Postcard from Davos

Although he only addressed the delegates by video link, Donald Trump dominated the week in Davos. His message to the world was crystal clear: he intends to build an extraordinarily attractive US economy, thanks to deregulation, low (fossil) energy prices and low tax, and those who choose not to produce on the US territory but still want to serve US demand, will face heavy tariffs. We may well have just witnessed “peak Trump”, before the internal contradictions of his economic agenda start materialising, but for now the dominance of the US is striking.

Ursula Van der Leyen’s speech in Davos was received as Europe’s response to the US assertiveness. Her message was nicely balanced between an affirmation of European values – notably in favour of a multi-lateral approach to world affairs – and a recognition of the need to change how EU institutions deliver policies. We found her three-pronged offer attractive– completing capital market union, simplifying the regulatory framework, rolling out a new energy strategy – but the details of the policies will be unveiled only in the coming weeks. Moreover, we could not help noticing that the fiscal constraint, an internalised difficulty to bring about a new wave of jointly funded programmes, plays a prominent role in the ranking of the EU’s priorities (CMU and simplification cost nothing to the public purse). We continue to think there should be space for ambitious joint action, for instance in the field of energy and defence. Yes, governments’ debt is high in the EU, but it is smaller than in the US, and there are obvious economic gains from electrification and defence.  It may well be that while EU institutions are well aware of the need for urgent action, the difficulty lies in national governments. It remains to be seen if the coalition agreement which will follow the German election will provide the necessary jolt, while political clarification remains elusive in France. In the meantime, it will be up to the ECB to provide the necessary “bridge”. While this is not for immediate consumption – for now, cutting 25 bps per meeting, just like this week, is likely to remain the ECB’s baseline – Christine Lagarde’s recognition that Europe is facing an “existential crisis” should be a good reason for the central bank to focus on downside risks to growth and, ultimately, go beyond “neutral” and bring its policy rate into accommodative territory.