Europe cannot sacrifice financial regulation to Trump’s economic warfare

Since President Trump’s inauguration in January 2025, the US administration has overhauled its trade relationships and its collaboration at the level of international standard-setters, unwinding decades of globalisation and leaving Europe dangerously exposed. 

Europe in MAGA-land 

Trump’s approach to global economics is often reduced to self-harming protectionism. His economic coercion encourages European decision-makers to pursue conciliatory tactics. The idea is that Europe just has to sacrifice a few regulatory standards regulatory standardsIn modern trade agreements, social and environmental standards are considered obstructive to trade. in US-EU trade negotiations as a token of goodwill. This would help the EU to avoid the possible disruptive effects of tariffs on its heavily export-reliant economy and wait for the reversal of Trump’s policies, once their detrimental economic consequences fully set in. Yet, this logic is fundamentally flawed. The link between trade power and monetary power that is being exploited by the Trump administration reveals a much bigger threat for Europe.

Trump’s big re-industrialisation plan

By forcing foreign investment into US industries, Trump’s main objective is to re-industrialise the US. On one hand, he is rebooting all existing trade, multilateral, and security relationships to push partners into buying more American products and services and into lowering their regulatory standards – thereby easing access to foreign markets for American companies. The steep tariffs targeting the US’ key trading partners marked the beginning of this strategy. On the other hand, Trump’s domestic budget bill ratifies drastic cuts in US corporate taxes in a bid to attract foreign industrial investments and improve the competitiveness of American businesses. He is also pressuring the Federal Reserve – with no regard for its statutory independence – to buy more US debt and lower interest rates. This would weaken the dollar and increase the competitiveness of US exports by making US goods cheaper abroad. 

These policies bestow negative consequences for the US economy and threaten dollar supremacyThe big weakness of this strategy is that it could threaten the dollar's supremacy in the global economic order. Trump’s “big beautiful (budget) bill” creates such an unprecedented US public deficit that credit rating agencies have already downgraded US public debt and markets are starting to doubt if it will ever be repaid. The internal political attacks on the Fed’s independence as well as the weaponisation of the international financial system by the US are a threat to the credibility of the dollar. Read more. – a a crucial pillarWith the decline of its dominance, the dollar could lose its status as a reserve currency, ending the famous ‘exorbitant privilege’ which enables the USA to finance its ‘twin deficits’ – trade and budget. The end of the dollar hegemony would subject American public debt to market discipline, forcing the US administration to adopt a much more restrictive fiscal policy. This would be incompatible with the tax cuts and investments needed to support a productive economy and social wellbeing: it would threaten Trump’s very strategy of economic attractiveness. Read more. of Trump’s costly plan. Therefore, to maintain the US trade and monetary hegemony, and safeguard the international dominance of the dollar, proposals have been made to forcefully convert the outstanding US debt into century bonds and promote the use of dollar-backed stablecoins internationally.

The regulatory race to the bottom

Against this backdrop, an economic recession looms and panic is reaching European leaders. But instead of standing firm and bolstering public support for the European economy through investment in the green and digital transition, the EU has engaged in a dangerous race to the bottom, opening the doors to deregulation under the disguise of ‘simplification’ and for the sake of the so-called EU ‘competitiveness’. 

This move is an attempt at recreating economic attractiveness in Europe by quickly and drastically reducing the so-called ‘regulatory burden’. This is despite the near absence of policies that generate productive new public or private investment. This has emboldened the corporate lobby to push for the rollback of key safeguards that are meant to protect EU citizens. Just in the area of finance, the European Commission is proposing to delay 122 planned technical standards across banking, insurance, investments and sustainable finance, including rules on consumer protection, transparency, corporate responsibility, data protection and financial stability. As the US is busy undoing its progress on the implementation of post-2008 crisis rules, EU leaders are following suit, weakening the implementation of the Basel III international banking standards in Europe – the rules designed to protect citizens from future financial crises. 

This deregulatory moment is, to a great extent, driven by Trump’s agenda and trade war reflecting a disregard for public interest and international collaboration. Yet the EU’s response to Trump’s ‘America First’ agenda also undermines the very foundations of Europe’s economic and financial system: rule-based order, evidence-based policymaking, economic sustainability and social standards. 

