Lars Feld at FGvW: Chances and Risks of the Trump Economy

On Wednesday, 20^th February 2017, the Freiburg economist Professor Lars Feld (who, as a member of the German Council of Economic Experts, is one of the economic advisors to the Federal Government) spoke at FGvW on the chances and risks for the German and European economy under the presidency of Donald Trump. The invitation had been jointly offered by FGvW, bwcon, Carl-Schurz-Haus Freiburg, the Reinacher Europadialoge and the SÜDVERS-Gruppe.

The subject proved to be highly topical as the audience consisted of more than 200 people who had followed the invitation to FGvW’s Freiburg office. After being welcomed by our Partner Gerhard Manz, Lars Feld began his comments on Donald Trump’s election as the 45^th President of the United States of America on a political note: On the one hand, an American President’s potential for damage is, due to the system of checks and balances, smaller than it is often portrayed over here. On the other hand, Europeans should not be under the illusion that it would only take a few weeks for the presidency of Trump to head towards an early end. Although Trump did not win the majority of votes, he did win the majority of the electoral districts. Large cities and urban centres were the strong points of his opponent Clinton while Trump finds large support outside the cities. For this reason – and because of strict legal requirements – it would be rather daring to hope for an impeachment much too soon.

Obviously, a lot is at stake. Throughout the elections, Trump never made a secret of his plans: protectionism, the limitation of immigration, deportations, an easing of the financial market regulations, a repetition of Ronald Reagan’s tax reduction in combination with an increase of national debt, the termination of international climate agreements as well as a deregulation of important economic sectors. However, Lars Feld called for considerateness and then examined the supposed threats to the world economy one by one.

A revitalization of the protectionist nationalism of the departing 19^th century, for example, simply is not compatible with the regulations of the WTO. Furthermore, there has been enough historical proof of the fact that tax reductions and the ensuing national debt increase do not result in economic growth. Additionally, any of Trump’s plans to be fixed in legal terms will require majorities; so far, during his first weeks of administration he mainly acted by issuing presidential decrees. The termination of international agreements or the long-term implementation of internal political changes are therefore not yet to be expected.

Trump’s accusation of Germany bleeding its trading partners dry by its current account surplus was given particular attention this evening. Dealing with the Euro zone first, Lars Feld demonstrated how Germany had reduced its export surplus considerably towards other EU countries over the past ten years. Germany’s relationship with France remains difficult, which is, however, rather caused by the French economy than the German. Lars Feld put emphasis on the fact that, ultimately, an export surplus constitutes a grant of credit of one national economy to another. Therefore, Germany’s considerable current account surplus towards the USA can be recognized as a grant of credit to a nation which is still financing its expenditures on credit. After the abandonment of the fixed Bretton Woods exchange rate system, the USA simply printed fresh money in order to strengthen their finances.

The Republicans’ plans of a corporate tax reformation were another focal point of Lars Feld’s presentation. There is an ongoing discussion about an abolition of the income-based corporate tax in favour of a cash-flow-based taxation, abbreviated to “DBCFT”, which would tax imports on a gross basis and at the same time keep exports tax free while unabatedly granting them a deduction of their local production costs. In plain words, the idea is, therefore, to tax imports instead of exports. According to Mr Feld, this idea would be suitable to attract international investors but would discriminate large US Multinationals who could neither credit nor deduct their taxes - paid primarily in the EU - in the USA. As a side effect, less money is directed into the emerging countries.

Finally, Lars Feld came to a positive conclusion. From a German perspective, one does not need to be too concerned regarding the portrayed Trumponomics. According to his personal perception, German entrepreneurs are not intimidated by the general political climate; in fact, there is no reason for concern so far as a deregulation of the US market always brings new opportunities as well.

Lars Feld concluded the evening with a word in defence of the global free trade which, during the last centuries, eliminated much poverty in particular in the developing countries. A renationalization of the economic policy would stand in stark contrast to this. As Donald Trump is opposed to the global free trade, too, it is Lars Feld’s hope that this might cause one or two TTIP opponents to reconsider their position.

contact: Barbara Mayer