Dr Ovidiu Tierean is Senior Advisor at PKF Malta
To say that last week was a roller coaster of emotions is an understatement.
If you asked me at the beginning of the year to write an article with this title, I would have smiled at best. Faced with the chaos caused by the prospect of tariffs imposed by Trump, the EU played the patient diplomatic game. It did not adopt a servile attitude, nor did it unleash its most powerful trade weapon. Above all, it must offer the world an alternative to the chaos in the US. Markets lost $10 trillion in three days and then regained half of that in a single afternoon, because of the erratic decisions of a single person. The individuals responsible for the abnormal buying spikes in the markets, including call options on various indices and exchange-traded funds were not just lucky, nor were they part of a special Signal group. They simply followed Trump on Truth Social, where he posted the message: “Now is the perfect time to buy!”, just hours before the tariff break.
The first conclusion for the EU is that Trump will back down under pressure, although the universal 10% tariff is still in place, as are last month’s tariffs on steel and aluminium. Economic analysts say that although the US president would have liked to make one-to-one agreements with all partners, this will not be the case in just ninety days. The decision to pause tariffs was about investors and funds around the world fleeing everything related to the US, including its sovereign debt, which increases borrowing costs for the US government.
There is a long-standing phenomenon where Europe tends to overestimate US power and underestimate its own. Europe did not “suck it up” nor did it retaliate for the Liberation Day tariffs. It saw how the market carnage and the threat to US Treasury bonds made a hole in the idea that the US was impregnable. One may only imagine how fast the wave of departures from the US assets to other safe havens, including the euro, would have been if the EU had immediately used its so-called “bazooka”, the anti-coercion tool, a powerful new regulation that would have allowed it to target American service industries, such as banking and technology. Even by playing this patience game, the euro is still the winner of safe-haven currencies, up 4.7% since the tariff chaos began.
The second conclusion is that the rest of the world is ready to bypass US chaos and unpredictability. EU just needs to be there as a plausible alternative. What Trump also fails to understand is that the US may have a trade deficit, but it was a reliable net exporter, until it messed up an interconnected economic and security system that it designed, built, and maintained for eight decades and of which the US was the main beneficiary. As a result, Brussels now believes that there is no long-term credibility about trading with the US. EU on the other hand, plays by the rules. In the long run, the more Trump attacks the idea that the US is stable, the stronger the case for the euro to replace the dollar as the world’s reserve currency.
The third conclusion is that, in the face of the very real animosity of the Trump administration towards it, the EU must act as quickly as possible to strengthen its greatest economic weakness: its dependence on fossil fuel imports. Sometimes, the animosity takes on tragicomic aspects, as when the US Secretary of Commerce, Howard Lutnick, declared that Europeans “hate our beef because ours is beautiful and theirs is weak”. At other times, it is more transparent, as when Trump stated that there will be no negotiations if the Europeans “don’t pay us a lot of money every year, primarily for the present, but also for the past”. That is, in Trump’s opinion, it would be around $350 billion in annual purchases of natural gas from the US in exchange for raising tariffs.
In recent months, the thoughts that governments should loosen climate regulations to promote economic growth has gained momentum. This would be a victory, firstly because Europe is extremely vulnerable to climate change, the human and financial costs of which worsen with every half degree of warming, but also because the EU’s dependence on imported fossil fuels, either from Russia or the US, is a clear strategic and economic weakness. The EU may turn this into a window of opportunity to consolidate its advantage over the US in clean technology. Ideas on how to do this have been floating around: a decarbonisation bank, the completion of the single financial market, and the issuance of new Eurobonds. In the future, the mantra should be “whatever it takes” to fully replace fossil fuels with renewable energy – designed in Europe, built in Europe – so that governments never spend $350 billion to import gas from the US, Russia or anywhere else.
