Sixteen thoughts on Greenland

The strong must suffer too

1. From a game-theory point of view, Trump always tries to defect from the ‘cooperative equilibrium’. He does not just play ‘defect’ under the old rules (the WTO, the UN, etc.), but also under the new rules he proposed. The Turnberry agreement concluded last July between the US and EU was presented by the Administration as a model for a new trading system and did not even last six months.

2. Even if ‘cooperating’ is less painful in the short run, against an opponent inclined to defect, the optimal response is retaliation. It is better to do this sooner rather than later, as Trump will keep exploiting Europe’s tendency to cooperate for increasingly megalomaniac purposes.

3. Europe is the main source of finance for America’s huge foreign debt. Europe owns twice as many US bonds and equities as the rest of the world combined.

4. Robin Wigglesworth and Toby Nangle from FT Alphaville have argued that dumping treasuries would cause as much pain to Europe as to the US, that it would be hard to find buyers for ten trillion dollars in assets, and that ‘most of these assets are not actually owned by European governments’.

5. The objections are well taken, but not definitive. Europe does not have to dump all the treasuries at once: the market is wobbly, as we saw after yields spiked in April. And, while many of the assets are not held by the public, a large share are also held by semi-public investors (such as Dutch and Swedish pension funds, and the Norwegian sovereign wealth fund).

6. Certain American tech companies have driven much of its stock market overperformance, are closely associated with the Trump administration, and make large shares of their revenues in Europe. Some of them — like Meta, X, and Uber — exist primarily due to network economies, where everyone uses them because everyone else is on them. If they did not exist, substitutes would rapidly develop. There is no reason why Europeans should pay a toll for communicating with each other to people like Zuckerberg, who have used their proximity to Trump to punish the European Commission.

7. There are four ways to target these companies. The DSA allows for fines and the suspension of Very Large Online Platforms. The DMA applies to gatekeepers such as Meta, and allows for even larger fines — up to 20 percent of global turnover — and also the forced divestiture of repeat offenders. Third, GDPR can be more strictly enforced. Fourth, Europe’s anti-coercion instrument allows for market access to be withdrawn.

8. Europe’s bazooka – the anti-coercion instrument – is unlikely to be triggered. It requires 15 of the 27 member states to vote in favor and many smaller and more exposed member states are probably unwilling to risk angering Trump further.

9. The difficulty of triggering the anti-coercion instrument reveals an important weakness of the ‘one country, one vote’ model of the European Council. In extremis, the thirteen smallest countries, which combined have 10 percent of the EU’s population, can block a major foreign policy avenue for the remaining 90 percent of Europeans.

10. In the long run, the best response to Trump, apart from pursuing general pro-growth reforms, is to make a concerted effort to draw top talent out of the US. Chinese universities are offering top researchers millions of dollars. So far, no European institution has been willing to make exceptions to its civil servant pay scales for top American-based talent.

11. China is not our friend and its values are still much further from ours than America’s. However, building leverage means we must follow Canada in a pivot towards China. It is hard to negotiate without an outside option.

12. The second mover AI strategy – which we have repeatedly argued for on this blog – seems bankrupt in a world where the world’s sole provider of frontier models is willing to extort other countries and cannot be counted on to abide by the agreements it makes. A true ‘sovereign AI’ push seems worthwhile.

13. Given the quality of Europe’s leaders and the political constraints they face, by far the likeliest outcome is failure. But the payoff is such that it still seems worth spending a trillion euros on it (six percent of GDP) — not more than Europe has been spending fighting climate change every two years.

14. The reason for the surrender at Turnberry was Ukraine. But Ukraine is currently on a grim trajectory. American contributions have also declined, with aerial defenses providing less and less protection against Russian missiles. A just and sustainable peace seems more likely with muscular European guarantees than with weak American ones. The former is less inconceivable now than it was two weeks ago.

15. The danger of Trump is that it leads to negative polarization, where Europeans defend policies that do really need to reform. Europe emits only six percent of global emissions, and is still planning to drive its industry off a cliff in order to reduce those. They should consider instead the examples of the leaders who have stood up successfully to Trump: Mark Carney in his speech to Davos highlighted his ‘investments in energy’ and Canada’s place as ‘an energy superpower’ and Claudia Sheinbaum is trying to increase Mexico’s oil output by 31 percent by 2030.

16. Despite everything, Trump’s recent actions could work out well for Europe. Its biggest problems are still in the long-term (the original post planned for this slot was on pensioners and fiscal dominance). Few things focus the mind like the threat of external invasion. If Trump succeeds in uniting Europe around a hard-headed and pragmatic program of reform, Europe may well be in a much better position twenty years from now.