“Europe is in a better place than it was six months ago”

August 2017 – An economic mid-term review 2017: HSH Nordbank chief economist Dr. Cyrus de la Rubia on US President Donald Trump, the Brexit negotiations and the uncertain future of the German automobile industry.

Donald Trump has been US president for more than half a year now. Many – especially in Europe – were very anxious about his presidency. Has it been as bad as some predicted?

Dr. Cyrus de la Rubia: Yes and no. As many feared, Donald Trump denounced the Paris Climate Accord, halted the ratification of the Transpacific Trade Agreement or TTP, and has placed a travel ban on seven different countries – a significant restriction for those concerned. These actions are disruptive.

What about concerns that US trade policy might become aggressively protectionist?

Dr. Cyrus de la Rubia: Asides from the US refusal to rubberstamp the TTIP free trade agreement with Europe and TTP deal with the Pacific region, not much has happened yet. But this could change. Early on, there was talk of a “border adjustment tax” which currently doesn’t exist. At the same time, Trump insisted that there were too many German cars on the streets of New York and that some countries use unfair trade practices. He’s also in the process of renegotiating the current NAFTA agreement with Mexico and Canada, which has been in place since 1994. Any alteration to that would mean interference in the value-added chain.

What about Trump’s plans to reform the health system and push through a tax reform?

Dr. Cyrus de la Rubia: No progress has been made in the abolition of Obamacare because there’s no Republican majority to push it through. It’s become clear that Trump is not 100% part of the Republican party. The massive tax reform with drastic cuts that he trailed in the election campaign has not appeared – it simply doesn’t seem to be financially viable. And the large infrastructure investments that many placed a lot of hope in seem to be moving further into the future.

Dr. Cyrus de la Rubia

Dr. Cyrus de la Rubia, HSH Nordbank chief economist

What’s the impact of the chaos caused by all these personnel changes in the US government?

Dr. Cyrus de la Rubia: This chaos has more impact than any other factor. It manifests itself externally in the difficulties Trump is having in getting laws through Congress. It’s a matter of poor preparation. In the midst of all these hectic changes, Trump seems not to realise that with his excursiveness he is the main cause of disorder in the White House.

Relations between the US and Russia are more fraught than they have been in a long time. How great is the danger of escalation?

Dr. Cyrus de la Rubia: The last cause of worsening relations was the US Congress’ vote to tighten the sanctions against Russia, although Trump himself opposed new sanctions. The personal relationship between the two presidents is perhaps reasonable, but I’m not worried about further escalation. I think the relationship between US and North Korea is a greater problem, with North Korea building missiles that can reach the west coast of America. Trump has urged China not only to leave it at admonitions to North Korea, but also walk the talk. Otherwise the US will take action.

„The pound has fallen in value, and domestic consumption has dropped. This development will intensify as companies, especially banks, announce plans to relocate to Paris, Dublin or Frankfurt.“

Dr. Cyrus de la Rubia, HSH Nordbank chief economist

Let’s look at Europe for a moment, and the Brexit negotiations. How are the talks going?

Dr. Cyrus de la Rubia: Britain seems to have sent its chief negotiator to the talks with no clear road map, which makes it difficult, of course. In the first round, the UK wanted to talk about a free trade agreement. The EU, however, wanted to clarify budgetary issues first, and it has prevailed. There’s also the question of the rights of EU citizens in the UK and vice versa, and the topic of the border between Ireland and Northern Ireland. Generally, the backlash within the British government against a hard Brexit is growing. That’s why I can also imagine fresh elections in the UK.

Has the announcement of Brexit already affected the UK economy?

Dr. Cyrus de la Rubia: Yes, growth in the first quarter of 2017 was noticeably weaker than in the previous quarter. In the second quarter there was a 0.3% rise. Meanwhile, the eurozone is currently growing by 0.5% – 0.6%. The pound has fallen in value, and domestic consumption has dropped. This development will intensify as companies, especially banks, announce plans to relocate to Paris, Dublin or Frankfurt. This uncertainty has had a negative impact on investment in the UK.

Another problem: Turkey. The German government is cautioning against travel and investment. How important is Turkey to the German economy?

Dr. Cyrus de la Rubia: Turkey has less than 2% of German exports, so it doesn’t play a major role in our economy. But many German companies have production facilities of significant value in Turkey, and these may depreciate depending on what happens next.

Is it wrong to suggest that the world seems somewhat more disordered in the first half of 2017?

Dr. Cyrus de la Rubia: That’s too sweeping a statement to make. If you’re considering the US, Brexit negotiations or North Korea, you could be excused for thinking uncertainty has risen. But it’s hard to say how far that will go. In Europe, it’s a different picture. At the beginning of the year, right-wing populists in the Netherlands and France looked as though they were on the verge of substantial victories. But in both countries, pro-Europe parties came to power. Poland and Hungary, however, are worrying because of their recent violations of the rule of law and European values. Overall, Europe is better off than it was six months ago. Political and economic developments are generally pointing in a positive direction.

Is this strengthened Europe behind the booming stockmarkets?

Dr. Cyrus de la Rubia: This is true for Europe. And I see more potential here because France is implementing labour market reforms, which will result in further growth opportunities. In the US I’d say that the markets are doing well despite Donald Trump, given that there is much more uncertainty.

The German economy is as robust as it’s been for some time, with unemployment below 6%. Does the diesel sector and the linked crisis in the German automobile industry threaten this trend?

Dr. Cyrus de la Rubia: We will experience a structural change in the car industry, accelerated by the diesel scandal.

Is the automobile industry today’s coal mining industry?

Dr. Cyrus de la Rubia: This is an exaggeration, because cars will still be used for transport in thirty years’ time. But the German car industry, which is responsible for around 7% of GDP and employs 1.5 million people if you include the industries and services it depends on, is facing major challenges. Climate change has to be respected and that’s not exactly possible with internal combustion engines. So that means alternative drive systems like fuel cells or electric motors are needed. In this sector other manufacturers are far beyond Germany. Tesla has just introduced the Model 3, which will have an initial production run of 500,000. Some people compare Tesla to the iPhone, which changed an industry and the way we communicate. The German automobile industry still has many reasons to be wary.