How can the EU Trump-proof its economy?

The first week of the new US administration has intensified the pressure on Europe. President Trump has gone further than expected on US territorial expansion, and has refused to rule out the use of force. The speed, aggression and (in some cases) disregard for the rule of law with which he has started to implement his policies further complicate the US relationship with the EU.

Bruegel’s assessment of the Commission’s emerging economic strategy, as we can discern it from the mission letters to the commissioners, is that it is on the right lines on economic security, international partnerships and digital regulation. The EU has to take a broader approach than a foreign economic policy focused only on supply chains.

The Commission follows Mario Draghi’s prescriptions on innovation and single market reform and his expansive approach to industrial policy, except on two points: it avoids World Trade Organisation-prohibited subsidies and it proposes a new state aid framework for national industrial policy, rather than the expansion of EU funds for public investment. However, the state aid proposals risk harming competition and weakening the single market, with the unintended consequences of protecting incumbents and inhibiting structural change.

Instead, the EU should accelerate policies that address its structural weaknesses by raising productivity growth (not just for labour but also resource productivity) and improving defence capacity and economic security by lowering Europe’s financial dependence on the US. Trump’s Wild West approach to deregulation offers an opportunity for the EU to make itself attractive to investors who prefer a more reliable regulatory environment and rule of law. Unlike tariffs and discriminatory subsidies, the competition to provide a good business environment is not a zero-sum game.

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