Donald Trump’s victory in the US presidential election heralds the return of an economic policy that, mockery aside, can be summed up in two words: America First It is not for us to comment on the US public’s democratic choice. However, it is worth analysing the economic backstory. How is the US economy doing as the Biden years draw to a close? Quite well, judging by the main indicators. GDP growth in the US was 2.5% in 2023 (versus just 0.5% in the European Union) and is likely to come in above that figure for 2024.
US exports have surged in the last three years, having become more competitive as a result of the Inflation Reduction Act. Unemployment fell to a historic low of 3.6% in 2023. Financial markets are in rude health: The S&P 500 is up 22% year-to-date, driven by US tech giants whose leadership has been extended in recent years through the advent of generative AI.
So, what led voters to kick the Democrats out of office? Two things seem to have fuelled Americans’ discontent. Firstly, the fact that US prosperity has done nothing to reduce inequality. In 2022, the Gini coefficient – which measures the level of inequality within a country – was even higher than it had been in the early 2010s. Then there’s inflation and the monetary policy introduced to tackle it. In a country of consumers where household debt reached $17.8 trillion in Q2 2024[1], recent years have been particularly tough – especially for the middle class.
With his promises to regain control over monetary policy, cut taxes, boost energy production to lower prices, and raise customs tariffs to protect US industry, Trump managed to win over a majority of voters.
Return of protectionism
This economic manifesto will certainly have consequences for the rest of the world. Trade wars and the return of protectionism are nothing new. But with a US president who wants to impose a blanket tariff of 10% or 20% on foreign products – inevitably prompting reciprocal measures – and a specific rate of 60% to 200% on Chinese imports, the trend will only steepen, further disrupting the trade network on which our economies have built their growth in recent decades. Trade with the US amounts to $25 billion for Luxembourg alone. Imported services make up the vast majority: $17.9 billion in 2022 [2]. Luxembourg mostly exports financial services ($3.75 billion annually), along with transport and communication services. It also exports more than a billion euros of manufactured goods (2022), mainly in steelwork. Our country is a popular destination for foreign direct investment from the US, with several large firms (e.g. Microsoft, Amazon and Goodyear) settling in Luxembourg to run part of their business in Europe. Moreover, trade relations between Luxembourg and the US are very important for our investment funds.
The EU as a whole exported €867.8 billion of goods and €684 billion of services to the US in 2022 [3]. Some European powers will be particularly exposed to the consequences of these protectionist policies. This is the case in Germany, where exports of products and services represented 47.1% of GDP in 2023. The day after the US election, Moritz Schularick, president of the Kiel Institute for the World Economy, said[4]: “Donald Trump’s likely election victory marks the beginning of the most difficult economic moment in the history of the Federal Republic of Germany. In addition to the domestic structural crisis, the country now faces massive foreign trade and security policy challenges for which we are not prepared.”
The return of Donald Trump gives Europe all the more reason to reassess transatlantic relations and be more realistic and less naive. And, as the 47th US president seems to view all negotiations – whether diplomatic or commercial – as a trial of strength, Europe will have to show that it can rise to the challenge. Clearly, it won’t be able to do this if it is divided. In this new geopolitical and economic landscape, the European project is of vital importance. With the US looking to protect its market, it is time for Europe to put the finishing touches to a single market that would enable us to go toe to toe with Trump. Enrico Letta explained how to do this in his April report. It’s up to us to act.
Competitiveness challenge
The other big challenge is restoring Europe’s competitiveness. The situation is definitely painful and was described perfectly by Mario Draghi in his September report. Europe must now undertake the reforms needed to raise productivity through innovation and become a leader in both the green transition and artificial intelligence. It will have to create global champions that can make the kind of investment needed to rival the US giants, such investment being partly funded from the savings of Europeans to the tune of €300 billion each year. This is particularly true in the technology, financial, healthcare, defence and space industries. The new European Commission, led by Ursula von der Leyen and including Luxembourg’s Christophe Hansen as Commissioner for Agriculture, has written its roadmap accordingly.
The Commission’s task will be particularly tricky given the problems besetting various member states. Relations between France and Germany seem to have been paralysed by internal political crises and greater budgetary divergence. Whether for ideological or strategic reasons, other member states will be fatally tempted to prioritise bilateral tractations with the US rather than stand firm with their fellow Europeans. We can only reiterate: Division guarantees failure.
European defence: A necessity
What if, paradoxically, Trump’s re-election was the short, sharp shock that Europe needed? With his America First doctrine, Trump is laying down another challenge for Europe, one that requires cohesion: defence. Given that Trump has made a number of ambiguous comments about the future of Nato (the US itself accounted for 65.6% of all member states’ military spending in 2024) and support for Ukraine, it is now more vital than ever that Europe becomes more strategically independent. In a world increasingly at war, Europe’s security – and very existence – must no longer rely on the goodwill of whoever happens to be in the White House.
By raising its defence budget to 2% of GDP in 2030, Luxembourg is contributing to this effort and assuming its responsibilities. This will mean annual expenditure of nearly €1.5 billion from 2030. Most European countries are on the same path. However, this funding drive will need to be supported by an ambitious economic policy designed to give the European Union a defence industry capable of ensuring this strategic autonomy. Luxembourg must play its part.
And the environment?
Trump’s election also represents a political challenge for Europe in terms of international cooperation on climate change mitigation. By pulling the US out of the Paris Agreement during his first term and playing down the urgency of the energy transition (saying that the US would “drill, baby, drill”), Trump created an ideological divide from European climate policies, which are based on ambitious greenhouse gas reduction targets and reaching net zero carbon by 2050. This divergence will certainly make it harder to implement globally agreed strategies, now that the collective pressure needed for other nations to commit has been weakened by the withdrawal of the world’s second biggest emitter of CO₂.
The European Union will have to assume the role of climate leader, ramping up its investments in innovative green technologies. However, this must not come at the expense of European business competitiveness. Trump’s environmental deregulation plans will force Europe to protect its industries from the competitive disadvantages that result, particularly through the carbon border adjustment mechanism.
Europe may have been built on its motto of being “United in diversity”, but will now have to show that it can be united in adversity.
[1] Source: Federal Reserve Bank of New York
[2] Source: STATEC
[3] Source: European Commission
[4] https://www.ifw-kiel.de/publications/news/trump-victory-economically-most-difficult-moment-in-the-history-of-the-federal-republic/