Trump and Merkel ready for tough talk on trade and defense spending

Trump vs. Merkel
Trump vs. Merkel

President Trump will meet German Chancellor Angela Merkel on Friday. How they get along could shape relations between the U.S. and Europe's economic powerhouse for years.

The omens for their first meeting aren't great. Trump accused Merkel of "ruining Germany" in 2015 with her open door to refugees. He has sent mixed signals about the European Union and spoken warmly of Russia's President Vladimir Putin.

His senior adviser, Peter Navarro, has taken aim at Germany's trade surplus, accusing the country of using a "grossly undervalued" euro to harm America. Now, Trump's talking about tariffs or taxes to protect U.S. jobs.

"The preconditions... are probably the worst we've seen so far," said Karl-Theodor zu Guttenberg, a former minister of defense, economics and technology in the German government.

Merkel, who grew up behind the Iron Curtain, will likely respond with a very clear message: Free trade works, don't build new barriers.

"The entire German federal government believes that protectionism isn't the way forward for the world if we all want to pursue sustainable economic growth. We also believe that free trade has advantages for all stakeholders," said Steffen Seibert, Merkel's spokesperson, on Monday.

After the pleasantries, here's where the talks could get tricky:

Trade and jobs

Trump believes America's trade deficit is evidence that it is losing the global economic game. Its deficit in goods trade with Germany was $65 billion in 2016 -- a point Trump will reinforce, say senior administration officials.

He may also cite data showing that German exports to countries outside the EU rose by nearly 18% in January, compared with the same month last year.

Merkel will underscore the value of German businesses to the U.S. economy, according to a senior adviser. She was planning to take senior executives from BMW (BMWYY), Siemens (SIEGY) and automotive supplier Schaeffler with her to help explain the benefits of America's trading relationship with Germany, and the EU.

top german employers

"We have a stock of 271 billion euros in direct investment in the USA," Merkel said Monday. "There are about 750,000 jobs created by German companies in the USA. If you multiply that by two or three, you can see that over 1-2 million jobs depend on German companies."

NATO and defense spending

Trump is also sure to want to talk about defense spending and NATO. He has lambasted European allies for not paying their way in the alliance.

Only five of NATO's 28 members spent 2% or more of their GDP on defense in 2016. The laggards, including Germany, have all committed to reach that benchmark by 2024, but Trump thinks Europe's biggest economy could still do better and he'll want to talk about whether that goal can be achieved faster.

"Germany should be setting an example," said a senior administration official.

That could be tricky for Merkel, particularly in an election year when defense spending is unlikely to be a priority for voters, but there could be an opportunity for her to play to Trump's professed love of a deal.

"She might hint at the possibility that if there's no aggressive move from the U.S. on trade, then it will be easier for her to fulfill the 2% commitment," said zu Guttenberg.

nato gdp 2

The future of the EU

"You look at the European Union and it's Germany. Basically a vehicle for Germany. That's why I thought the UK was so smart in getting out."

Related: Europe is teetering on the edge of change, and Trump might push it over

That remark from Trump in January rattled EU leaders desperate to fend off a wave of populism that threatens to tear the region apart. Britain is preparing to trigger the formal process of leaving the EU any day, while elections in France next month could see a sharp upswing in support for anti-EU forces.

Merkel will want to mount a robust defense of her European convictions, without provoking a diplomatic row, said zu Guttenberg.

"What we need to do is to help explain the history [of the EU] and how different countries can work with the U.S.," said a senior adviser to Merkel.

Europe to Trump: Learn more about the EU!

Russia and sanctions

European leaders have been reassured by Trump's stronger commitment to NATO since taking office. But they're still uncertain about the kind of relationship he wants with Putin.

Merkel played a central role in formulating Europe's robust response to Russia's annexation of Crimea and destabilization of eastern Ukraine, including the imposition of economic sanctions.

Trump will acknowledge the leadership shown by Germany and France, but will make clear the U.S. wants to play a greater role in finding a solution to the Ukraine crisis, senior administration officials said.

Europe is also very concerned that Russia may be trying to influence pivotal elections in the region this year.

Related: Trump and Russia: What the fallout could

U.S. intelligence officials believe Russian leaders, including Putin, were involved in hacking the election campaign.

Trump is also under pressure from revelations concerning connections between key aides and Russian officials.

"We have received different signals and are working through our understanding," the German adviser said.

-- Atika Shubert and Nadine Schmidt in Berlin contributed to this article.

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