Resilience of the West

• One of the conditions for the transatlantic relationship to thrive is that Europe is convinced the US is not a spent economic force. It’s easier today than 10 or 20 years ago.
• If PM Sunak manages to push through his deal with the EU on the Northern Irish protocol, for the first time since 2016 the extreme Brexiters will have failed to impose their view on the UK government

This week we want to take a step back from assessing cyclical conditions and second-guessing central bankers to take a look at the transatlantic relationship, spurred by a view “from the outside”, a long essay by Ding Gang, senior editor at China Daily, who highlights how the Ukraine war makes Europe more united and at the same time more reliant on the US, generally pointing at a more resilient than expected “West”.

One of the conditions for Atlanticism to thrive is that Europe convinces itself that the US is not in economic decline. It is easier today than 10 or 20 years ago. Since the 1990s, the US had been increasingly seen as a “spent force” in terms of its capacity to compete with both the rest the “old world” and the emerging nations. GDP continued to grow faster than in Europe, but this came at the price of a rising current account deficit, proof that the US was living “above its means” and had less and less to sell to the rest of the world. Today, even if the US current account deficit is still significant, it is at half of its pre-GFC peak. Sustainability conditions are better achieved while the US can still exert significant traction on European exporters. Meanwhile, foreign holdings of US federal debt have been “westernised”. The share of China has been declining and roughly 60% of foreign holders of treasuries now come from strong allies of the US, linked by free-trade agreements or military treaties.  The “macro-financial West” still exists and this reality, in our view, shapes the EU’s pathway. The solution to the challenge created by the IRA lies more in the EU’s capacity to respond with its own industrial ambition than with confrontation at the WTO.

Brexit has been a thorn in the solidity of the “West” since 2016. We want to be cautious, and we are convinced that the next steps will be very slow to come, but if Prime Minister Sunak manages to push through his deal with the EU on the Northern Irish protocol this week, this will be the first time since the referendum that the extreme Brexiters will have failed to impose their view on the British government.