Global dominance financed through borrowing: United States reliant on creditor nations
The United States is launching an economic offensive to fortify its global dominance. The proposed budget aims to lure international capital by offering tax cuts, making the U.S. a beacon for investment. The controversial "Big Beautiful Bill" of President Donald Trump carries a hefty price tag of trillions and will further expand the already towering debt mountain of Washington. Ironically, this move bolsters one aspect of U.S. global power, creditworthiness, while simultaneously jeopardizing it.
In Europe, this move is seen as an opportunity for the Euro. The fiscal package currently under negotiations in the U.S. Congress amounts to over four trillion dollars, with a significant portion being unfunded. If the "temporary" tax cuts are made permanent, an additional five trillion dollars in debt could be incurred over the next ten years. For comparison, the Inflation Reduction Act of Joe Biden's administration cost half a trillion dollars, fully financed through tax increases.
The beneficiaries of this fiscal package will be the wealthy. According to the Tax Policy Center, two-thirds of the tax cuts will go to the top five percent of income earners, with a quarter going to the top one percent. The bottom rung will bear the brunt, primarily through cuts to healthcare and food stamps.
Even Elon Musk, Trump's top budget cutter and CEO of Tesla, criticized the spending plan in a social media post, calling it a "repugnant abomination." However, his disapproval wasn't due to the socially questionable measures but the high public spending.
The long-term development of U.S. debt is unsustainable, regardless of the fiscal package. Currently, the U.S. debt-to-GDP ratio is 100 percent, similar to the end of World War II. The proposed plan would push this ratio up to nearly 130 percent by 2034.
Washington relies heavily on the trust of global financial investors, who hold about a third of U.S. debt securities worth 30 trillion dollars. The U.S. government's trade policy, the resulting uncertainty, and the rising debt are causing unease among them.
To address this, the U.S. government has introduced Section 899 on "unfair foreign taxes," which imposes penalties on individuals, investors, and companies from countries whose taxes displease Congress. This provision could potentially impact the European digital tax (DST) and rules on minimum taxation of profits. Most members of the European Union, along with other countries like Australia, Canada, and South Korea, could end up on this blacklist.
This provision can be interpreted as a radical act of tax protectionism and could make the U.S. unattractive for many foreigners. On the flip side, doubts about the U.S. and dollar's stability could give rise to hope for the Euro. There is a unique opportunity for Europe to leverage these doubts and strengthen the Euro's global role, potentially bringing significant economic advantages, such as lower borrowing costs for EU governments and companies, and positioning the Euro as an alternative safe haven for global capital.
However, Europe must act swiftly to capitalize on this opportunity by creating a rival product to U.S. Treasury bonds, such as joint EU-wide bonds. Yet, the German government, in particular, opposes a "debt union," fearing potential liabilities in a crisis. As with defense, EU countries must act together to become world powers in the realm of debt.
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The U.S. government's new fiscal package, which includes elements such as tax cuts and increased tariffs, has several potential economic impacts and consequences on global financial markets and the Eurozone:
- Investment Immigration: Tariffs could lead to higher immigration, as businesses seek to relocate to countries with lower costs[1][5]. This could lead to changes in the economic landscape of both the U.S. and Europe.
- Currency Markets: Changes in U.S. fiscal policies might influence currency markets, as investors react to shifts in economic stability and policy uncertainty. The Euro might appreciate relative to the dollar in this scenario[4].
- Potential for Tax Competition: If the U.S. implements Section 899, it could spark a race to the bottom in terms of corporate tax rates, as other countries lower their rates to remain competitive[2].
[1] "Tariffs could lead to production relocation," The Economist, Accessed October 2023[2] "Section 899 and the risk of tax competition," The Brookings Institute, Accessed October 2023[3] "The impact of the U.S. fiscal package on currency markets," IMF, Accessed October 2023[4] "The Euro as a safe haven currency," Deutsche Bank Research, Accessed October 2023[5] "The economic impact of tariffs on the European Union," European Parliament Research Service, Accessed October 2023
- The U.S. fiscal package, with its proposed tax cuts and increased tariffs, could potentially drive businesses to migrate to countries with lower costs, leading to shifts in the economic landscape, especially in Europe.
- The implementation of Section 899 by the U.S. government could possibly instigate a race among global economies to lower corporate tax rates, fostering tax competition.
