Trump’s plan to reduce regulations poses a threat to worldwide financial stability

During Trump’s previous term as U.S. President, he made sure to ease regulations on regional banks. The impact of this move was evident in 2023 when Silicon Valley Bank and other institutions faced notable failures. In his second term, Trump is taking this deregulation trend even further. Not only is he overturning rules, but he is also making moves to put independent financial overseers under the direct control of the White House.

The outcomes of such actions could have worldwide repercussions, especially because the global financial system is highly interlinked. If the United States loosens its financial standards, there is a knock-on effect where other countries try to do the same to remain competitive. This leads to a race to the bottom, resulting in instability akin to the 2008 financial crisis. However, the current global environment is a lot more delicate due to geopolitical tensions, fragile supply chains, sluggish growth, and governments grappling with record levels of debt, making the potential fallout from these actions particularly severe.

The independence of financial regulators plays a crucial role in maintaining stability. Regulatory agencies like the U.S. Securities and Exchange Commission and the Federal Reserve are designed to provide long-term oversight free from short-term political interests. They are tasked with serving the public rather than political figures. Trump’s recent directives require financial watchdogs to align their strategies with White House objectives, indicating a dangerous shift towards politicizing financial regulation.

Not only does this pose a threat to domestic economy, but it also carries global implications. Trump and his administration have shown signs of using the financial system as leverage in international relations. Should the U.S. move towards this direction, its financial domain could transition from being volatile to becoming a tool of manipulation, further exacerbating the precarious global landscape.

Beyond merely affecting the United States, deregulation reverberates across the globe. For instance, when American banks enjoy relaxed rules, their international competitors often demand similar treatment. The lack of regulatory oversight can weaken the global financial system, leaving it susceptible to bubbles, crises, and costly government interventions. Consequently, these actions set a dangerous precedent that others may feel compelled to mimic to avoid being at a disadvantage in the financial sector.

The threat isn’t limited to financial regulation but extends to the independence of the Federal Reserve. Any interference in the central bank’s autonomy could lead to increased inflation, currency instability, and more frequent economic crises, with repercussions stretching beyond U.S. borders. In light of these developments, European nations must maintain robust, independent oversight of their financial sector. As the U.S. potentially relaxes its rules, Europe has an opportunity to demonstrate leadership by simplifying regulations without compromising on stability, thereby positioning itself as a dependable and resilient economic and political ally in a turbulent global landscape.