Trump Spurs European Race to Rearm

Summary

WSJ What’s News: "Trump Spurs European Race to Rearm" – Detailed Summary

Release Date: March 6, 2025 | Host: The Wall Street Journal

The Wall Street Journal’s podcast, "What’s News," in its episode titled "Trump Spurs European Race to Rearm," delves into a series of interconnected geopolitical and economic developments. The episode navigates through significant policy shifts in the United States, the European Union's response to emerging security concerns, and strategic maneuvers in the global luxury goods market amidst escalating trade tensions. Below is a comprehensive breakdown of the key topics covered, enriched with notable quotes from industry experts and officials.

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1. US Department of Veterans Affairs Workforce Cuts

The episode opens with the Trump administration’s controversial plan to reduce the Department of Veterans Affairs (VA) workforce by approximately 70,000 employees. This move is part of a broader review aimed at increasing efficiency within the agency.

• Department Secretary Doug Collins addressed concerns in a video posted on X (previously Twitter), stating, “[...] the cuts won't affect health care or benefits for veterans and beneficiaries, and that there will still be hiring for mission-critical roles” (00:54).

• A memo released earlier emphasized a shift from measuring VA progress by expenditures and employee numbers to focusing on the actual assistance provided to veterans.

• The American Federation of Government Employees Union, representing over 300,000 VA workers, warned that these layoffs could lead to longer wait times for veterans seeking services.

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2. Potential Abolition of the Education Department

In a bold and unprecedented move, President Trump is anticipated to issue an executive order aimed at dissolving the Education Department.

• A draft order directs Education Secretary Linda McMahon to commence the closure process “[...] based on the maximum extent appropriate and permitted by law” (01:08).

• Legal experts voice skepticism, highlighting that dismantling the department would require a filibuster-proof 60-vote majority in the Senate due to the codification of major programs like student loans in federal law.

• During her confirmation hearing, McMahon clarified that Trump’s intent was not to eliminate federal programs but to “make them more efficient”, contingent on Congressional approval.

• The White House has yet to respond to inquiries regarding this significant policy shift.

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3. European Union’s Shift Toward Increased Defense Spending

Reacting to President Trump’s foreign policy maneuvers, European leaders convened in Brussels for emergency security talks, focusing on defense spending amidst growing geopolitical uncertainties.

• Bertrand Benoit, Journal Germany bureau chief, remarked on the EU’s tangible commitment: “We’ve definitely started to see a real shift, and the main clue for this is that we’re talking about real numbers now, not just intentions” (03:33).

• The European Commission plans to redirect over $860 billion from social spending in the bloc’s poorest regions to the defense sector over the next decade.

• Friedrich Merkel, Germany’s likely next Chancellor, announced that Germany’s strict fiscal rules “would no longer apply to military spending,” facilitating a swift ramp-up in rearmament efforts (03:42).

• Benoit elaborated on the significance of Germany’s pivot, noting, “Germany is the biggest country in the EU and the biggest economy, and it’s always been the one that was pulling in the other direction and telling others not to spend too much” (04:10). This strategic reversal is expected to embolden other EU nations to increase their defense budgets, even if it means temporarily higher public debts.

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4. European Central Bank’s Interest Rate Decision

Amidst the EU’s defense realignment, the European Central Bank (ECB) is poised to announce what is likely its sixth interest rate cut since June, responding to declining inflation and economic sluggishness within the eurozone.

• Paul Hannan, Dow Jones Newswire’s economics editor, discussed potential implications: “The ECB is going to cut its key interest rate again, and they would expect a couple more cuts to come in the months ahead” (05:05).

• Hannan highlighted that while the ECB aims to stimulate the economy, the recent defense spending boost could paradoxically “push inflation”, potentially altering the central bank’s economic forecasts within the next 18 months to two years.

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5. China’s Concerns Amid US Rivalry

The podcast also touches upon China’s strategic apprehensions regarding its Cold War-like rivalry with the United States, exacerbated by recent US policies.

• Chinese officials express worry that US strategies could lead to China experiencing isolation akin to Moscow during the Cold War, encompassing trade restrictions, sanctions, and limited access to essential technologies.

• President Trump’s diplomatic initiatives, such as attempting to mediate Middle Eastern conflicts and engaging with Vladimir Putin’s Russia, are viewed by Beijing as efforts to “drive a wedge between Moscow and Beijing”.

