end up as one of Trump’s biggest problems overseas

Incoming President Trump and his team are clearly preparing to raise the stakes in confronting China. Focusing on what they (correctly) view as the main threat to the United States, Trump seems to view Europe as a secondary concern.

But that might not last.

Europe is facing a multi-dimensional set of problems. The continent’s elite, while lecturing the rest of the world about its superior values, have squandered the post-Cold War peace dividend, growing the welfare state, building an unwieldy bureaucracy and creating a flawed currency. Now all that is falling apart.

Confronting China will be difficult and expensive. It will require managing a complex and shifting coalition. But there is at least some structure to the conflict. The problems facing Europe, in contrast, are unbounded, with little leadership and no consensus on how to address them. The result could well be an unsolvable chaotic vacuum — just about the worst possible situation.

America certainly has its own problems, but its demographics are better, and it is home to the most innovative and cutting-edge companies. More importantly, productivity and the economy are consistently growing. By comparison, Europe is practically at a standstill; outside the Dutch semiconductor systems supplier ASML, it is home to few leading technology companies. Worse, the continent seems to have no will to make difficult choices, a situation exacerbated by its common currency.

The adoption and promotion of the Euro is emblematic of Europe’s problems. The existence of the Euro has nothing to do with economics and everything to do with politics and the European elite class.

European political elites have harbored a fantasy of a united Europe for the last 160 years, both as part of their own internationalist vision and as a counter to the U.S. — a nation viewed with a combination of envy and contempt. From the founding of the European Coal and Steel Community in 1951 (precursor to the European Union), senior bureaucrats within western European nation-states and their pan-European organizations have pursued a policy of opportunistic integration. Pushing on every door, they walk through the open ones and move past the closed ones.

Unfortunately for the elites, nationalism has proven impossible to eradicate. The actual citizens of the various European countries have supported some integration but clearly do not embrace the elite’s idea of a “United States of Europe.” On rare occasions when major treaties were put before the voters, approval was hit or miss, with several second-chance referenda where special carve-outs and favors were added to gain approval. (Germany, the largest nation and economy in Europe, has never even had any referenda.)

The creation of the Euro was supposed to be a major step in integrating Europe. The elites figured the common currency would be a brilliantly successful next step and, more importantly, a rival or replacement to the dollar as the world’s reserve currency. It hasn’t worked out that way.

After a rocky start, the Euro, originally pegged at $1.15 to 1 Euro, soared to $1.60 by 2008 only to begin a long, inexorable slide to near parity at present. While this makes Euro nations’ exports more competitive, it also makes their people poorer. Additionally, any prolonged fall in a currency’s value reflects economic weakness.

What’s worse is that the Euro forces one-size-fits-all monetary policy. It prevents borrowing in their own currency for the 20 countries using the Euro, despite their very different economies, fiscal policies, national debt and domestic politics. On top of that, the Euro has become a cardinal achievement in the minds of the Eurocrats in Brussels. It’s a “Hotel California” currency of sorts — you can check out any time you like, but you can never leave.

Everything is fine when economic conditions are good and national governments practice fiscal rectitude. But when growth falters and the books are cooked, trouble arrives.

Greece’s financial crisis was a warning, and the result was not pretty. Barred from devaluing its own currency or a debt default or restructuring, the Greeks endured crippling austerity and political instability for years. Hundreds of thousands emigrated, and the economy is barely bigger than it was 20 years ago.

Of course, the EU learned nothing — Greece should have left the Euro.

Today, it is France that is in trouble. Facing a massive fiscal deficit and fast-rising national debt, France finds itself unable to devalue or engage in financial repression. It is consequently facing an austerity package that nobody will accept domestically. Neither left nor right are willing to rein in the French state.

France can’t grow its way out of trouble, as the various entrenched interests are not willing to accept the disruption that serious economic reform requires. In short, the French want to have the largest welfare state in Europe, but at a discount.

If France still had the franc, the country could devalue it in addition to forcing its debt on its own citizens and banking system. That’s hardly ideal, but it’s better than austerity. Devaluation and financial repression happen over time and can be blamed on “the market” — always preferred politically. The pain is spread among everyone, there is more room for reform to occur and people have time to adjust to a new economic reality.

In contrast, austerity is immediate, painful and hits specific groups very hard. Austerity is incredibly destabilizing politically, giving rise to extremism. It is rarely a long-term answer. Between two bad choices, devaluation is better, but the Euro prevents that option for any of its participants.

Whereas Greece was small enough for its crisis to be manageable, France is far too large. The country is already in a political crisis amid a war on Europe's eastern flank, a looming wave of Chinese imports swamping European markets, and a political vacuum in Germany.

France is not the only European nation with a large welfare state and competitiveness issues. Other states have the same problem and even worse demographics. Handcuffed by the Euro, more European states are likely to enter into austerity crises, metastasizing into a political crisis.

Without a big boost in economic growth, Europe will find it nearly impossible to get to where it needs to be in paying for its own defense, exacerbating tensions with Trump. Consumption will not rise, keeping the continent dangerously dependent on exports. Reforms proposed by Mario Draghi in his report to the EU are landing with a thud. While Draghi’s proposals are hardly a cure-all, there seems to be no appetite whatsoever for changing anything.

The Trump administration could be facing a growing crisis for the next four years, as Europe fragments further politically and cannot afford its own welfare state, let alone its own security. There is unlikely to be unity on confronting China or Iran or Russia.

While establishment pundits in the U.S. panic over Trump’s commitment to NATO, it could well be that European economic and political decay causes NATO's collapse. For all the jabbering by the chattering classes, it is Europe that has failed to hold up its end of the bargain on defense and build a robust economy to support itself and the transatlantic alliance.

Keith Naughton is co-founder of Silent Majority Strategies, a public and regulatory affairs consulting firm, and a former Pennsylvania political campaign consultant.

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Surprise! Why Europe could end up as one of Trump’s biggest problems overseas

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