The US needs the EU to step up on trade, not just defense spending

The US needs the EU to step up on trade, not just defense spending

Jens Stoltenberg, Secretary General of NATO speaks with U.S. President Donald Trump ahead of the NATO Leaders meeting at the NATO HQ on December 3, 2019 in Watford, England.

NATO | Getty Images News | Getty Images

Underwriting Europe’s security and offering large and open markets to European goods and services are excessively costly legacy issues the U.S. can no longer afford.

Here is what we have now.

By the end of this year, the U.S. is expected to run a quasi-unstoppable gross public debt of $23.2 trillion, with its public sector budget deficits remaining at about 7% of the country’s economy.

On external accounts, the U.S. is showing a trade deficit on goods and services currently running at an annual rate of $529 billion, and a net foreign debt of $10.6 trillion at the end of last June.

In a sharp contrast, the European Union, the world’s largest free trading area (a single market and a customs union) of 513.5 million people, offers a picture of wealth and macroeconomic stability.

At the end of this year’s second quarter, the EU’s gross public debt stood at $14 trillion, with a budget deficit of only 0.9% of the group’s GDP.

Apart from that, the EU is a large net beneficiary on international trade accounts. Its surplus on goods and services trade in the first half of this year ran at an annual rate of $194.3 billion, in large part as a result of its strong net exports to the United States.

So, there it is: A deeply indebted U.S. continues to carry most of the financial burden of a defense alliance – NATO, The North Atlantic Treaty Organization – that guarantees the security of a rich and prosperous European Union.

Negligible progress on cost sharing was announced last week. According to those reports, Washington is now expected to save $150 million on NATO’s administration and some military exercises — a drop in the bucket compared to costs of financing the U.S. bases and military operations on the European continent.

The U.S. NATO allies are supposed to alleviate those costs by significantly raising their own defense capabilities with military budgets equivalent to 2% of their GDPs. At the moment, only eight of the 29 member countries are meeting that goal.

Interestingly, Germany, the most vocal opponent of the U.S. call for higher defense spending, now emphatically advocates that NATO remains the linchpin to European security because Berlin says the EU alone cannot defend itself. In spite of that, Germany will not meet the 2% military budget rule until early next decade.

Germany is the country that built its riches and high living standards under the U.S. military umbrella, and with the befit of a liberal access to U.S. markets. In the first nine months of this year, for example, Berlin’s net income on U.S. goods trade ran at an annual rate of $67.6 billion.

How Washington wants to respond to German military decisions is not part of this discussion, but the U.S.-EU trade issues are inextricably linked to security considerations.

As things now stand, the U.S. needs substantial changes in its trade relations with the European Union. Washington’s deficit on goods trade with the EU is currently running at an annual rate of $180 billion, a 10% increase from last year.

That is unsustainable. The U.S. needs regulatory adjustments to even out the playing field for its businesses operating in European markets. In addition to that, Washington should insist that the EU use its room for fiscal stimulus to revive domestic demand instead of living off exports. A stronger EU economy would reverse the global growth slowdown and expand markets for U.S. companies.

The idea that Germany is obstructing both sets of measures is irrelevant — and so is Germany’s long-simmering political disarray that culminated last weekend in a radical leadership change within the governing coalition.

Indeed, solutions to economic policy problems that Washington needs to balance its European trade are in the hands of the EU Commission.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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