This was hardly the result that European leaders wanted, but while Donald Trump’s victory in the US presidential election may have come as a shock, it won’t have come as a surprise to a Continent already reeling from the outcome of the Brexit referendum. At a time when Europe is struggling to cope with a wave of crises, from migration to weak growth to instability on its southern and eastern borders to Brexit itself, its leaders would have preferred a US president unambiguously committed to the global, multilateral, rules-based system that the US put in place in the aftermath of the Second World War and to the institutions such as Nato, the International Monetary Fund and the World Trade Organisation that underpin it. Instead, they’re confronted by president-elect Trump, who has questioned the lot.
European policymakers will be on the lookout for economic shockwaves crossing the Atlantic that might undermine the eurozone’s fragile recovery. Contrary to what many had predicted, the dollar strengthened on the day, while US Treasury yields rose, perhaps reflecting expectations that the Republican Party’s clean sweep of the presidency and Congress will pave the way for a debt-funded infrastructure spending splurge that will push up inflation, leading the Federal Reserve to raise interest rates faster than has been expected. Such a reflation in America could be helpful to the European economy, particularly if US spending spills over into greater demand for European goods.
What would be problematic for the eurozone is if European bond yields were pulled upwards on the back of rising US Treasuries, or if sentiment was to shift in coming days, causing the dollar to weaken against the euro. That would lead to a mechanical downgrading of eurozone growth and inflation forecasts, further complicating what is already a highly complex decision facing the European Central Bank as it debates how to boost its bond-buying programme when it is facing a scarcity of eligible bonds under its self-imposed rules.
The ECB has given itself until early December to decide which of three politically toxic steps to take to boost the supply of eligible bonds: whether to buy bonds at prices that guarantee the ECB will take a loss; to increase the proportion of individual bond issues that it is willing to hold, turning it from a price-taker into a price-setter; or to abandon the so-called capital key that ensures government bond purchases are undertaken in strict proportion to each country’s shareholding in the ECB.
At the least, Mr Trump’s win increases the pressure on the ECB to prove that it has the firepower to support the eurozone through a period of uncertainty and even a potential shock, if Mr Trump follows through on his hostile campaign rhetoric on trade, leading to a lowering of global growth expectations. Yet the ECB also knows that whichever taboo they choose to break is sure to further fan political passions in Germany, where opposition to loose monetary policies is running high.