• Recent 10% US tariffs symbolize the challenges in US-China relations, revealing vulnerabilities in China’s approach to resolving trade disputes.

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6. Bernard Arnault and LVMH’s Strategy to Evade US Tariffs

A significant portion of the episode is dedicated to exploring how Bernard Arnault, CEO of the global luxury conglomerate LVMH, is navigating potential 25% US tariffs imposed on European goods.

• Nick Kostoff, luxury goods reporter, outlines the relationship between Arnault and President Trump: “I would describe them as friendly rather than close friends. They’ve known each other for a very long time” (09:06). Their longstanding connection dates back to the 1980s when both were real estate developers in New York.

• Arnault’s strategy involves relocating production to the US. For instance, LVMH has established a Louis Vuitton handbag factory in Texas, increasing production that falls outside the scope of tariffs (10:45).

• Kostoff notes the broader luxury industry’s stance: “The entire luxury industry, whenever I speak to executives at rival firms, are firmly behind his efforts and really hope that he succeeds” (10:45).

• Despite these efforts, challenges persist. Other European luxury brands prefer maintaining their "Made in Europe" identity and are reluctant to shift production, potentially limiting LVMH’s ability to fully mitigate the impact of tariffs.

• Arnault’s approach also includes lobbying the Trump administration to dissociate LVMH from broader trade conflicts, emphasizing that previous tariffs were unrelated to the luxury sector.

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7. Upcoming Reports and Conclusion

The episode concludes by previewing upcoming economic reports, including US productivity data for Q4, the January trade deficit, and earnings reports from major retailers like Macy's and Kroger. Additionally, listeners are teased with a special series on Beijing's Belt and Road Initiative and its role in challenging American global dominance.

Notable Quotes:

• Bertrand Benoit: “We’ve definitely started to see a real shift, and the main clue for this is that we’re talking about real numbers now, not just intentions” (03:33).
• Nick Kostoff: “The entire luxury industry, whenever I speak to executives at rival firms, are firmly behind his efforts and really hope that he succeeds” (10:45).

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Conclusion

This episode of "What’s News" paints a comprehensive picture of the intertwined nature of US domestic policies, European defense realignment, global economic strategies, and the luxury goods market amidst rising geopolitical tensions. From significant workforce reductions in the VA to the strategic defense investments by the EU and LVMH’s maneuvering to avert heavy US tariffs, the discussion underscores the complex ripple effects of President Trump’s administration policies on global markets and international relations.

Transcript

[Luke Vargas]

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[Nick Kostoff]

The art of Trump whispering I mean, it's not easy. I have no idea if Bernard Arnault will be successful or not. What I can say is that the ENT luxury industry, whenever I speak to executives at rival firms, are firmly behind his efforts and really hope that he succeeds.

[Luke Vargas]

It's Thursday, March 6th. I'm Luke Vargas for the Wall Street Journal, and here is the AM edition of what's news, the top headlines and business stories moving your world today. We begin in Washington, where the Trump administration is looking to cut roughly 70,000 workers from the Department of Veterans affairs, part of a review of the agency. In a video posted on X yesterday, the department secretary, Doug Collins, said the cuts won't affect health care or benefits for veterans and beneficiaries, and that there will still be hiring for mission critical roles. The days of kicking the can down the road and measuring VA's progress by how much money it spends and how many people it employs rather than how many veterans it helps, are over, according to a memo from earlier this week. The cuts are slated to happen in August. The American Federation of Government Employees Union, which represents more than 300,000 Veterans affairs employees, said the layoffs will result in longer wait times for veterans. Meanwhile, President Trump is expected to issue an executive order aimed at abolishing the Education Department as soon as today. A draft of that order, viewed by the Journal, directs education secretary Linda McMahon to take all necessary steps to facilitate the closure of the department based on the maximum extent appropriate and permitted by law. It's a move that, as we've reported, has been in the works since hence Trump's transition, though, according to legal experts, fully unwinding the department will require a filibuster proof 60 vote majority in the Senate. The major programs it administers, including student loans, are codified in law and have significant political constituencies. During her confirmation hearing, McMahon said that Trump doesn't intend to cut federal programs but to make them more efficient and that Congress would need to go along with scrapping the department. The White House didn't respond to a request for comment. Turning overseas now EU leaders are gathering for emergency security talks today with defense spending in focus. The summit in Brussels comes as the bloc wrestles with questions about its own security after President Trump's rapprochement with Russia's Vladimir Putin, who many European leaders say poses the biggest threat to them, signaled they would need to invest in their own defenses.

