Luigi Zingales, finance professor at the University of Chicago, warns about the impact of the US elections on Europe and compares President-elect Trump to Italy’s media mogul Silvio Berlusconi.

The aftershocks of the US presidential elections are still rocking the world. Luigi Zingales is concerned that policy changes in Washington will cause havoc to Europe’s economic heavyweights like Germany and Italy. That could even lead to the end of the European Union, says the highly regarded professor of entrepreneurship and finance at the University of Chicago Booth School of Business. The fierce advocate of capitalism and free markets fears that crony capitalism could flourish even more under the Presidency of Donald Trump. He’s drawing parallels between the US real estate tycoon and Italy’s media mogul and former Prime Minister Silvio Berlusconi.

Prof. Zingales, all eyes are on the transmission of power in Washington. What does the Presidency of Donald Trump mean for the world?
As far as what Trump represents there are big question marks. He has not a lot of clear positions from an economic point of view. The only thing that is clear about his platform is that he wants more protectionism. So we will see how he is going to implement that. What’s more, he wants more infrastructure and defense spending and lower taxes. Translated, this means higher deficits. This might not be the worst possible thing for the United States. Historically, interest rates will still be quite low, even if you have a little bit of a rise. But my concern, being Italian, are the spillover effects that this might have in Europe.

Why?
When Ronald Reagan was elected in the early eighties and created big budget deficits interest rates started to rise even higher and as a result of that Latin America went bust. This time it will be Europe that goes bust.

How come that rising interest rates in the US could be so dangerous for Europe?
In order to finance the deficit the United States need to attract foreign capital. To attract foreign capital they are going to have to raise the interest rate. Raising the interest rate will make investments in the US much more appealing and so the Dollar will appreciate against the Euro.

Why is that so bad? Doesn’t European economy get more competitive globally with a weaker Euro?
If the Dollar appreciates against the Euro German goods become much cheaper abroad and there will be a surging demand for German goods. Since Germany is close to full capacity that pressure will lead to an increase in prices in Germany. If Germany was a separate country they could deal very easily with that:  They would increase interest rates and that would offset the inflation pressures and everything would be fine. But Germany is not a separate country anymore. If you raise rates within the Eurozone the cost of debt for the Italian government goes up and the debt becomes unsustainable. So there’s only a choice between one of two bad things: Either you have inflation in Germany or a default of Italy – it’s your pick!

Also (ALSN 85.4 0.47%), Trumps victory could energize populist movements in Europe. What does that mean for the upcoming constitutional referendum in Italy on December 4?
Very few people understand that this is a self inflicted wound. There was no need for a referendum. Italy’s Prime Minister Matteo Renzi initially thought he would have a gigantic success and so he asked for having this confirmatory referendum on his reform. But the reform is not that great. So it was basically Renzi’s stupidity to put this entire thing on the bloc.

Mr. Renzi vows to quit as PM if he loses the referendum. Could that eventually lead to Italy’s exit from the European Union? For instance, the UK already voted to leave the EU this summer.
I’m sorry to say that, but the Italians are not British. UK’s PM David Cameron said he will resign the next day after the Brexit vote and he did. In contrast to that, Renzi said he will resign the next day if the referendum gets voted down and he will not. So my view is that even if he loses he will stay on.

It’s not just Italy and the UK. There’s a growing rejection against the EU in many other European countries as well.
The fundamental problem is that the wealthfare system is basically at the national level but all the major economic policies are decided at the EU level. So people are resentful exactly for that reason. They become nationalist or populist because they feel completely unprotected against the risks that come from globalization and technology shocks. So either Europe makes a concerted effort and creates a wealthfare system at the EU level or Europe is destined to fail.

Donald Trump was playing exactly to those fears. Is he really going to stand up for the little guy against crony capitalism and “drain the swamp” in Washington?
Trump made his money in real estate which is probably the most corrupt sector in every country in the world, including in the United States. He says that he’s an entrepreneur. But I think he is a real estate tycoon which is a very different thing than an entrepreneur and even a different thing than a business man. The way you make money in real estate is by having the right contacts and by striking the right deals. It’s not by managing very efficiently or by implementing innovative ideas. Also, you have very little competition in real estate because many times the tendering process for real estate projects is rigged. So Trump has not really a good idea what competition is about, exactly like Silvio Berlusconi in Italy.

