Davos peaks over Europe as US exuberance rises

Investors have warned of Europe's vulnerability to Donald Trump's “America First” policies, contrasting the continent's economic struggles with the animal spirits running amok in the United States under the new president.

Trump's plans for deregulation and tax cuts sparked a burst of enthusiasm from many US leaders at the World Economic Forum in Davos this week, while on Wall Street the S&P 500 index ended Wednesday just before reaching a new record.

But the mood towards Europe was far more somber, with an executive at a major US bank warning against extreme pessimism towards the continent. The threat of U.S. tariffs on Europe added to the concerns of leaders and politicians at the Swiss gathering, and they warned that the rising U.S. economic tide may not bolster sentiment on the other side of the Atlantic.

Christine Lagarde, president of the European Central Bank, said it was not pessimistic to say that Europe was facing an existential crisis.

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Europeans must be realistic, Lagarde said during a round table. We are getting a very big push today, because another major player in the global economy is organizing things in a different way and threatening some of the partners and players that this country used to work with.

IMF forecasts this month sharply improved the U.S. economic outlook this year, projecting growth of 2.7 percent, well above the euro zone's forecast of 1 percent expansion.

The currency zone's largest economy, Germany, has suffered two years of contraction and is expected to grow just 0.3% this year, the fund said. Meanwhile, the United States took a record share of new cross-border investment projects in the 12 months to November, according to preliminary data from fDI Markets, an FT-owned company.

It is fairly agreed that things are going really well for America and that it looks very negative for Europe, declared the head of a large sovereign fund. People are worried about the lack of leadership from Germany and France, the advance of the far right, the regulation of AI and the strength of the union.

The question is: is there enough sense of crisis to spur Europe to recover? I don't think so.

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The main risk in the United States is that Trump's agenda ends up fueling inflation and preventing the Federal Reserve from lowering interest rates. The IMF has warned of the risk of rising prices if Trump overstimulates the US economy while restricting the supply side of the economy through his crackdown on immigration. A boom-bust cycle could ensue in the longer term because of his financial deregulation campaign, he said last week.

But those concerns have been overshadowed by the short-term bullish outlook, economists say.

There has been a sharp increase in animal spirits. This can be seen in business confidence and consumer confidence. It's also increasingly likely that taxes won't increase in 2026. That will be very good for overall demand, said Mike Medeiros, macro strategist at Wellington Management.

Although stronger U.S. demand will benefit countries that rely heavily on exports to the United States, investors at Davos cited the risk that growth in Europe could fall short of already gloomy forecasts.

Strained public finances in countries like France and the United Kingdom could expose them to further rises in long-term borrowing costs due to U.S. tax cuts, they added.

The issue of sovereign debt is really important. You see what this did to the U.K. a few weeks ago and the constraints it imposes, said Kasim Kutay, chief executive of Novo Holdings, the Novo Nordisk Foundation's $187 billion investment company.

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Ursula von der Leyen, President of the European Commission, told the WEF that the EU and the United States should negotiate to preserve their trade relations, given that with trade volumes between them of 1.5 billion and investments massive transatlantic negotiations, the stakes are high for both parties.

Brussels hopes threats of high tariffs will be a precursor to deals avoiding some of those barriers, as was the case during Trump's first term. But the divide with Brussels became evident this week when Trump announced the United States' departure from the Paris climate accord, a cornerstone of EU policy, and the World Health Organization.

The European economy has shown resilience in the face of shocks such as Covid-19 and soaring energy prices following Russia's invasion of Ukraine, said Valdis Dombrovskis, European Commissioner for Energy. 'economy. But he acknowledged that deeper fragmentation of the global economic system would be very costly for the EU, given that the EU is a trading superpower.

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At the same time, a deregulatory drive in the United States could further harm European competitiveness if governments fail to come up with an effective response.

A major global investor said he believed von der Leyen had underestimated how difficult it would be to exploit and galvanize a group of nations with very different views.

There is a need for a much more honest debate about European bureaucracy, obsessive regulation and divergent views between large numbers of countries, they said.

Regulation of technology and artificial intelligence will prove to be a key test, the executives said.

One thing that will ensure that the continent descends further towards museum status is simply taking a doctrinaire and conservative approach to regulation and not being open to the fact that as technology evolves, the Europe must evolve with it, said one of them. technology manager.

Carlos Cuerpo, Spain's economy minister, told the Financial Times that he had come to Davos to counter the notion that Europe was moribund, touting his country's excellent performance after it surpassed America's performance last year with growth estimated at 3.1 percent and record job creation. .

We are fighting against this perception, because it is important that a positive message comes from the EU, he said. He underlined the urgency of implementing our own roadmap, referring to the competitiveness report of former ECB President Mario Draghi.

But European officials had difficulty transmitting this positive message to the managers of the Swiss station. The feeling here is how negative European CEOs are about Europe, the U.S. banking executive said. There's a stark contrast to the United States, where it's all about animal spirits and euphoria.

Asked if Trump's election represented a wake-up call for Europe, Lagarde replied: I respectfully think that is the case.

Additional reporting by Stephen Morris and Arash Massoudi in Davos and Claire Jones in Washington

Data visualization by Stephanie Stacey, Keith Fray, Ray Douglas and Alan Smith

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