Economics is largely a matter of contrasting the good with the bad: high inflation, for instance, typically reduces citizens’ purchasing power but eases countries’ debt ratios; a strong currency, meanwhile, slashes import costs while harming export competitiveness.
Donald Trump might, at first sight, appear to be an exception to this general principle of economic double-edged swordism. Where, after all, can one discern positives amid the US president’s attacks on the international trading system, the Federal Reserve, and the rule of law?
Events this week, however, underscore that even the self-proclaimed ‘Tariff Man’ might occasionally have sound financial judgement – and that, in economics as in life, swords are rarely fully single-edged. (As one comedian has quipped, even single-edged blades are, in a certain sense, double-edged, insofar as they’re sharp on just one side.)
On Wednesday, Trump slapped sanctions on two major Russian oil companies, Rosneft and Lukoil: the first time he has hit Moscow with restrictive measures since returning to the White House in January.
The move, which caused Brent crude prices to make their highest two-day jump since shortly after Russia’s full-scale invasion of Ukraine in 2022, was hailed by European leaders, who have frantically sought to persuade Trump to take a tougher stance on the Kremlin and renounce his instinctive affinity for his Russian counterpart, Vladimir Putin.
The announcement already appears to be having the desired effect of starving Putin’s war chest of potential revenue. On Thursday, firms in both China and India, which have massively ramped up purchases of Russian energy since the invasion, were reported to be reconsidering their financial exposure to Moscow.
Arguably, Trump’s sudden policy swerve is not the only win for Europeans. In fact, some analysts argue that the (Not So) Stable Genius’ general instability eliminates one of the main obstacles to harnessing the hundreds of billions in immobilised Russian sovereign assets held in the EU to support Kyiv’s war effort.
Belgium, which houses the assets that would be used for the €140 billion “reparation loan” discussed ad nauseam by EU leaders on Thursday, has argued that their inappropriate use could cause spooked foreign investors to withdraw their money en masse from the euro area – which could potentially threaten the bloc’s financial stability.
Despite being echoed by the European Central Bank, many analysts remain unpersuaded by this argument.
Alexander Kolyandr, a non-resident senior fellow at the Center for European Policy Analysis, argues that US instability would likely prevent investors from shifting their funds out of Europe even if the assets were unilaterally confiscated, for the simple reason that – outside of Europe and America – there aren’t that many other places for investors to park their money.
A bubble set to pop
But not all analysts concur.
Nicolas Véron, a senior fellow at Bruegel and the Peterson Institute for International Economics and a strong supporter of the reparation loan scheme, warns that unilateral seizure of the assets – which the loan scheme purports not to do – would actually “be unprecedented and have a profound and lasting impact on the global monetary order”.
Regardless of what the implications of Trump-induced volatility for the loan plan are, analysts overwhelmingly agree that recent developments in America pose severe risks to the global US-led financial system.
In an op-ed last week in The Economist, Gita Gopinath, a professor at Harvard University and former IMF chief economist, argued that the current record-high US stock market could soon face a “painful” correction, which threatens to be “far more severe and global in scope” than the bursting of the infamous ‘Dotcom Bubble’ in 2000.
Gopinath calculated that a downturn similar to the Dotcom crash – which, much like today’s AI-driven mania, was turbocharged by investor exuberance over the possibilities of the internet – would eliminate $20 trillion in US wealth,. That’s 70% of American GDP, and $15 trillion from the rest of the world. The Dotcom crash, by contrast, resulted in just $4 trillion in losses in today’s money.
The reason for this heightened impact, she noted, is that for more than a decade Americans and Europeans have “poured” their money into rising US equities, thereby ensuring that any sudden market correction “will reverberate around the world”.
High global debt and deficit levels, the dollar’s weakness, and general economic and political uncertainty mean there is “much less policy space to soften the blow of a correction”, Gopinath added.
Fears of an eventual stock market crash are widely shared. In fact, they have even been echoed by those benefitting from the AI-induced boom, including OpenAI’s Sam Altman and Amazon founder Jeff Bezos (although the latter has suggested, bizarrely, that the current bubble is a “good” one).