Are you saying that Donald Trump is basically an American Version of Silvio Berlusconi?
This is where the analogy gets a little bit stretched. In the case of Berlusconi there was a very obvious reason why he was running for prime minister: If he had lost the election he would have lost his media empire, in part because of judicial inquiries and in part because of the debt he had at that time. So running for office basically saved his life. That’s not the case with Trump. He would have survived happily without running for president.

Is that a good thing or a bad thing?
It creates an advantage and also a disadvantage to Trump. His advantage is that he has not an agenda which is to enhance his businesses. In the United States, real estate is mostly a local business where the authority of the President is close to zero. In that sense this is good. But on the other hand Berlusconi’s agenda protected him against the worst possible scenario. Because Berlusconi was trying to save his company, he has always been against major tensions. Despite all his defects, he was ultimately a moderate in the way he ran the country. That can not be said of Trump. I think there is much more violence in Trump than in Berlusconi.

So do you think he’s actually going to fight against the establishment?
This is exactly where we need to figure out what kind of President Trump is going to be. So far he has been the big outsider, fighting for those people who Hillary Clinton called the “deplorables”. But now he is in power and because of his background and because of who he is my suspicion is that he’s going to forget the deplorables and that he’s going to get in bed with every possible lobby that exists in the world. He was probably the first Republican candidate that was not endorsed by the chamber of commerce. But now I doubt that the chamber of commerce would not try to jump in bed with Trump because they always try to jump in bed with whoever is in power.

And what about his call for protectionism and his stance against international trade agreements like Nafta or TPP?
It’s going to be interesting to see what he will actually do about it. I suspect that it would be suicidal to slap a big tariff on Chinese imports. Most of his voters shop at stores like Walmart and they don’t like to see their bill going up 50%. So that would be sort of the kiss of death for his agenda.

And what about his threats against US corporation if they move production to places like Mexico or Asia?
First of all he’s going to do a lot of talking. That’s good for publicity and also might have some impact. For instance, if I’m a US company and I’m thinking about moving jobs abroad I don’t want to anger a President who was just elected. So there might be some delays with respect to outsourcing plans. Second, Trump might try to get some deals that make it easier to retain manufacturing jobs in the US. For example, one thing that he could do right away is to decrease the tax with regard to the repatriation of profits. US companies keep a lot of money abroad because they don’t want to pay taxes. So he could lower that tax and let them bring the money in, maybe in exchange for some investments in the US. That would make the people in the business happy and it would give some impression that manufacturing jobs are coming back. But in the end that’s not going to have a long term impact.

So what does this all mean with respect to people’s trust in capitalism and free markets?
If fear the little credibility markets have left will be associated with the way Trump acts as a President and that could have negative consequences. In my book  “A Capitalism for the People” which was published four years ago I anticipated a lot of what happened this year in the political world. At that time I statet that given the economic situation, populism is inevitable. So the question is which kind of populism are we going to have. So far, I think we’re not having a very good version of it. That’s my concern.

What would a good version of populism look like?
We could channel populism to destroy the corrupt and crony components of capitalism. What are the things that keep people in the United States behind today? High prices! On reason for that is a high concentration in many industries. So using the anger to add more antitrust could be good. Another idea: The school system in the US is dominated by unions which makes learning actually more difficult. In my view the unions are one of the biggest enemies of education. Introducing more competition at every level would make the system better, exactly as it was done by President Theodore Roosevelt at the beginning of the 20th century.

How high are the chances that this is going to happen?
I don’t give it zero probability that with Trump this might happen. When he was campaign he was smart enough to pick up some of those ideas. For example, in the platform of the Republican party the possibility was included to reinstate the Glass-Steagall Act. But now, I’m reading that Trump is considering people like Jamie Dimon as Secretary of the Treasury. So I fear he’s going to be a disaster to the US like Berlusconi was to Italy.

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