[Bertrand Benoit]

We've definitely started to see a real shift, and the main clue for this is that we're talking about real numbers now, not just intentions.

[Luke Vargas]

That's Journal Germany bureau chief Bertrand Benoit. The European Commission is hoping to steer more than $860 billion from spending on its poorest regions to the defense industry through the decade. And the man expected to be Germany's next Chancellor Friedrich Meertz, made headlines by saying that the country's famously strict fiscal rules would no longer app to military spending, paving the way for a rapid acceleration in its rearmament.

[Bertrand Benoit]

The dynamic is important here because Germany is the biggest country in the EU and the biggest economy, and it's always been the one that was pulling in the other direction and telling others not to spend too much, not to run too high public debt. And now Germany suddenly is pulling in the other direction. And so the idea is that this will give cover for others to raise spending, even if it means borrow more and running higher public debts for the time being.

[Luke Vargas]

Well, that potential u turn in spending priorities comes as the European Central bank prepares to announce its latest interest rate decision today, an all but guaranteed sixth rate cut since June as inflation eases and it shifts its focus toward the eurozone's hobbled economy. But could a defense spending boost change the script? I asked Dow Jones Newswire's economics editor Paul Hannan.

[Paul Hannan]

Yes, it could. The question is, how soon will we see evidence of that? So today, investors are as near as certain as you can be that the ECB is going to cut its key interest rate again, and they would expect a couple more cuts to come in the months ahead. That's because we're moving into the range where interest rates are neutral. So they're not stimulating the economy, but they're not holding it back from there. If you look at the weakness of the Eurozone economy and the potential for tariffs from the us you might think that you need to go below neutral, but then comes along this German announcement. And last night, French President Emmanuel Macron was laying out his plans for boosting defence. So Bertrand is right that this does give cover for others to move, and that could be a big stimulus to growth and a big push on inflation. So 18 months, two years ahead, which is where central banks think about things, you could be seeing a stronger eurozone economy than they'd expected and more inflation than they'd expected.

[Luke Vargas]

The ECB's decision is due at 8:15am Eastern, and we report that Chinese leader Xi Jinping has grown concerned that his country's Cold War rivalry with the US could leave it isolated like Moscow was during that era, cut off by trade restrictions and sanctions and with fewer outlets for its goods and limited access to crucial technology. That's according to people who consult with senior Chinese officials, who see several of President Trump's early diplomatic moves in such a context, including his efforts to wind down conflicts in the Middle east and Ukraine to focus on China, as well as his embrace of Russia, a pivot in part driven by a desire to drive a wedge between Moscow and Beijing. Those people said Xi has thus far been uninterested in making a narrow offer to the US Related to the fentanyl crisis, holding out instead for the Trump team to specific demands that could lead to broader talks. However, Trump's new 10% tariffs this week have exposed the pitfalls in that wait and see approach, with one person close to Beijing's thinking saying that move was pretty unexpected. And speaking of the great power rivalry between the world's top two economies, we're working on a special series about how Beijing has tried to use its trillion dollar belt and road infrastructure program to undercut American dominance on the world stage. The second episode of Building Influen is out now on the what's News feed, and we've left a link to the series in our show notes. Coming up, what can French billionaire Bernard Arnault teach us about how to steer clear of U.S. tariffs? We'll look at the LVMH chief's efforts to spare his luxury empire from President Trump's trade actions.

[Paul Hannan]

After the break. This episode is brought to you by Atlassian. Atlassian makes the team collaboration software that powers enterprise businesses around the world, including over 80% of the Fortune 500. With Atlassian's AI powered software like Jira, Confluence and Loom, you'll have more time to do the work that matters. In fact, Atlassian customers experience a 25% reduction in project duration per year. Unleash the potential of your [e-mail] Atlassian.

[Luke Vargas]

As the US pushes ahead with tariffs on two of its closest trading partners, can anyone rest easy? They won't be caught up in President Trump's protectionism. Bernard Arnault, the owner of globe spanning luxury empire lvmh, could soon find out. The longtime friend of the president is trying to work his magic to spare his business from potentially damaging 25% tariffs on European goods. And Journal luxury goods reporter Nick Kostoff is here to discuss what we can learn from Arnault's efforts. Nick, how close are Arnault and Trump? Just so we can gauge whether personal diplomacy really is at play here?

