The mid-term elections in the United States have come and gone, and with them the hope harbored by many national governments in Europe that the much anticipated “blue wave” would materialise. The Democrats did make modest gains on the whole, but nowhere near enough to cause a genuine upset of American politics the same way that the so-called “Republican revolution” wrested both chambers from the Clinton presidency during the mid-terms of 1994. Most fundamentally for European prospects, while the Democrats gained control of the House of Representatives, the Republican majority in the senate has widened – and the Senate is the chamber where the president’s foreign policy can be championed or disrupted. Trump might well find himself curtailed at home, but his foreign policy will remain untouched and his stance might even harden as his domestic challenges grow.

To say that all this represents a momentous development for European foreign policy would be understating it. By riding out the mid-terms, Trump has proven that he is far from a temporary upset of American politics. Indeed, the most careful observers will realise that the change of direction in the GOP’s base precedes Trump’s political career by many years. Trump has simply been the first GOP primary candidate seriously and consistently motivated in promising the electorate what they really wanted. This heralds a reversal in Transatlantic relations that is without precedent.

One of the many fields in which Europe must now contend with entirely new challenges is that of free trade. Trump’s economic nationalism mirrors that of his voters, and has translated in a general American retreat from free trade around the world. In the meantime, the European Union has negotiated – and in some cases clinched – enormous trade deals, to much publicity. Can the EU step into the breach left by Trump’s withdrawal from the world market?

The Linchpin of Free Trade

The EU is well positioned to exploit the vacuum left by the United States in free trade: outside of its score of preferential trade agreements with countries in its neighbourhood, the Union has been active for a number of years in negotiating ambitious free trade agreements with Australia, New Zealand, Vietnam, Singapore, Canada, Japan, Mexico, and the South American trading bloc Mercosur. These wide-ranging deals seek to dramatically reduce and in some cases all but eliminate tariffs. They also typically include clauses on worker protection and rights, safety and food standards, and protection from imitation. This is an upward equalisation which would progressively enshrine EU standards as widely recognised all over the world.

The state of these talks vary. The EU and Mexico originally signed a trade agreement in 2000, and are now in the process of agreeing to an updated text which would replace the original agreement. Others, like CETA, are on the cusp of finally being implemented, pending approval by the parliaments of each member state. On the opposite end of the scale, the EU-Mercosur trade deal has a long and politically complicated road ahead.

Of all these, however, the most significant is undoubtedly the free trade deal with Japan. Labeled as the “cars for cheese” agreement, this truly gigantic deal is in the final stages and, once cleared by the European Council, will be put forward to the European Parliament. When implementation begins, the agreement will bring together a combined 19% of the world’s GDP and a combined 38% of the world’s export of goods into a single free economic zone. No wonder that the European Commission has hailed it as “the most important bilateral trade agreement” it has ever concluded. Even in isolation, it will massively strengthen the EU’s position in world trade. When combined with the other trade deals currently being negotiated, it could well be a game changer for the European export market.

No Economy is an Island

The narrative of this grand trade offensive is, of course, limited in two ways. The first regards timing, while the second regards the way we interpret macroeconomic developments in the 21st Century. The trade deals being negotiated by the EU have taken years to reach a point of maturity, and have gone through difficult days of impasse and delay. The case of CETA being stonewalled by a Belgian regional parliament best illustrates the hurdles that the EU has to face when agreements transition from successful negotiation to successful implementation.

It is a happy convergence that some of these trade deals – such as CETA, or the recently signed EU-Singapore agreement – reached a critical point just as Trump tried to turn global trade into a zero sum game. Of course, this is not entirely down to coincidence: Trump himself greatly contributed to the sudden acceleration, particularly with regards to the Pacific. Japan and Vietnam eagerly sought far-reaching trade deals with the EU as substitutes for Obama’s grand project of a Trans Pacific Partnership. Nor should we discount the importance of these free trade agreements as an opportunity for the European export economy, or for the accessory benefits in soft power and international standing.

This, however, is the point where Europe finds itself faced once again with its own limitations. In a classic, 20th century view of macroeconomics, the world economy is composed of many “islands”, corresponding to national economies, which are interconnected through flows of goods, payments and investments, collectively aggregated into a balance of payments. But in the highly globalised economy of the 21st Century, things are not so simple. The flows of trade and finance are linked, but do not overlap. It is a very important point that the Great Recession of 2008 was not a crisis of public finances or trade deficits, but primarily one of banking claims. The pre-2008 fear that the US would slip into a twin deficit crisis with China proved unfounded. It was the private sector, with European, British and American banks in the lead, that caused the disaster.



As shown by the two charts above, provided by the IMF and the BIS, trade and finance do not overlap. More to the point, the center of the financial world is still a system primarily based on American and European banks, with east Asia on the rise. But something has changed since 2008, and it’s the staying power of European banks.

The state of the world’s finances and of the European banking sector in particular deserve to be explored in depth in a different article.

For the moment, suffice to say that European banks have never recovered from the crisis they were, in large part, responsible for unleashing, as they rushed to exploit the American mortgage bubble. Here we see one further, dramatic instance of the theme that has run through the last 150 years of history: the decline of Europe and the rise of new global players. The United States and Southeast Asia are the two main centers of global finance. European banks teeter on the edge of implosion to this very day, with even Deutsche Bank – the biggest corporate muscle of the locomotive of the European economy – facing the very serious prospect of collapse. European banks would have never survived the recession without vigorous liquidity provided by the American Federal Reserve.

When European leaders talk about an independent trade policy as a way to achieve a new independence from the United States, it’s hard to disagree with the sentiment. However, no course of action has been proposed to suggest how this could actually be achieved in practice. Behind every trade deal negotiated by the European Union looms the uncomfortable knowledge that Brussels would not be in a position to conduct its trade offensive, without the modicum of financial stability guaranteed by American credit.

Uncertainty Lies Ahead

The importance of free trade should not be discounted, and the European Union is in a prime position to become the centerpiece of a new international trade system. This has significant political and prestige connotations as well, at a time where the opponents of liberalism are gathering strength. It is inconceivable, however, that this could lead to a true European economic emancipation from the United States. When it comes to credit-worthiness, the all important factor in a sophisticated and globalised capitalist economy, the Old Continent has well and truly been eclipsed, not because of the state of its public finances, but primarily for the beleaguered state of its banks in the wake of the Recession.

European strength in free trade will not increase the health of its banks, or remedy the tragic vulnerability of its credit system. As China and the United States have demonstrated, moreover, a strong export economy is not a sufficient or complete substitute for a booming domestic market. To name a practical example, while it’s easy to look at the German trade surplus as a demonstration of economic strength, one should keep in mind that the surplus is so large thanks to, in part, suppressed consumption at home. This is true of Europe writ large – no amount of exports has been able to comprehensively revert the anemic state of European economies to their pre-crisis levels.

The European trade offensive is a great undertaking, but expecting it to reposition the EU in relation to the United States is a recipe for disappointment. The solution to the EU’s economic ailments, if it indeed can be found, will require a much larger strategic vision – one that seems to be lacking, not just in Brussels, but in all European capitals.