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Karen Maley

Donald Trump triggers fresh tremors over eurozone's future

Karen MaleyColumnist
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Will US President-elect Donald Trump's comments trigger a fresh outbreak of the eurozone debt crisis?

That's the huge worry in Berlin and Brussels after Trump said that Germany was the major beneficiary of the European Union and that other European nations would probably follow Britain's lead in leaving the bloc.

In an interview with two conservative European daily newspapersThe Times of London and the German mass circulation Bild – Trump praised Britain's decision to leave the EU, saying it would "end up being a great thing".

President-elect Donald Trump's criticism of tight European economic integration is in stark contrast to the outgoing Obama administration. Anthony Behar

"People, countries, want their own identity and the UK wanted its own identity," he said, adding that Britain was "smart" to leave the bloc because the EU was "basically a vehicle for Germany".

"I believe others will leave. I do think keeping it together is not going to be as easy as a lot of people think."

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Trump's comments threaten to trigger fresh turbulence in global financial markets, as investors worry that the value of investments could fall sharply if some eurozone countries decide to abandon the common currency, the euro, and allow their currencies to depreciate.

Global equity markets soared in mid-2012 after European Central Bank chief Mario Draghi defused widespread speculation about a break-up of the eurozone by pledging to do "whatever it takes to preserve the euro".

Reverse gains

Draghi's promise – subsequently backed by the ECB's massive bond-buying program – sent yields on the bonds of debt-laden "peripheral" eurozone countries such as Spain and Italy tumbling. The yield on Spanish 10-year bonds has dropped to 1.4 per cent, compared with close to 8 per cent in mid-2012. And as worries about a chaotic break-up of the eurozone ebbed, investors moved back into risk-taking mode, sparking a major rally in global equity markets.

Some analysts are concerned that Trump's comments could reverse Draghi's efforts by helping to reignite fears of a eurozone break-up.

German Chancellor Angela Merkel says Europe's future is in its own hands but refuses to comment on Trump's emerging policy agenda before his inauguration on Friday. Michael Sohn

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Investors are becoming nervous about the rise of populist movements in Europe. Already Beppe Grillo, the founder of the Italian anti-establishment Five Star Movement, has called for a referendum on retaining the euro, as has Marine Le Pen, the leader of France's far-right National Front. Le Pen is widely expected to reach the second round of the French presidential election in May.

Both Grillo and Le Pen hailed Trump's unexpected victory last November. "It is those who dare, the obstinate, the barbarians, who will take the world forward. We are the barbarians!" Grillo wrote in his blog. Meanwhile, Le Pen said Trump's victory gave French people "an extra reason to break with a system that shackles them".

Trump's criticism of tight European economic integration is also in stark contrast to the outgoing Obama administration. During the darkest days of the eurozone debt crisis, Washington argued strongly that the zone be held together for fear that a disorderly break-up could roil global markets and derail the struggling US economic recovery.

In the interviews with European newspapers, Trump also criticised Germany as pursuing an "unfair" policy in selling cars to the US but without buying US cars in return.

Trump says there are too many BMWs on US roads and not enough Chevrolets in Germany; German Vice-Chancellor Sigmar Gabriel says the US needs to "build better cars". www.daniel-kraus.com

"When you walk down Fifth Avenue, everybody has a Mercedes-Benz parked in front of his house," Trump told Bild.

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"You were very unfair to the USA. It isn't mutual. How many Chevrolets do you see in Germany? Not many, maybe none, you don't see anything at all over there. It's a one-way street."

Car imbalance 'unfair'

Trump also sent share prices of German auto companies lower by making it clear that German carmakers should expect to pay a hefty border tax if they produce cars in Mexico for export to the US market.

"I would say to BMW, if they build a factory in Mexico, and want to sell cars in the US without paying a 35 per cent tax, then they can forget it.

"If they want to build cars for [export to] the rest of the world, I wish them all the best. They can build cars for the US. But they will pay a 35 per cent tax for every car they export to the US. What I am saying is that they should build their factory in the US."

German chancellor Angela Merkel told reporters in Berlin on Monday that "we Europeans have our destiny in our own hands".

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In her first reaction to Trump's comments in the two European newspapers, she said: "I will continue to work to ensure that the 27 [EU] member states work together effectively and, above all, in a forward-looking way" and cited fields including the economy, combating terrorism and securing the EU's outer borders.

Merkel said she wouldn't comment on Trump's emerging policy agenda before his inauguration on Friday. Once he was in office, Germany would seek to work with his administration "on all levels", she said.

"He has now set out his positions once again, but they've been known for a while. My positions are also known."

German Vice-Chancellor Sigmar Gabriel responded to the comments about BMW by saying that Trump's protectionism would only hurt the US car industry. "The US needs to build better cars," Gabriel said.

Karen Maley writes on banking and finance, specialising in financial services, private equity and investment banking. Karen is based in Sydney. Connect with Karen on Twitter. Email Karen at karen.maley@afr.com

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