[Nick Kostoff]

Good question. I would describe them as friendly rather than close friends. They've known each other for a very long time. They were both real estate developers in New York in the 80s. Their families have ties. So one of Arnault's sons, Alexandre, is close to Jared Kushner. Arnaud's daughter is close to Ivanka Trump. When Trump was shot in Pennsylvania last year, Arnault called him to check in on him. After that, they speak on the phone on a fairly regular basis, but I wouldn't say they're close friends. Actually, Trump said in an interview last year to Bloomberg that Arnault was a friend.

[Luke Vargas]

I think, okay, who knows what to make of that caveat enter into that relationship. Nick, these threatened tariffs on European goods, how big of a threat would those pose for lvmh? Of course, it's just one company, but it is no small fry.

[Nick Kostoff]

No, I mean, it's Europe's largest company by market cap, and much of its value is tied up in the fact that it sells European heritage, it sells European Savage Faire. A lot of its goods are produced in Europe and that is why they can charge high prices for it. And it also comes at a time when China, the economy there, has slowed. Europe's economy is not really growing. And so there were very, very high hopes when Trump got elected that the US Would really drive growth for LVMH and for other luxury goods companies. And obviously now tariffs are a danger. Some of these brands have high pricing power, obviously Louis Vuitton, Dior, others, but they've been raising prices quite a bit since COVID How much more can they do that? Analysts are pretty divided on that and the US Is obviously their biggest market.

[Luke Vargas]

So what is he trying to do to thwart this? And is there any way we can handicap Arnault's likely success in avoiding these tariffs.

[Nick Kostoff]

First of all, he's looking at moving some production to the U.S. so, as we reported, he's looking at several projects during Trump's first term. He opened a Louis Vuitton handbag factory in Texas so that Louis Vuitton would increase the percentage of its production that wouldn't be taxed in the event of tariffs. What he's trying to do is also lobby Trump, lobby other people in Washington to say that LVMH is not the source of any trade disputes between Europe and America. When there were tariffs in the first term against European companies, these were because of European subsidies to Airbus. It was because France imposed a tax on tech giants. These had nothing to do with the luxury industry. But, yeah, the art of Trump whispering. I mean, we've seen it with world leaders like Emmanuel Macron and Keir Starmer from the UK in the past week. It's not easy. Trump has obviously very strong views on what he wants to do, and we'll see. I mean, I have no idea if Bernard will be successful or not. What I can say is that the entire luxury industry, whenever I speak to executives at rival firms, are firmly behind his efforts and really hope that he succeeds.

[Luke Vargas]

If he isn't successful, are there other viable efforts afoot to try and talk Trump away from these tariffs?

[Nick Kostoff]

Yeah, it's difficult. I mean, obviously Europe, like Canada and like others have said that they will respond tit for tat to any U.S. tariff. And so Trump obviously cares about the stock market, how it's doing. He cares about other economic indicators, and in the end, that might be what persuades him. But there's not a ton Europe can do other than saying that they'll respond in kind. And for luxury goods companies, yeah, clearly this is a problem. And Arnault has said that he'd be willing to move production to the US but some of his European peers just say it makes no sense. And for them, they want to be seen as to be made in Europe, made in Italy, and they're not even looking at moving production over there. The other thing to say is that LVMH obviously has a big drinks business. It owns cognac brands like Hennessy, champagne brands like Dom Perignon, Moet, others. And so there, you just have to take the tax. There's nothing you can do. You can't move production of champagne to.

[Luke Vargas]

The US Journal reporter Nick Kostoff covers the luxury goods industry for us out of Paris. Nick, thank you so much for bringing us this story.

[Nick Kostoff]

Thank you.

[Luke Vargas]

Well, in addition to the ECB's decision later this morning, reports on US productivity for the fourth quarter and the January trade deficit are Both due at 8:30am Eastern. And we'll get results from Macy's and Kroger this morning, while Broadcom, Costco and the Gap are due to report earnings after the closing bell. And that's it for what's news for this Thursday morning. Before we go, a heads up that we've got another bonus episode for you later today. In our next what's news in earnings. We'll be looking at American retailers and how the industry is grappling with a growing list of issues, from tariffs and cautious consumers to still high inflation. That'll be in the feed around midday before our usual PM show tonight. Today's show was produced by Kate Bullivant and Daniel Bach, with supervising producer Christina Rocca. I'm Luke Vargas for the Wall Street Journal. And thanks for listening.