Trump’s policy agenda is dominated by corporate interests, disregards science (eg. addressing the risk of climate change) and the public interest. It is not sustainable and is already resulting in negative economic shocks to the global economy. Aside from a few corporate interests, there is no benefit for European citizens to follow the US in this suicidal drift. Put simply, sacrificing financial regulation to short-term considerations would compromise European sovereignty when Europe needs it most.

Investing in Europe’s future

EU leaders must react to the US’ reckless economic attacks with a strong, sovereign Europe that strengthens its international role and pulls the global economy into a virtuous circle of cooperation and stability. As President of the European Central Bank (ECB) Christine Lagarde put it, the withdrawal of the US offers the EU an opportunity to make progress on ‘strategic autonomy’ and to become an attractive economic partner for new allies: a rule-based, stable destination for international capital. 

However, this would require the political will in Member States to overcome narrow national interests and put the joint long-term EU interests first. It would necessitate coordinated economic and industrial policies that support a green and digital transition, an acceleration of the EU Green Deal (as the only path towards energy security), the safeguarding of monetary independence and the fostering the international role of the euro, as well as the integration of EU capital markets with strong protections in place.

Financial regulation, a cornerstone of strategic autonomy

To do this, the EU must urgently prioritise protecting its monetary sovereignty – accelerating the digital euro project and reinforcing the regulation of crypto assets with restrictions on US-backed stable coins. The EU would also greatly increase the resilience of Europe’s financial sector by strengthening the regulation of AI-powered financial services and reducing its dependence on foreign IT and big tech firms for the provision of critical digital infrastructure and services. 

Sound financial regulation crucially also means defending international cooperation through the implementation of internationally agreed standards to avoid financial crises (such as Basel III). On trade policy, the EU will have to diversify its trade exchanges with other cooperative jurisdictions and include sustainability and social goals in trade negotiations. The EU also needs to make its economy stronger and more appealing for businesses and investors. That means truly integrating its capital markets, fostering investments in innovation and sustainable economic development, and protecting workers’ rights and EU social standards.

Further, there can be no economic growth and prosperity in an economy disrupted by climate change and environmental degradation. As the energy transition is a major challenge and opportunity for a stronger Europe, its sustainable finance framework is a competitive advantage that must be safeguarded. Europe’s enormous reliance on fossil fuel imports (totaling 450 billion € in 2023) is a major weakness in the context of trade war and a key factor in the EU’s companies lagging competitiveness. In addition to mitigating looming risks of major climate-related disruptions, reducing reliance on fossil fuels would limit the EU’s exposures to countries that exploit their exports of fossil fuels as a tool of destabilisation and geopolitical leverage. Instead of undoing the sustainable finance framework, the EU should implement and streamline its due diligence rules, taxonomy, disclosure standards, rules on climate risk management and carbon border adjustment mechanism. 

Finally, the EU needs to rethink its public finance architecture and review its public spending rules to unlock investment into sectors of joint strategic priority such as the green and digital transition. Public investment is indispensable not only to fund these priorities but also to maintain social cohesion – providing for social resilience as people weather challenges related to the transition and geopolitical shocks. Using joint EU debt to finance these investments will be also conducive to achieving progress on the Saving and Investment UnionSaving and Investment Union: The Saving and Investment Union is an EU initiative to better channel household and institutional savings into long-term, sustainable investments. It aims to support the green and digital transitions by strengthening capital markets, improving cross-border investment, and increasing financial literacy and trust. by offering an EU safe asset as an international alternative to US treasuries.

Chartering the way forward

For all this to happen, Europe needs stronger, not weaker, financial regulation. Slashing protection standards would undermine the very bedrock of Europe’s sovereign future.  Fair rules, transparent policymaking processes, democratic liability and legal certainty allow the EU to maintain a good environment for companies and workers and represent a fundamental competitive advantage. 

There is still time for EU leaders to right the ship and renounce the destructive deregulation agenda. US rule cutting is not a formula to emulate, but a key moment for Europe to assert itself as a strong global player and a reliable partner, one that supports cooperation and stability, and offers a vision for a better future.

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The rules of finance are not set in stone; they are decided by people. It is up to civil society to convince decision-makers to change them.

Pablo Grandjean and Axelle Van Wynsberghe, Finance Watch