WSJ What’s News - Trump Spurs European Race to Rearm

Episode Date: March 6, 2025

A.M. Edition for Mar. 6. EU leaders convene for emergency security talks, headlined by a German U-turn on fiscal prudence that could prompt a massive boost in defense spending. Plus, the Department of Veterans Affairs plans to cut as many as 70,000 workers. And French billionaire Bernard Arnault is one of the world’s richest men – with a family relationship with President Trump that spans decades. But can the LVMH boss spare his luxury-goods empire from looming U.S. tariffs? The WSJ’s Nick Kostov explains. Luke Vargas hosts. Check out our special series on how China’s trillion-dollar infrastructure plan is challenging the West.  Learn more about your ad choices. Visit megaphone.fm/adchoices

I've got this condition where I don't feel pain. You're a superhero. No. This is how intense Nova Kane sounds. Oh, wow. Imagine how it looks. Is there more? Yeah, big time.

Nova Kane, forming theaters March 14th. The VA plans to cut tens of thousands of workers. Plus, Europe loosens its purse strings as it contemplates a future without America's security umbrella. And he's one of the richest people in the world, with a relationship to President Trump going back decades. But can LVMH's boss shield his empire from U.S. tariffs? The art of Trump whispering, I mean, it's not easy. I have no idea if Bernal 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. 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 broad 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, quote, the maximum extent appropriate and permitted by law. Its move, then, as we've reported, has been in the works since 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 reproachment 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. 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. That's journal Germany bureau chief Bertrand Benoit. The European Commission is hoping to steer more than 860 billion dollars from spending on its poorest regions to the defense industry through the decade.

And the man expected to be Germany's next Chancellor, Friedrich Merz, made headlines by saying that the country's famously strict fiscal rules would no longer apply to military spending, paving the way for a rapid acceleration in its rearmament. 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 putting in the other direction and telling others not to spend too much, not to run too high public debt. And now Germany suddenly is putting in the other direction. And so the idea is that this will give cover for others to raise spending even if it means borrowing more and running higher public debt for the time being.

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. Yes, it could. The question is how soon will we see evidence of that.

So today investors are as near 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

defense. 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. The ECB's decision is due at 8.15 a.m. Eastern. And we report that Chinese leader Xi Jinping has grown concerned that his country's Cold

War rivalry with the U.S. 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 technologies. 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 U.S. related to the Fentanyl crisis, holding out instead for the Trump team to make specific demands that could lead to broader talks. However, Trump's new 10 percent 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 Influence 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 Arnaud 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 after the break. With the Fizz loyalty program, you get rewarded just for having a mobile plan.

You know, for texting and stuff. And if you're not getting rewards like extra data and dollars off with your mobile plan, you're not with Fizz. Switch today. Conditions apply. Details at fizz.ca. As the U.S. 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 percent tariffs on European goods. And journal luxury goods reporter Nick Kostoff is here to discuss what we can learn from Arnaud's efforts. Nick, how close are Arnaud and Trump, just so we can gauge whether personal diplomacy

really is at play here? 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 Arnaud's sons, Alexandre, is close to Jared Kushner. Arnaud's daughter is close to Ivanka Trump. When Trump was shot in Pennsylvania last year, Arnaud 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 Arnaud

was a friend, 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. 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 savoir-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 you know, 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.

So what is he trying to do to thwart this? And is there any way we can handicap Arnaud's likely success in avoiding these tariffs? First of all, he's looking at moving some production to the US. 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 Bernal will be successful or not. What I can say is that the entire luxury industry, whenever I speak to executives of rival firms, are firmly behind his efforts and really hope that he succeeds. If he isn't successful, are there other viable efforts afoot to try and talk Trump away from these tariffs? Yeah, it's difficult.

I mean, obviously Europe, like Canada and like others have said that they will respond tit for tat to any US 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 Arnaud 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 and there's nothing you can do. You can't move production of champagne to the U.S. Journal reporter Nick Kostoff covers the luxury goods industry for us out of Paris. Nick, thank you so much for bringing us this story. Thank you. 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 and 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 Bulevent and Daniel Bach with supervising producer

Christina Rocca. I'm Luke Vargas for The Wall Street Journal, and as always, thanks for listening.