The Brexit Opportunity for Europe and the United States

The political strategy expected of Biden will have a drastic effect on the European economy, which remains heavily dependent on exports.

STANFORD – Most Europeans are happy that Joe Biden is the next president of the United States. Whether or not they realize that Biden’s economic policies will put the euro and Europe in a bind is another story. The new US administration will want the euro to stay strong against the dollar to keep the US economy going.

In order to boost spending on the pandemic response, on the environment and on infrastructure, the Biden White House will undoubtedly pressure the United States Federal Reserve to keep the value of the dollar low, no matter how much. more fiscal stimulus I can get from Congress. And having done so many favors for Donald Trump, Fed Chairman Jay Powell will not be in a position to say no to Biden. In this context, it was a stroke of genius for Biden to appoint Janet Yellen to serve as Secretary of the Treasury. Having preceded Powell at the Fed, he still has considerable influence there. Rightly so, Wall Street is betting big against the US dollar in the next year or two.

The political strategy expected of Biden will have a drastic effect on the European economy, which remains heavily dependent on exports. In 2019, exports accounted for 46.9% of Germany’s GDP, 31.8% of France’s and 31.5% of Italy’s. Europeans cannot afford to sit and watch the euro strengthen to the point where it strangles their exports.

The best solution would be for Germany to implement a fiscal stimulus, as this would “internalize” a good part of the EU’s trade, rendering the appreciation of the euro against other currencies irrelevant. Instead of exporting to the United States, Italians could export more to Germany and other northern eurozone countries, as the additional stimulus will have provided the means for increased purchases from the south. Europeans have a gigantic domestic market; it is time to use it, if only to mitigate a run on the euro that could divide the European Union.

In the same way that the United States forced quantitative easing for Europe to save its own economy from an overvalued euro in 2014, Biden’s policies likely force expansionary fiscal policy on the Germans for the same reason. If this happens, the deciding factor this time will have been Brexit. Had the UK not left the EU, the chances of a German fiscal stimulus and a new internalized EU trade model would have been virtually nil.

As Karl Kaiser, former director of the German Council on Foreign Relations, tells Roger Cohen of The New York Times, “Brexit made German Chancellor Angela Merkel willing to abandon positions that had been sacred.” Merkel was afraid that others would leave the EU if Germany did not change its fiscal policies. Similarly, the EU’s new € 750 billion recovery fund, perhaps Merkel’s greatest achievement, would not have happened if the British had stayed on the bloc. As Cohen explains, “The European Union can now borrow like any government – a step towards sovereign status and a means to finance the $ 918 billion pandemic recovery fund that a British presence would likely have blocked.”

It would seem that the British left the EU at the right time. The new US president, in the face of a series of urgent policy demands at home, will be in a strong position to push the Germans in precisely the direction they need to take – towards a new model of greater fiscal stimulus from the EU and internalized trade.

Since this change, which could end up being a strong antidote to European populism, would help harmonize relations between the United States and the EU and benefit the American and European economies, no one in Washington or Brussels should shed a tear for it. departure from Great Britain. Germans may not be eager to embrace the internalized trade model, but they should recognize that Brexit, in this case, is good for Europe. It has introduced the possibility of a mixed fiscal and monetary policy model that would be much more effective than the strictly monetary policy-based strategy that has dominated EU decisions since the 2008 financial crisis.

True, the European Central Bank has done wonders with its expansionary monetary policy in the last twelve years. The President of the ECB, Christine Lagarde, and her predecessor, Mario Draghi, are to be commended for their bold policy decisions. As the spread of sovereign bond yields between the northern and southern eurozone countries has narrowed dramatically, the ECB has managed to financially integrate the two regions for the first time in history. What’s more, returns on riskier peripheral assets are now at or near record lows.

These financial developments have been excellent for European unity and solidarity. But history shows that monetary policy alone cannot do the job of delivering strong economic growth. Although the euro continues to reach new peaks, the European economy is collapsing and the ECB continues to miss its inflation target of “below but close to 2%”. In seven of the last eight years, inflation has been closer to 1% than 2% and the market expects this to continue for the next ten years.

This is unacceptable. Fortunately, by allowing fiscal policy to add to the EU policy mix, Brexit is precisely what Europe needs to implement a more effective macroeconomic stabilization policy, and to deal with a current ‘protectionist’ monetary policy on the part from the Fed.


Project Syndicate is an international non-profit organization of union of publishers, press and newspaper association. It is considered the largest source of opinion articles in the world.

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