Blades of fear
Worryingly, US-induced financial madness is not confined to stocks. Even senior US officials, including Federal Reserve Governor Michael Barr, have explicitly warned about today’s parallels with the build-up to previous financial crises, including the 1929 Wall Street crash and the Great Recession of 2007-2009.
Washington’s push to slash banks’ capital buffers, weaken “stress testing” requirements, and erode supervision of highly volatile cryptocurrencies, represents just a few of many other potential dangers, analysts and officials say.
“Indications of systemic risk, not just in the stock market, but also in other parts of the system, are piling up in the US,” said Véron. “There is good reason not to predict a market correction at a given date, because that’s a fool’s errand, but to prepare for the possibility of financial instability coming from the US at some point in the future.”
EU officials should take note. Indeed, they should probably begin sharpening their appropriate policymaking blades – at least one side of them, anyway.
Economy News Roundup
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Belgium defends Ukraine loan veto. Prime Minister Bart De Wever fiercely defended his country’s refusal to back a proposed €140 billion EU loan to Ukraine after a fractious Council summit on Thursday, insisting that other member states must share the legal and financial risks associated with the plan before he signs off on it. Read more.
EU hails Washington’s blacklisting of Russian oil firms. Speaking before a European Council in Brussels, the EU’s top diplomat, Kaja Kallas, said she was “very happy” about the US’ surprise decision on Wednesday to blacklist Rosneft and Lukoil – the first time America has slapped sanctions on Russia since US President Donald Trump returned to the White House in January. Ukrainian President Volodymyr Zelenskyy also praised the US announcement. “We waited for this,” Zelenskyy said. “God bless, it will work.” Read more.
EU leaders welcome ‘game-changing’ US sanctions on Russia
EU leaders on Thursday hailed Washington’s decision to impose sanctions on two major Russian oil…
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Belgian leader says he will ‘do everything in my power’ to block Ukraine loan unless demands are met. Prime Minister Bart De Wever said before Thursday’s Council summit that he wanted a “full mutualisation of the risks” associated with using immobilised Russian assets to support Kyiv’s war effort, which the European Commission is seeking to do under the auspices of the €140 billion ‘reparation loan’. Read more.
EU greenlights 19th Russia sanctions package. The move came after Slovakia dropped its veto late on Wednesday night after blocking the measures for weeks. The package – the 19th since Moscow’s full-scale invasion of Ukraine – will see the 27 EU countries phase out their purchases of Russian liquefied natural gas (LNG) by January 2027. Read more.
EU greenlights 19th Russia sanctions package
The EU formally approved a fresh round of sanctions on Russia on Thursday, after Slovakia…
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Chinese Commerce Minister to fly to Brussels “in the coming days” to discuss rare earth restrictions. The EU’s trade chief, Maroš Šefčovič said on Tuesday that his Chinese counterpart, Wang Wentao, had accepted his invitation after a “constructive” two-hour video call on Beijing’s controls, which have alarmed EU policymakers and businesses. China accounts for roughly 70% of global rare earth mining and 90% of processing – giving Beijing an effective chokehold over the world’s supply of the metals, which are used to produce a wide range of advanced technologies, including electric vehicles and fighter jets. Read more.
Cyprus to ‘prioritise’ efforts to slash red tape during Council presidency. According to a draft government programme, obtained by Euractiv, Nicosia will build on the “significant work” of Poland and Denmark – the former and current holders of the presidency – by aiming to “foster a more business-friendly environment” during its forthcoming presidency. Cyprus will take over from Denmark on 1 January 2026, with Ireland next in line from 1 July that year. Read more.
EXCLUSIVE: Cypriot EU presidency programme revealed
Cyprus will “prioritise” efforts to slash red tape during its forthcoming Council presidency, according to…
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EU foreign ministers brainstorm 20th sanctions package. “Ministers were also clear today that after the 19th package, we should work on the next package. It will not be the last one,” said Kaja Kallas, the EU’s chief diplomat, following a meeting of the bloc’s foreign ministers on Monday. Estonia’s Foreign Minister Margus Tsakhna told Euractiv that he wants to see tariffs on Russian oil imports considered as part of the next steps, noting that tariffs would be easier to impose than sanctions as they would not require unanimity among the 27 member states. Read more.
