To clarify: in the piece I don’t argue the euro will replace the dollar, but rather that demand for safe asset diversification is an opportunity for Europe to push the euro to play a greater role (while doing a welcome fiscal stimulus and ensuring appropriate provision of European public goods)

US exceptionalism is fading in the data, but is still alive in
markets. S&P 500 trades at 23x, 15% above the 10 year average. USD real exchange rate is at 40 year highs, despite the US having grown slower than most of Asia for the past 20 years. Yet, both these trends are now reverting fast. End/

Monetary policy is also constrained because US inflation still runs above target and stopped slowing in late 2023. A trade-induced slowdown is a negative supply shock, so it would be inflationary at least in the short term. This will leave the Fed in a tough spot. 6/

Fiscal policy is constrained because the US debt is high and bound to increase on a growth shock. Interest costs are just shy of 3% of GDP, laving little space for peimary spending. The rhetoric from the Treasury aligns with a lack of urgency regarding supportive fiscal policy. 5/

Leaving aside campaign promises, the actual policies that have been implemented so far are not growth-positive. But if the US economy slows down, the policy space to react is very limited. 4/

Historically, uncertainty means recession. When uncertainty is too high, firms temporarily and suddenly pause investment and hiring. Output and employment tend to fall quickly as a result. US policy uncertainty is at the second highest level of the past forty years. 3/

US economic data are deteriorating meaningfully. Jobless claims are on the rise, pushing the unemployment rate above 4%. Economic surprises have been trending down steadily since November. Confidence is shaky and real time gauges of GDP are dropping sharply. 2/