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The US economy and its global impact: internal trends, trade tentions and alliance management

Rome, 27/11/2019, International Conference

The global economic picture is raising concerns over the (partially synchronized) slowdown being observed in various regions and the uncertainty caused by trade tensions, resulting in a mix of cyclical economic factors, financial concerns (fiscal and monetary policies, debt amount) and geopolitical issues with a pronounced technological dimension. United States and European policies can determine what instruments will be adopted to address these challenges as well as long-term transatlantic cohesion.

China’s role and its economic and geopolitical trajectory in the coming years naturally prompt central strategic consideration. The Trump administration’s position is that in the trade negotiations under way an at least transitory or partial bilateral agreement with Beijing is possible in the near future, but is certainly not a sure bet. Meanwhile, Washington’s concerns about Chinese practices especially with regard to artificial intelligence and the State control of enterprise are shared by many European governments and businesses. It is clear that major investments in everything ranging from new technologies to infrastructure, will be harder to come by if this issue is not resolved. The question, therefore, directly affects overall growth prospects, and not only in the United States.

China’s role is problematic also for Europe as the result of the strategic nature of some sectors where Beijing is gaining a dominant, or at least central, position. From this standpoint, Italy took an ulterior step – and a risky one in the view of some – as compared with the other G7 members by signing a Memorandum of Understanding in March 2019. nevertheless, Italy has decided to apply the concept of “golden power” (which gives the government special powers) to cybersecurity, 5G technology in particular – a major move within the ambit of the future choices regarding Chinese sector firms which, from the U.S. perspective and that of some European partners, offers a mix of light and shadow.

In a broader sense, China’s concentration on infrastructure (traditional and digital) is, nevertheless, highly effective in creating forms of dependence that will be difficult to break in the future.

There is widespread global concern, however, that the uncertainty caused by the contest under way with China – a real political risk – is triggering a growth slump, i.e. that this political risk is per se a systemic problem that could spin out of control. Confirming those fears is Washington’s insistence on a general reduction in America’s trade deficit, which is having serious repercussions on important European economies.

In the case of a recession – a scenario apparently not imminent – the major concern centers on the fiscal and monetary instruments available to governments that today appear insufficient. Possible stimuli have already been activated in both the U.S. and Europe, which has left economic authorities with inadequate instruments and the risk of serious damage if an extensive return to negative interest rates were to be decided. A basic difference, however, is that the American economy is rolling swiftly ahead while the same cannot be said of Europe overall.

The typical root of U.S. recessions is the Fed’s “overreaction” to the threat of inflation, but this seems not to be a concern over the present short run. The real American economy is not showing any major imbalances given the strong return to consumer activity, despite some weaknesses with regard to investments (not sufficiently dynamic) and the manufacturing sector.

The greater potential for international crisis lies in the financial sector where, according to some experts, the level of risk is not really known and, therefore, cannot be factored into forecast models and economic policy deliberations.

This side of the Atlantic, Europe’s slow growth depends mainly on the well-known problems burdening some manufacturing leaders such as the German automotive sector, but the uncertainty and tension over trade issues is sure to have further slowed things down. The transition toward a more environmentally sustainable model is offering some major opportunities but is also creating significant uncertainty. Likewise, Europe is saddled with its well-known difficulties in the area of innovative technologies and the creation and nurturing of start-ups.

Nevertheless, a look at the last twenty years reveals that the Eurozone has enjoyed per capita growth rates comparable to those of the U.S. and UK – the true (negative) exception has been Italy.

Two dossiers that are going to require a careful handling of transatlantic relations are privacy laws (especially in relation to major digital platforms) and climate change policies. While it accepts the need for dialogue regarding a more effective legislative framework in the two sectors, Washington fears excessive European regulation. With regard to environmental sustainability, there are two basic choices: the first regards the level of freedom to be allowed the market in developing innovative technologies; the second concerns the most appropriate instruments for convincing current major manufacturers of the pollutants responsible for the greenhouse effect to change course – instead of exploiting the competitive advantages linked with increased emissions.

Moreover, the Trump administration considers one economic – or at least quantitative – issue to be of fundamental importance: the 2% of national budgets that all NATO allies are committed to paying and that the majority do not currently respect. 

With regard to defense spending, it was underscored that Alliance’s common goal, in reality, has to do with capacities, not financial resources (which should be an indirect parameter); moreover, producing additional aggregate capacities, in turn, requires close member coordination (not least at intra-European level, with the possibility of working on highly integrated specific projects) more than respect for pre-established national targets. The fact remains that various Members complain about delays and gaps in investments in the modernization of their armed forces, which ends up impacting negatively on NATO inter-operability.  

In truth, NATO is very efficient from many points of view, starting with some traditional operational capacities that maintain optimal levels. It knows how to handle Russian pressure despite some doubts about American reliability, and how to facilitate close coordination against the terrorist threat. But the Alliance is dysfunctional from other standpoints such as the link between economic and security issues, or in confronting the old problem of burden sharing under the current macroeconomic conditions, as well as the issue of relations with Iran and the Syrian question with regard to the role of Turkey and the Kurds. The Alliance does remain crucial to transatlantic security but does not cover the entire spectrum of risks and threats, which has become broad and highly variegated.

One fundamental NATO shortcoming is that, to date, it has no shared policy on China, the West’s only true strategic global rival; and a strategic question associated with that is whether NATO is interested in recuperating relations with Russia with the aim of separating Beijing and Moscow (and in so doing, better contain Chinese assertiveness).

Meanwhile, both Russia and China are employing emerging technologies to penetrate our defenses in various sectors (more or less directly linked with security), but also in that sense NATO, and the EU itself, are in need of closer cybersecurity coordination, since this type of indirect and not easily traceable threat can seriously damage Euro-American cohesion if it erodes mutual trust.

China is having a sort of “Sputnik moment” in its global expansion, which poses a dilemma to Europe and the United States. A complete economic/trade de-coupling is improbable, but the scope of Western relations with China is shifting toward a form of containment of Chinese growth. A major comparative advantage for China is that it is making massive investments in infrastructure, unlike Europe and the U.S., in addition to substantial military and even space-related investments.

The West’s responses in all these sectors are going to have to be primarily internal, given that the contest between growth and development models is fully under way. Only through domestic structural intervention will it be possible to engage China from a position of greater strength and avoid head-on collision.

Other participants, however, underscored that as a precondition for a possible transatlantic strategy it is going to be necessary to formulate a shared European position on China.

Precisely in intra-European terms, some were of the opinion that great care must be taken in following a Franco-German line that would intensify cooperation in the field of security with a view to keeping the UK out of new agreements, since the British contribution remains important, with or without Brexit.