Do we have to worry about Trump

Contrary to all expectations Donald Trump won the election. In January he will become the 45th US President. It’s obvious: Trump is different from his predecessor and he will certainly also govern differently

But there is mounting concern that Trump will plunge not only the USA but also the western world into major problems. But do we really need to be worried?

Donald Trump did not get the most votes. But this is not necessary in the USA. Because of the electoral system the candidate that gets the most electoral votes is the winner. And here Trump has a huge lead. If the Michigan result, which is still not yet final, is confirmed, then Trump won the votes of 306 of the electoral-college members, while Hillary Clinton won only 232.

A victory that not all Americans are enthusiastic about: since the election there have been demonstrations against the future president every night in the USA, which is an unprecedented phenomenon. He has appointed three of his children to the core team that is to prepare his presidency. But they are also supposed to run his companies during his presidency, which suggests a clear conflict of interests.

Many of the worries about the future are based on the concern that Trump is an irrational populist. But I do not believe this is the case. Trump may have very unusual views and he may fail to conform to normal behaviour patterns, but he appears to proceed very rationally. So he is likely to pursue the two most important goals of democratically-elected politicians: first, that the people in his country are better off – political convictions also play a major role here – and second hold on to power. As the presidency in the US is limited to 8 years, the latter also goes hand in hand with securing a fitting place in the history books.

One important condition needs to be borne in mind with respect to achieving these two goals. With the majority in both Houses of Congress Trump has the greatest possible capacity to shape policy – this has only been the case in twelve of the years since 1968. But this very comfortable situation is unlikely to last long. As a rule, after two years a US president already loses his majority in the Senate in the midterm elections, which then makes it harder for him to govern the country.

Generally speaking, the following simple rule holds: for domestic policy issues and the budget the US president needs the Congress, but for large parts of foreign policy he can decide on his own. So Trump will probably make use of the full capacity he has to shape policy before the midterm elections and implement some of his election promises rapidly. In particular, a debt-financed economic stimulus programme is

likely to be passed in the near future. This should generate some stimulus to growth as of mid-2017 to 2018. However, the effects on the economy as a whole will remain limited as private sector investors are likely to withdraw to some extent. The election promises on immigration policy will presumably be implemented only in part as otherwise the necessary workforce would be lacking.

The medium-term economic outlook is also not promising with or without Trump. For some time now there have been signs that the US economy has passed its peak in the current economic cycle. It is now a matter of to what extent Trump can impose his protectionist views. Protectionism has become political mainstream in some countries. One must, therefore, expect that a broader alliance will fight for less free trade.

This is driven less by ideological convictions but is rather a reflection of the population’s fears of being left behind by the ever faster evolution of the economy and society. As a result, the pace of global economic growth will probably decline gradually as of 2019 and settle down at a level of a good 2% – at the moment it is around 2.75%. Inflation will probably increase very moderately. Only an excessively restrictive immigration policy in the US could lead to strong wage growth, which in turn would accelerate inflation.

As regards world politics Trump’s unusual behaviour patterns could break up established structures. But the new US president will definitely not endanger world peace. He may, however, well shatter or call into question many European convictions that are based on consensus and the goal of holding on to individual power. The downside here is likely to be a wave of populism – especially in the upcoming elections in the Netherlands, France and Germany. The election campaign in the US has shown that people can be reached with simple answers to difficult and complex questions even if the answers are wrong or unable to solve the problems. This approach is likely to be copied by some parties in the upcoming election campaigns.

The problem is that technological and economic progress will continue to move forward. Companies have a lot of capital and are not really completely at the mercy of individual governments. If politics becomes too hostile to business in the medium term then structures here are likely to change. Growth momentum is created in countries that position themselves accordingly and not in countries that stand in its way.

The central banks will presumably stick to their different courses. The US central bank is likely to continue to go down its moderate rate-hiking path while the ECB will stay with its very expansionary policy. The British and Japanese central banks should continue with their very loose monetary policy stances. So the bond markets have probably already digested a good part of the possible monetary-policy tightening and are no longer really expensive at the current level. Equity markets will presumably continue to chart a moderately friendly trend, whereby the notable share price losses in the emerging markets are no doubt overdone. However, in the coming months, as political uncertainty mounts, volatility in the financial markets will also increase.

Do we need to worry? Yes, but only a little.

Trump brings uncertainty into a well-established political system that is largely intent on holding on to power. However, this comes at a time that is characterised by great economic fragility. This creates the danger that backward-looking views will become capable of commanding a majority and preventing social and economic progress.

In the medium term companies will adjust to this and change the locations in which they invest accordingly.

It is up to us what kind of society we want. We cannot stand in the way of progress, but we can steer it. But in the short term there is little reason to be worried about the economy. Overall, it is important that European governments do not allow Trump to provoke them and that they avoid escalation. But this will require a concerted stance in Europe, which unfortunately is difficult to imagine at the Moment.


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