Pablo Gómez

To those worried about the share markets’ collapse and their impact on trade, and who wonder how Europe should respond, here are my thoughts this morning: How will the fall in share prices affect the global economy? Share prices have little to do with actual trade. Their precipitous fall reflects more the terror of margin calls on traders (who used overpriced shares to borrow for the purposes of gambling) than the real effects on trade. If falling shares become self-perpetuating, they may, of course, bring about the loss of confidence that cripples investment and slows down production. My view is that the negative effects will be real but nothing as dramatic as the recent falls in share prices might suggest. It is also important to keep in mind that Trump’s shotgun has two barrels. One barrel fired indiscriminate tariffs. The second will, at some point, fire exorbitant tax cuts for fat cats. When it does, I won’t be surprised if the fickle share markets go through the roof again in a spectacular show of mass relief. Will Trump’s tariffs stop global trade functioning as it should? This question is founded on an error: that trade was functioning as it should before Trump whacked it on 2nd April. It wasn’t! Since 1971 we lived in a grossly imbalanced system that relied, for its stability, of an unsustainably expanding American trade and gvt budget deficit. That Trump’s Shock may have been rude, uncouth, indeed shocking and wrong-headed means neither that things were fine before 2nd April nor that Trump’s way of upending a problematic status quo was the right way to do it. How should Europe respond? The early bravado from Brussels was inane and self-harming. When you are running a $240 billion surplus with America annually, you cannot win a trade war. Full stop. The only thing you can and you MUST do is blow up your own mercantilist model before you stagnate into irrelevance. Europe must rebalance its own economy so that it stops relying on ridiculous surpluses that go hand in hand with low investment and low demand domestically. For that Europe needs an additional domestic investment of at least 700 billion euros annually – something that, however, requires Europe to do the one thing Berlin steadfastly refused to do when it was politically possible with the result that it is now no longer politically possible: a fiscal and a political union.