Merkel’s world collides with Trump

G20 Hamburg

The G20 meeting this week in Hamburg should be just another review meeting by the 19 largest economies and the EU.  The Agenda is full of long term ambitions and intractable problems, from climate change to gender equality, from financial stability to managing refugees.  You can read the background papers as worthy long term statements of intent, carrying on the conclusions and aspirations of past meetings.

There is, however, an impatient and exasperated note in some of the language as well. The G20 summit, in Mrs Merkel’s words, seems to be an attempt to educate the President of the US into the ways of collaboration over an agenda of her choosing. She tells her wayward guest from Washington that “We can achieve more together than by acting alone”. That is certainly true for Germany, but Mr Trump thinks otherwise for the much more powerful US. She goes on to develop her point “These challenges will certainly not be mastered by countries plotting a lone course, or with isolationism and protectionism”. Mr Trump would argue that he is not going it alone, but he is putting America first. He wants to conduct foreign policy bilaterally, not through large multilateral gatherings with grand statements of general intent. He is transactional, like a businessman. She is creating mood music on the big issues as she sees them, in the hope that this will translate into solutions on the ground.

Mrs Merkel and Mr Trump do not even agree on what the priority issues are.

Mrs Merkel and Mr Trump do not even agree on what the priority issues are. Mrs Merkel puts great weight on the need to tackle carbon dioxide outputs. Mr Trump wants to power a US industrial revival on the back of cheap domestically produced oil and gas. Mrs Merkel wants to shore up the revenues for richer countries by stopping loopholes and making common cause against “base erosion and profits shifting” by large companies. Mr Trump wants a big US tax reform using much lower corporate tax rates to attract business and its profits to the US. Mrs Merkel thinks the G20 needs to regulate the financial markets more to control cross border flows better and to promote financial inclusion. Mr Trump wants to regulate banks less so they can lend more to raise the rate of US growth.

Both will play to loving audiences at home. The more Mrs Merkel speaks about inclusiveness, better regulation, more common action and fairer sharing of revenues, the more her Christian democrat and social democrat audience will like it. The more Mr Trump condemns the global elite and its agenda of higher taxes and more regulations, the more his America first base will respond positively to his tweets.

Meanwhile both Mr Trump and Mr Putin will be at this summit. The media may well find that more exciting than the underlying tension between Germany the US. After all, this will be their first face to face meeting. Mr Trump had wanted a Presidency which improved US-Russia relations. His Democrat opponents and the less than sure footed actions and words of some of his close advisers have created a bit more antagonism and distance than he planned. With investigations still pending over Russian influence on the US election, there will be plenty of significance and drama squeezed out of every gesture and twist in the Trump-Putin encounters.

So what do investors need to worry about? It does not look as if many positive conclusions can emerge that will change world economies or markets. Attempts to impose more tax discipline on companies are unlikely to result in any immediate action, whilst more words on how to manage migration, terrorism and capital flows are also unlikely to have a big impact on the ground. Mr Trump is there to stop a lurch to more regulation. Mrs Merkel is there to stop Mr Trump lurching to protectionism. It is likely to be a stand-off.

The G20 meeting later this week in Hamburg should be just another review meeting by the 19 largest economies and the EU. The Agenda is full of long term ambitions and intractable problems, from climate change to gender equality, from financial stability to managing refugees. You can read the background papers as worthy long term statements of intent, carrying on the conclusions and aspirations of past meetings. There is, however, an impatient and exasperated note in some of the language as well. The G20 summit, in Mrs Merkel’s words, seems to be an attempt to educate the President of the US into the ways of collaboration over an agenda of her choosing. She tells her wayward guest from Washington that “We can achieve more together than by acting alone”. That is certainly true for Germany, but Mr Trump thinks otherwise for the much more powerful US. She goes on to develop her point “These challenges will certainly not be mastered by countries plotting a lone course, or with isolationism and protectionism”. Mr Trump would argue that he is not going it alone, but he is putting America first. He wants to conduct foreign policy bilaterally, not through large multilateral gatherings with grand statements of general intent. He is transactional, like a businessman. She is creating mood music on the big issues as she sees them, in the hope that this will translate into solutions on the ground. Mrs Merkel and Mr Trump do not even agree on what the priority issues are. Mrs Merkel puts great weight on the need to tackle carbon dioxide outputs. Mr Trump wants to power a US industrial revival on the back of cheap domestically produced oil and gas. Mrs Merkel wants to shore up the revenues for richer countries by stopping loopholes and making common cause against “base erosion and profits shifting” by large companies. Mr Trump wants a big US tax reform using much lower corporate tax rates to attract business and its profits to the US. Mrs Merkel thinks the G20 needs to regulate the financial markets more to control cross border flows better and to promote financial inclusion. Mr Trump wants to regulate banks less so they can lend more to raise the rate of US growth. Both will play to loving audiences at home. The more Mrs Merkel speaks about inclusiveness, better regulation, more common action and fairer sharing of revenues, the more her Christian democrat and social democrat audience will like it. The more Mr Trump condemns the global elite and its agenda of higher taxes and more regulations, the more his America first base will respond positively to his tweets. Meanwhile both Mr Trump and Mr Putin will be at this summit. The media may well find that more exciting than the underlying tension between Germany the US. After all, this will be their first face to face meeting. Mr Trump had wanted a Presidency which improved US-Russia relations. His Democrat opponents and the less than sure footed actions and words of some of his close advisers have created a bit more antagonism and distance than he planned. With investigations still pending over Russian influence on the US election, there will be plenty of significance and drama squeezed out of every gesture and twist in the Trump-Putin encounters. So what do investors need to worry about? It does not look as if many positive conclusions can emerge that will change world economies or markets. Attempts to impose more tax discipline on companies are unlikely to result in any immediate action, whilst more words on how to manage migration, terrorism and capital flows are also unlikely to have a big impact on the ground. Mr Trump is there to stop a lurch to more regulation. Mrs Merkel is there to stop Mr Trump lurching to protectionism. It is likely to be a stand-off.


The above article  was first published by Charles Stanley on 4th July 2017