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A new world order?

John Redwood, Charles Stanley’s chief global strategist, looks at the current state of the transatlantic EU/US alliance.

John Redwood

in Features


Some commentators attach great significance to something Mrs Merkel said: “The times when we could completely rely on others are to an extent over”. To me it was a tentative and muddled comment with an election pending. To others it marks a new independence by the EU, and a parting of the ways with the US.

With an unusual rhetorical flourish, she added that Europe “must take destiny into our own hands.” As so often these days Mrs Merkel finds it difficult to distinguish between Europe, a continent of varied countries, and the EU. I doubt she bothered to clear her remarks with the other member states of the Union who may have a view.

It is not the first time the transatlantic EU/US alliance has been questioned. Mrs Merkel clearly found President Trump’s lecture on the need for more financial contributions to NATO from the European allies unpalatable, and was very unhappy about his wish to go cool on global warming agreements. This has echoes of EU unhappiness about President Reagan’s aggressive stance to the USSR prior to its collapse when the continental European allies were reluctant to help with his missile dispositions. It is similar to the worries about former President Obama’s much heralded tilt of policy to Asia. Neither turned out to be terminal for US/EU relations, and the Reagan pressure during the Cold War helped bring about the liberation of Eastern Europe.

So why do others think it is significant, and what might it mean if anything for markets? It will not herald the end of NATO. The moment of maximum danger for the alliance has passed. Mr Trump has met NATO and has confirmed he will continue to work with it. He will be a bit more aggressive in his language than his predecessors in making the same plea for the European members to pay more. Nor will it herald the end of all co-operation on security and Intelligence, where the balance works in the EU’s favour and where the US is likely to share what it should to alert EU member states to dangers.

There is no extant comprehensive trade treaty between the USA and the EU, and no known threat to current EU/US trade arrangements from the US Administration. Doubtless Mr Trump would like a better trade structure with more US exports and fewer imports. He does blame Germany for using an undervalued currency, and will be seeking improvements to the trade terms. EU agricultural protection is a particular impediment to the US. There is no current move towards imposing more barriers.

So what did Mrs Merkel mean, beyond wishing to send a signal that she disagreed profoundly with the President? She might have been thinking particularly of global warming and the EU enthusiasm for decarbonisation. Mr Trump is seeking US withdrawal from the Paris Accord, which will formally take up the rest of this term of his Presidency to accomplish. Meanwhile individual states of the US Union will continue with their renewables policies and their green initiatives. The EU with the rest of the world will press on with its programme and targets. There will continue to be plenty of alternative energy developments around the world, and the electric car remains a darling of the markets.

She might have in mind over the longer term building a bigger EU defence force, but we are a long way off EU forces being able to defend the EU against any major threat without US assistance. Probably she just wished to send a warning to the reluctant and the rebellious amongst EU member states that armed with a new ally in France’s President Macron, Germany is ready for the next forward move in EU integration.

I do not think this is the stuff of market moving decisions. The take away from the Trump tour is more business for the arms makers in the Middle East. Maybe even in a nervous EU there will be some modest uptick now in defence budgets following the Trump prod. If they do, the EU will show that far from becoming more independent, they reluctantly have accepted the military and security leadership of Donald Trump and their dependence on NATO. In the climate change and energy fields there will be some divergence between the US and the rest, but it will take time for Mr Trump to change much of it. It does signal again his intent to rely more on home produced oil, gas and coal, which will act as a downward pressure on world energy prices. Commentators will write plenty about these exchanges, but the underlying reality is of a decent economic recovery in most places, as a backdrop for improving company earnings and dividends. That is why markets often have good days despite all the worries we read about.

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