US political uncertainty crashes central bank retreat in Portugal

SINTRA, Portugal — When Europe’s most powerful technocrats gathered this week at a secluded mountain resort near Lisbon to discuss their deepest concerns, you’d have expected them to focus on the election in nearby France. 

But instead their gaze was fixed on developments across the Atlantic, where uncertainty over the direction of the world’s largest economy has been growing since U.S. President Joe Biden’s poor showing at a debate last week against Republican rival Donald Trump. 

“I think everybody in Europe is watching the U.S. elections,” one participant said. “Concern about France would be related to the high cost of borrowing — [whereas] concern about Donald Trump is concern about the fragmentation of the global economy.” 

The person, as with every Sintra invitee interviewed for this story, asked to remain anonymous on the grounds that central bankers — and other financial policymakers —  have a tradition of independence that bars them from commenting on national politics. Even as political turmoil intrudes ever more on their turf.

Since Sunday’s first round of voting in the French general election, much of the European establishment has been fixating on the prospect of political breakdown in the country. A final election round on July 7 may yet reward the far right with control of parliament for the first time in the country’s postwar history. 

But at this year’s ECB Forum on Central Banking — an annual elite gathering near the town of Sintra featuring top central bankers from four continents — the prospect of French financial turmoil drew a collective “meh.”

In private discussions — including over veal rump with rosemary, seabass and creamy salmon — mention of France elicited at most a shrug, with some policymakers even confessing they weren’t following the situation that closely. 

One official on the ECB’s Governing Council dismissed the threat out of hand, telling POLITICO that the leadership of Marine Le Pen’s far-right National Rally (RN) would be moderated by power — just as Italian PM Giorgia Meloni has been so far. 

“If something disorderly happens, we would do as necessary,  but [currently] it doesn’t look to be of extreme and major concern,” another Governing Council member told POLITICO.

Part of the initial worry for policymakers was that an RN majority, under Le Pen protégé Jordan Bardella, would roll out major new spending plans and thwart President Emmanuel Macron’s efforts to bring down France’s deficit. However, turbulence in French bond markets has faded since Bardella watered down some of his spending proposals, with one participant noting the drama was par for the course in an election period. 

Part of the initial worry for policymakers was that an RN majority, under Le Pen protégé Jordan Bardella, would roll out major new spending plans and thwart President Emmanuel Macron’s efforts to bring down France’s deficit. | Julien De Rosa/AFP via Getty Images

“The road to fiscal salvation is going to be bumpy — you will [inevitably] go through phases of dramatization, that’s unavoidable,” the person said. 

At the same time, multiple ECB officials suggested to POLITICO that Frankfurt would be ready to deploy its crisis-fighting powers — the so-called Transmission Protection Instrument — should things go south. 

Washington worries 

Instead, those gathered at the opulent Ritz-Carlton Penha Longa resort were fretting about events across the Atlantic, which — unlike affairs in France — they are powerless to influence.

Among their concerns was that a victory by Trump could see the U.S. abandon Ukraine to its fate while burdening Europe — already suffering from chronic low growth — with the cost of defending the would-be EU member in its ongoing war against Russia. 

It’s still not clear that Trump would turn his back on Kyiv — and that, perhaps, is the worst part. “Trump comes with lots of uncertainty,” said the Governing Council member quoted above. “And you never know if that is going to be good or bad.”

Others worried that Trump’s trade and economic policy, with a fresh dose of tax cuts, would accentuate both the protectionist drift and the fiscal slippage seen in the U.S. over the last four years under Biden.

In a panel discussion Tuesday, Goldman Sachs chief economist Jan Hatzius warned that Trump’s proposed blanket tariff of 10 percent on imported goods — and up to 60 percent on Chinese goods — would ultimately have a bigger impact on Europe, potentially depressing its economic growth by as much as 1 percent, as opposed to 0.5 percent in the U.S.

The U.S. was by far the top destination for European exports last year, taking nearly 20 percent of the total, according to Eurostat.

“The key is trade policy uncertainty,” Hatzius said. “We consistently find that the euro area is more susceptible than the U.S.”

But, as much of the academic discussion at the Sintra gathering made clear, the U.S. election is only one of many variables that might further convulse the global economy. 

“People are broadly concerned that the world as we know it is going away,” another attendee said. “At the same time, what cannot last forever cannot last forever.”

Weighing on the gathering was the risk that an international trade war pitting Europe and the U.S. against China will be difficult for Europe to win, especially if the two sides of the Atlantic are not aligned in their approaches. As the participant quoted above told POLITICO, Europe is far more dependent on Chinese exports than is the U.S., and has already suffered economic damage after tentatively joining the U.S.-led tit-for-tat over Chinese-made electric vehicles. 

The calculus, the participant said, is that waging a trade war at the behest of the U.S. is a reasonable price to pay to keep the U.S. onside in the proxy war against Russia. But should a Trump administration leave Europe high and dry as it withdraws from Europe to focus on its own economic health, that bargain could be exposed as catastrophically self-defeating.