Change of economic narrative

A few months ago, the prevailing viewpoint was that the US was in exceptional shape and Europe was asleep. In 2023 and 2024, the US economy surprised by its vigour and Europe by its torpor, especially Germany. In just a few weeks, the “economic narrative”, to use Robert Shiller’s expression, has radically changed, far more so than underlying economic conditions which, barring a sudden shock such as a financial crisis or pandemic, are generally fairly inertial. In the US, Donald Trump’s tariff policy is confused, causing households and businesses to fear higher prices and weaker incomes. At their most extreme, these trends have a name: stagflation. While this risk is still a distant prospect, it is forcing the Fed to sit on its hands. The same president Trump gave a wake-up call to European leaders by making them understand that the US security umbrella is no longer guaranteed. Germany has changed its fiscal paradigm. Europe wants to rearm. We have to differentiate between announcements and their implementation, especially when it involves the roll-out of a coordinated industrial policy along the lines recommended by the Draghi report. But the outlook for a genuine recovery in Europe is taking shape.