Davos hits “peak pessimism” in Europe as US euphoria soars

Investors have warned of Europe’s vulnerability to Donald Trump’s “America First” policies, comparing the continent’s economic problems to the animal spirits produced in America under the new president.

Trump’s plans to deregulate and cut taxes drew a lot of enthusiasm from many US executives at the World Economic Forum in Davos this week, while Wall Street’s S&P 500 ended at a new record on Wednesday. .

But the outlook for Europe was more gloomy, with the governor of the US central bank warning of “pessimism” on the continent. The threat of US tariffs on Europe added to the worries of governors and politicians at the Swiss conference, and they warned that the rise of the American economy could fail to boost 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”.

Europeans had to be realistic, Lagarde told the panel. “Now we’re getting this big, big deal, because another big player in the world economy is organizing things differently, and it’s threatening other partners and players that that country used to them too.”

Estimates from the IMF this month a much improved economic outlook for the US this year, predicting growth of 2.7 percent, far above the Eurozone’s forecast of 1 percent growth.

The currency area’s biggest economy, Germany, has had two years of recession and is expected to grow by just 0.3 percent this year, the fund said. Meanwhile, the US took over a record proportion of greenfield cross-border investment projects in the 12 months to November, according to preliminary data from FDI Markets, the company that owns the FT.

“It is agreed that things are going well for America and they look very bad for Europe,” said the head of a large sovereign wealth fund. “People are worried about the leadership of Germany and France, the development of the far right, the control of AI and the power of the union.

“The question is, is there enough sense of crisis to bring Europe together? I don’t think so.”

The main risk for the US is that Trump’s plan ends up raising inflation and preventing the Federal Reserve from lowering interest rates. The IMF has warned of the risk of inflation if Trump boosts the US economy while reducing the supply side of the economy with his crackdown on immigration. A “boom-bust cycle” could follow for a long time due to his austerity measures, it said last week.

But such concerns were overshadowed by short-term expectations, economists said.

“There has been a great increase in the number of animals. You can see it from a business perspective, from a consumer perspective. And there is an increasing possibility that taxes will not be as high in 2026. That will be very good for aggregate demand,” said Mike Medeiros, chief strategist at Wellington Management.

Although strong US demand will help countries that rely heavily on US exports, investors in Davos have spoken of the risk that European growth may reduce already depressed forecasts.

Damaging public finances in countries including France and the UK could leave them exposed to more long-term borrowing costs driven by tax cuts in the United States.

“The issue of private credit is very important. You see what it is made in the UK the last few weeks and the obstacles it poses,” said Kasim Kutay, chief executive of Novo Holdings, the $187bn investment company of the Novo Nordisk Foundation.

Ursula von der Leyen, the president of the European Commission, told the WEF that the EU and the US should discuss maintaining trade relations, since the volume of trade between them is €1.5tn and large transatlantic investments, “to a lot is at stake on both sides”.

Brussels hopes that threats of higher tariffs will be a prelude to deals that avoid some of those obstacles, as they did during Trump’s first term. But the gap in Brussels was there this week when Trump announced the US from the Paris climate agreementthe basis of EU policy, and the World Health Organization.

The European economy has shown “resilience” in the face of shocks such as Covid-19 and the rise in energy prices after Russia’s invasion of Ukraine, said Valdis Dombrovskis, the EU’s economic commissioner. But he admitted that a deep fragmentation of the world economic system would be “too much money for the EU, as the EU is the biggest trading power”.

At the same time, the US deregulation process could further damage European competitiveness if governments fail to organize an effective response.

One of the world’s biggest investors said they felt von der Leyen was underestimating how difficult it would be to harness and strengthen a group of nations with very different views.

“There was a need for a more honest discussion about the EU system, excessive regulation and different views among many countries,” they said.

Management of technology and artificial intelligence will be an important test, said the executives.

“The one thing that will ensure that the continent will go down to the level of a museum is to take education, a sustainable approach to management and not to be open to the fact that maybe as technology is changing, Europe needs to change as well it,” said one technology executive.

Carlos Cuerpo, Spain’s Economy Minister, told the Financial Times that he came to Davos to challenge the notion that Europe was dead, citing his country’s record, after it surpassed the US last year with an estimated growth of 3.1% and record job creation. .

“We are fighting that opinion, because it is important that there is a positive message from the EU,” he said. He stressed the need to urgently continue with “our road map”, referring to the competition report of former ECB president Mario Draghi.

But European officials struggled to convey that positive message to Swiss resort managers. “The sentiment here is how bad European CEOs are in Europe,” said the American banker. “There’s a big difference in the US, where it’s about animal spirits and happiness.”

Asked if Trump’s election represents a campaign to wake up Europe, Lagarde replied: “I respectfully think so.”

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

Insights by Stephanie Stacey, Keith Fray, Ray Douglas and Alan Smith