MacroVoices #475 Daniel Lacalle: Is This The End of The Monetary System As We Know it?
Apr 17, 2025
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Daniel Lacalle, Chief Economist and Fund Manager at Tressis, dives into the evolving financial dynamics between Europe and the U.S. amid geopolitical tensions. He discusses the implications of Trump Tariffs on investments and highlights the risks of stagflation and a declining euro. Lacalle also critiques the European Central Bank's push for a digital euro and its impact on stability. The conversation offers insights into how these factors could redefine economic cooperation and the future of monetary policy on both sides of the Atlantic.
The podcast reveals European fund managers are recognizing both pros and cons of Trump tariffs, contrasting media's one-sided narratives.
Concerns over U.S. debt sustainability indicate potential threats to the dollar's reserve currency status, urging fiscal reforms to avoid crises.
The podcast discusses how rising political pressures may hinder central bank cooperation, raising risks of monetary instability between the Fed and ECB.
Deep dives
Impact of Trump's Tariffs on Europe
The discussion highlights the evolving European perspective on tariffs imposed by the Trump administration, revealing a more nuanced understanding among European fund managers. European media tends to portray a one-sided view, emphasizing the negative impacts without recognizing some merits in the U.S. position on trade. The perception among asset managers suggests that the way these demands have been communicated is causing as much concern as the tariffs themselves, leading to heightened anxiety about future negotiations. There is a prevalent worry that volatility driven by political headlines could overshadow the broader economic implications for both Europe and the United States.
The Challenges of U.S. Debt Sustainability
The sustainability of U.S. debt remains a significant concern, especially given projections of increasing deficits over the next decade without any economic contraction. Analysts warn that rising debt levels could undermine the dollar's status as the world’s reserve currency, particularly if these trends continue unchecked. Most importantly, there is anxiety around how the U.S. could address both its fiscal and trade deficits without triggering severe economic repercussions. This situation poses a critical dilemma for policymakers, as there is growing pressure to reform current fiscal practices to avert a potential crisis.
Stagflation Risks in Today's Economy
Stagflation, characterized by stagnant economic growth coupled with inflation, is deemed unlikely due to the unique factors driving current inflation trends. Experts argue that the traditional conditions for stagflation do not align with the present monetary environment, where inflation appears to stem more from government spending rather than a rise in money velocity. Additionally, sectors showing signs of price declines point to a slowing economy rather than runaway inflation. Thus, the expectation is more aligned with the risks of recession rather than a prolonged period of stagflation-like conditions.
European Union's Defense and Energy Vulnerabilities
The podcast outlines the current vulnerabilities faced by the European Union, particularly concerning defense expenditure and energy security in light of reduced American support. It highlights that while the EU must bolster its defense capabilities, there is significant resistance to reallocating necessary funds from existing social programs. Furthermore, Europe's dependency on U.S. liquefied natural gas (LNG) for energy poses additional challenges, particularly in negotiating favorable terms without compromising other economic relationships. This combination of defense and energy needs exacerbates the EU's financial and political difficulties, necessitating better trade relations with the U.S.
The Future of Central Bank Collaboration
Concerns about central bank cooperation between the U.S. Federal Reserve and the European Central Bank are rising amid increasing political pressures. Analysts warn that diverging monetary policies may exacerbate existing tensions, especially given the ECB's ongoing digital currency initiatives. The podcast discusses the risks associated with the ECB adopting a markedly different path than the Fed, which could lead to monetary instability reminiscent of past crises. Acknowledging that the euro lacks the same reserve status as the dollar further complicates the collaboration efforts, with uncertainty surrounding the future structure of international monetary relations.
MacroVoices Erik Townsend & Patrick Ceresna welcome, Daniel Lacalle. They’ll discuss Trump Tariffs as the European investment community sees them, and discuss whether this is the dawn of a new age in terms of monetary and economic policy cooperation between the United States and Europe. https://bit.ly/43XhGUI
