Simon Nixon 

When Donald Trump addresses a joint session of Congress this week, his words will be studied with closer attention than usual in Europe.

Across the Atlantic, Mr. Trump's arrival on the world stage has been met with widespread anxiety. Many fear that his America First rhetoric, skepticism toward multilateral institutions and enthusiasm for Brexit signals a disengagement from the rules-based order that most Europeans consider the bedrock of their prosperity and security.

Yet ironically, the immediate economic impact of Mr. Trump's arrival has been positive for Europe. Last week's eurozone composite Purchasing Managers Index showed the economy expanding at its fastest rate in 6 1/2 years and jobs are being created at the fastest rate in nearly a decade, while the Stoxx Europe 600 index of leading European equities is up 13% since Nov. 8. That may partly reflect an improved global growth picture. But Mr. Trump can take some credit: expectations that his promised tax cuts and deregulation will deliver faster U.S. growth have lifted the eurozone too, not least by halting the appreciation of the euro, down 4% against the dollar since the election.

There may be more good news to come. Mr. Trump may already have indirectly helped deliver progress toward a more durable solution to Greece's debt crisis. International Monetary Fund officials believe that the new administration's skepticism toward multilateral organizations has strengthened their negotiating position in the latest brinkmanship over Greece's bailout.

Whereas the Obama administration used to put pressure on the Fund to soften its demands to accommodate European political interests, the Fund has been emboldened to stand firm with the result that last week both Berlin and Athens appeared to give ground. Similarly, Mr. Trump's insistence that European countries increase their military spending could provide a useful stimulus, particularly if the EU exempts any increased defense spending from the its fiscal rules.

Nonetheless, European policy makers have four major anxieties. The first concerns the Trump administration's policy toward the dollar. So far, China, Japan and Germany have all found themselves in the rhetorical firing line for benefiting from an undervalued currency.

Attempts to weaken the dollar, whether through excessively loose monetary policy or by talking it down, pose a risk to the eurozone's recovery. History is hardly reassuring: going back more than 40 years, Republican presidents have presided over a weakening of the dollar with the exception of the first Reagan administration.

Second, Europeans want to know whether America First will evolve into outright protectionism. There is particular alarm in Europe at talk in Washington of a border-adjusted tax, which would oblige companies to pay tax on imports but not on exports.

This would hit hard European exporters such as Germany that would find their goods at a disadvantage to domestic U.S. competitors, damaging the European recovery. Worse, a U.S. border tax would risk retaliatory action, raising the prospect of a damaging trans-Atlantic trade war.

The third concern relates to Mr. Trump's plans for financial deregulation. Some eurozone policy makers would have no problem with a watering down of the Volcker rule -- which prohibits banks from trading on their own account -- or loosening the rules around securitization.

What they really worry about is a U.S. retreat from the Basel bank capital rules; one top official reckons this would be reckless since loosening capital rules when central banks are running loose monetary policy would replicate the conditions that led to the global financial crisis. It would also create an unlevel playing field between U.S. and European financial institutions, fueling demands for protection. The result would be further damaging fragmentation of the global financial system.

The fourth concern is that Mr. Trump damages Europe economically by deepening its political divisions. Until now, most U.S. conservatives have focused their criticism of Europe on its high welfare spending and rigid product and labor markets which have held back its growth and productivity. Many European policy makers have privately welcomed this criticism since it reinforces their own calls for the bold overhauls needed to make European economies flexible enough to cope with the disciplines of a common currency.

But Mr. Trump and other administration officials have aimed their strongest criticism not at outdated European socialism but the institutions of the EU and the single currency itself. That has played into the hands of euroskeptic parties opposed to any reforms but determined to destroy the EU and single currency.

So far, there is little evidence that the markets share these concerns: Even as measures of political uncertainty have risen, the equity risk premium -- the extra return that investors demand for holding stocks -- has fallen in Europe, notes Ian Harnett, chief economist of Absolute Strategy Research, an advisory firm. Perhaps that's the right call. After all, veteran European policy makers recall the widespread anxiety when Silvio Berlusconi became prime minister of Italy in 1994.

Yet Italy's domestic institutions were strong enough to restrain Mr. Berlusconi's populist instincts enough to maintain confidence in Italy's ability to continue to service its giant debts. Investors may be betting that U.S. institutions will be strong enough to restrain Mr. Trump too -- even if European politicians have yet to be convinced.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

February 26, 2017 13:48 ET (18:48 GMT)