The Economies of the USA and Europe
Introduction
Today, we find ourselves in an unusual situation where employment in developed countries is partly sustained by arms sales. Paradoxically, Donald Trump has stated his intention to end the war between Ukraine and Russia.
History
During the Covid-19 pandemic, governments heavily invested in supporting companies and subsidizing their working populations. While health authorities learned valuable lessons during this time, it also left a legacy of high interest rates and increased debt in Western economies. Some companies went bankrupt, further disrupting the economy.
Present
Since then, governments have turned to fiscal competition to attract wealthy taxpayers, aiming to boost their economies. Gradually, interest rates have been reduced. Interestingly, Europe lowered its rates before the USA.
Election in United States
With Trump's election, business confidence has returned in the United States, strengthening the dollar. However, this raises a critical question: Is this confidence well-placed? If Trump succeeds in stopping the war, demand for American arms will decline. The real issue is whether the expanding U.S. economy can compensate for this loss.
Europe mixed opinion
Meanwhile, Europe presents mixed signals. Its politics are characterized by fragmented parliaments influenced by right-wing policies. Yet, U.S. elections have prompted the European Union to unify its policies to shield its economies from potential future decisions by the United States.
A Look Ahead
So, where does this leave us? It is possible that the U.S. is overestimating Trump’s capabilities and that the dollar is overvalued. The recent lowering of U.S. interest rates has not significantly affected the exchange rate or the ongoing strength of the dollar.
In Europe, interest rates are likely to continue their downward trend, potentially settling just above 2% by 2025—aligning with inflation. If the U.S. follows a similar path, it could stimulate global economies. However, governments must avoid overtaxing businesses and individuals to encourage spending, which indirectly increases tax revenue. Unfortunately, this strategy is not being widely implemented, leading to growing social unrest.
Trump strategy
Trump is betting on this unrest to avoid a rise in unemployment, particularly by replacing private-sector jobs tied to military manufacturing. The year 2025 will be pivotal: if Trump is correct, his policies could boost global economies and ease the burden of international debt. Furthermore, the strong dollar allows the U.S. to repay foreign debt more cheaply, improving its cash flow.
Conclusion
That said, governments are playing a delicate game within the G7, manipulating exchange rates to mitigate the costs of currency appreciation and rising interest rates. Who will make the right decisions, and who will make the wrong ones? That remains unclear.
What is evident is that governments appear to have abandoned proven Keynesian economic theories, and internal corruption has led to significant mistakes and waste of public funds.
The question remains: Do traditional economic principles still apply? I believe they do. What about you?
