MNI INTERVIEW2: Trump Stagflationary For Eurozone-ECB's Wunsch

MNI (WASHINGTON) - A victory for Donald Trump in the U.S. elections would be likely to drive the dollar higher and send a stagflationary impulse into the euro area, making the European Central Bank’s job harder, National Bank of Belgium Governor Pierre Wunsch told MNI on Saturday.

The implications of a potential Trump victory were widely discussed during the IMF’s autumn meeting, Wunsch said in an interview in Washington, adding that while the impact of such a result on Nov 5 remains unclear “in the U.S. it is quite clearly inflationary.”

Wunsch outlined several scenarios including one based on ECB models in which an “unconfidence impact dominates” being clearly negative for growth and “more or less neutral for inflation because you have lower GDP but some limited appreciation of the dollar or depreciation of the euro.” 

“Having discussed with people here, there is this feeling that Trump is going to try to run the economy very hot where inflation and interest rates are still higher in the U.S.,” Wunsch said, noting that if that were the case Trump may also try to increase oil production as much as possible and “potentially limit the capacity of Opec+ to coordinate.”

TARIFF TIT FOR TAT

“We already had an appreciation of the dollar of 4%, [then] you do not need much more to compensate for a fair share of a 10% tariff on Europe,” he said.

If the U.S. economy is strong in that case the country would mathematically need a stronger dollar to compensate for the tariffs, Wunsch said, adding that he does not foresee U.S. manufacturing being able to quickly replace imports from China.

A second Trump administration would probably force China to try to increase its exports to the EU, prompting the bloc to respond with tariffs, and triggering “an acceleration of deglobalisation and fragmentation that would be bad,” he said.

However, Wunsch didn’t rule out a “positive confidence shock impact in the U.S.”

The long-end of the U.S. yield curve could also move higher, with implications for exchange rates, he said.

Asked whether these events could deliver a blow to euro area confidence similar to those from the wars in Ukraine and the Middle East -- which some analysts believe are already a factor in restraining consumption -- Wunsch noted that “we tend to extrapolate gloom and at some point people are just tired of being gloomy.”

The euro area could see positive surprises to confidence soon, he said.