As America’s joy rises, Davos is hit by Europe’s ‘deep disappointment’

Investors have warned of Europe’s vulnerability to Donald Trump’s “America First” policies, comparing the continent’s economic struggles to animal spirits unleashed in the US under the new president.

Trump’s plans for deregulation and tax cuts drew the attention of many US executives at the World Economic Forum in Davos this week, but on Wall Street, the S&P 500 closed just shy of a new record high on Wednesday.

But the mood for Europe was bleak, with an executive at the US central bank warning of “significant pessimism” for the continent. The threat of US tariffs on Europe fueled worries among executives and politicians at a meeting in Switzerland, and they warned that the rising US economic tide was unlikely to bolster sentiment across the Atlantic.

European Central Bank President Christine Lagarde said it was “not pessimistic” that Europe was facing an “existential crisis”.

Lagarde told a panel discussion that Europeans should be realistic. Another big player in the world economy is organizing things differently, threatening some of the partners and players that the country works with, so now it’s getting this big, big push. We are getting it.

Forecasts from the IMF this month Greatly improved economic prospects for America It forecasts growth of 2.7 percent this year, far above the euro zone’s 1 percent expansion.

Germany, the currency area’s largest economy, faces a two-year contraction and is expected to expand by just 0.3 percent this year, the fund said. Meanwhile, America took over. A record share of cross-border greenfield investment projects In the 12 months to November, FDI markets, according to preliminary data from the FT-owned company.

“The consensus is that things are going well for the US and it looks negative for Europe,” said the head of a large sovereign wealth fund. “People are concerned about the lack of leadership in Germany and France, the progress of the far-right, AI regulation and the strength of the coalition.

“The question is, is there enough of a sense of crisis for Europe to come together? i don’t think so.”

The key risk in the US is that Trump’s agenda will fuel inflation and prevent the Federal Reserve from lowering interest rates. The IMF has warned that if Trump overstimulates the US economy by curbing the supply side of the economy with his immigration measures, it could lead to inflationary risks. A “boom-bust cycle” could follow in the long run due to financial deregulation, he said last week.

But such concerns were overshadowed by short-term optimism, economists said.

“There is a great increase in animal spirits. In the corporate sense, you can see in the consumer sense. It is increasingly likely that the tax will not be raised in 2026. That would be very good for overall demand,” said Mike Medeiros, macro strategist at Wellington Management.

While stronger U.S. demand will benefit countries that rely on U.S. exports, investors in Davos expressed concern that growth in Europe could undermine already bleak forecasts.

Strained public finances in countries including France and the U.K. could expose them to a longer-term jump in borrowing costs due to tax cuts in the U.S., he added.

“The issue of sovereign debt is very important. You will see what it is Made it to the UK Qasim Kutai, CEO of Novo Holdings, the $187 billion investment company of the Novo Nordisk Foundation, a few weeks ago and there are limits.

European Commission President Ursula von der Leyen told the WEF that the EU and the US must negotiate to maintain trade relations, with trade between them at €1.5tn and huge transatlantic investment, “a lot is at stake for both sides”.

Brussels hopes that the threat of higher tariffs, as they did during Trump’s first term, will be the starting point for deals to avoid some of the hurdles. But the gulf with Brussels was in evidence this week as Trump announced the U.S. Withdrawal from the Paris Climate AgreementA cornerstone of EU policy and WHO.

The European economy has shown “resilience” to shocks such as Covid-19 and rising energy prices following Russia’s invasion of Ukraine, EU Economic Commissioner Valdis Dombrovskis said. But he admitted that the deep divisions in the international economic system “will be very expensive for the EU as a trading superpower”.

At the same time, regulatory action in the US could further hamper European competitiveness if governments do not respond effectively.

Von der Leyen, a major global investor, feels they are seeing how difficult it is to harness and motivate a group of nations with widely divergent views.

“There should have been a more honest discussion about EU bureaucracy, burdensome regulation and differences between many countries,” he said.

Managing technology and artificial intelligence will be a key challenge, managers said.

“One thing that proves the continent is further reduced to museum status is taking a doctrinaire, conservative approach to regulation and perhaps not being open to the fact that Europe needs to evolve as technology evolves,” said one tech executive.

Spain’s Economy Minister Carlos Cuerpo told the Financial Times that he came to Davos citing his country’s track record of 3.1 percent growth and job creation, outpacing America’s performance last year. .

“We are fighting this perception, because it is important to have a positive message from the European Union,” he said. The former ECB President Mario Draghi, referring to the competition report, emphasized the urgent need to continue “on our own road map”.

But European officials have struggled to convey that positive message to executives at the Swiss resort. “The feeling here is how negative European CEOs are about Europe,” said a US bank executive. There is a stark contrast to the US, which is all about animal spirits and euphoria.

Asked if Trump’s election represented a wake-up call for Europe, Lagarde replied: “I think it does, with respect.”

Additional reporting by Stephen Morris and Arash Massudi in Davos and Claire Jones in Washington

Data visualization by Stephanie Stacey, Keith Frey, Ray Douglas and Alan Smith