Nobel laureate Paul Krugman has issued a stern warning to European leaders, urging them not to succumb to former U.S. President Donald Trump’s trade threats. He emphasized that Europe is not economically weak, its export policies to the U.S. are already favorable, and its trade surplus involves accounting factors. Europe must overcome “learned helplessness,” Krugman asserted, calling on the continent to “stand up for itself” and recognize its strength.
Last Friday, Trump expressed dissatisfaction with Europe’s negotiation tactics. On May 23, he suggested imposing a 50% tariff on EU imports starting June 1, as reported by CCTV News. However, following a call with European Commission President Ursula von der Leyen on Sunday, Xinhua reported that Trump agreed to delay the tariff implementation to July 9. In response, Krugman penned an “open letter” on the 27th, urging Europe to cease appeasing Trump and act like a true “major power.” He stressed that Europe cannot afford to make substantive concessions, as its export policies to the U.S. are already advantageous. Krugman warned that even symbolic concessions would embolden Trump and reinforce his misguided beliefs. Von der Leyen earlier stated on social media platform X that she had a “good call” with Trump but emphasized the need for time to reach a favorable agreement by July 9. She affirmed the EU’s readiness to negotiate “swiftly and decisively” with the U.S. Krugman dismissed Trump’s complaints about the EU trade deficit, arguing that value-added taxes (VAT) are not trade barriers and bilateral deficits are harmless. He reiterated that Europe must overcome its learned helplessness and act as the major power it is—especially as the U.S. appears determined to undermine its own pillars of strength.He pointed out that although the EU and the US impose significant tariffs on a few of each other’s products, before Trump’s “outburst,” the average tariff rates were very low—below 2% in both directions. The Trump team’s attack on Europe’s value-added tax (VAT) was even more absurd: “Trump and his team are furious about Europe’s VAT. Yes, US producers do have to pay a 19% tax to sell products to German consumers. But so do German producers! VAT is a sales tax, not an import barrier.”
As for Trump’s anger over Europe’s trade surplus with the US, Krugman believes that “bilateral imbalances are normal and harmless.” He quipped, “I have a huge deficit with the corner grocery store because I buy a lot of groceries from them, and as far as I know, they don’t subscribe to my Substack.” The “false prosperity” of the EU’s trade surplus was more sharply critiqued by Krugman, who exposed the accounting tricks behind it. He noted that official data shows Ireland accounts for a third of the EU’s trade surplus with the US, “but this is almost certainly the product of accounting gimmicks designed to avoid taxes.” The specific method involves multinational companies’ Irish subsidiaries selling products at inflated prices to their US subsidiaries responsible for sales in the American market, thereby reducing reported profits and taxes in the US while creating large but largely fictitious profits in Ireland, where corporate tax rates are lower. “These accounting maneuvers make Ireland, and thus the entire EU, appear to export a lot, but in reality, no jobs are created; it’s all about corporate profits.” He added that while the EU should crack down on Ireland’s role as a tax haven, “this isn’t one of Trump’s demands.” Krugman emphasized that the US has no legitimate trade grievances against the EU, nor is it “holding all the cards” as Trump imagines. The EU’s dependence on the US market is not high, with the US buying only about 3% of the EU’s products. Conversely, US companies that have invested trillions of dollars in Europe are more reliant on Europe’s goodwill. German Chancellor Friedrich Merz warned on Monday that US tech companies could become targets if trade conflicts escalate. Krugman deemed this a “credible threat.” Refuting the “decline of Europe” narrative, Krugman dismissed the idea that Europe is becoming a “museum of past successes.” He advised people to “try spending time in Europe—not in crowded tourist spots but in cities and companies where ordinary people work.” He described these as “highly educated, highly capable countries where many things work very well.”Although Europe’s economic growth has indeed lagged behind the United States by a generation, Paul Krugman, citing the ‘Draghi Report,’ points out that Europe’s delay is largely confined to the technology sector, while other parts of its economy remain quite vibrant.
The most striking observation is Krugman’s argument that the Trump administration’s determination to engage in ‘self-harm’—by undermining the scientific research and research universities that have driven America’s past success—could make Europe’s catch-up easier than expected. Finally, Krugman’s message to Europe is: ‘Stand up for yourselves.’ He concludes, ‘In terms of trade, GDP, and even all but the most advanced technologies, you are no more dependent on the U.S. than the U.S. is on you. Nothing forces you to indulge the delusions of America’s ‘mad king.” Risk Warning and Disclaimer: The market carries risks, and investments should be made with caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should evaluate whether any opinions, views, or conclusions in this article align with their particular circumstances. Investments made accordingly are at the investor’s own risk.