America’s soaring public debt and widening trade deficits have finally forced Washington to review unsustainable economic and security policies with its European allies.

Trade with Europe has been a contentious issue ever since the early post-WWII years, when the new international monetary system was established by Bretton Woods agreements (July 1944) with fixed but adjustable exchange rates against the dollar, and the value of the dollar fixed at a price of $35 for an ounce of fine gold.

The member countries with trade surpluses or deficits had the responsibility to return to the trade balance by adjusting their monetary and fiscal policies, while the U.S. had to adjust its monetary policy (i.e., the supply of dollars) to keep the price of gold fixed.

Europeans, however, continued to run trade surpluses and insisted on redeeming their dollar holdings into gold. By 1958, the French were declaring the U.S. bankrupt. One of their analysts calculated that the outstanding dollar balances were exceeding the value of American gold holdings. They, therefore, insisted on settling their dollar claims in gold.

The Bretton Woods monetary system was dysfunctional but continued to limp along until President Richard Nixon ended the dollar’s convertibility into gold on August 15, 1971, ushering in the dollar’s floating exchange rates.

Europeans don’t like the dollar standard

But that still was not good enough. Led by the French, the Europeans were now complaining about the American “exorbitant privilege” of being able to pay the bills in their own currency – without any binding external constraints.

Ostensibly to put some order in a new system of floating exchange rates, the French president Valery Giscard d’Estaing and the (West) German chancellor Helmut Schmidt organized a G6 summit (U.S. Japan, (West) Germany, France, United Kingdom and Italy) at the Château de Rambouillet on November 15-17, 1975.

The order they were seeking was impossible and unnecessary, because the governments still had the possibility to stabilize their economies by running appropriate monetary and fiscal policies.

What they got instead was a G7, a new international talking forum, because Canada joined the original six members in 1976.

Having failed to impose external constraints on American monetary policies, the Europeans then tried to “defend” their trading bloc (customs union) by narrowing their own currency fluctuations.

That was a good move. A genuine customs union cannot operate with floating exchange rates since a currency devaluation is equivalent to an export subsidy and an import tariff.

The Europeans realized that already in 1968, when they started common currency discussions, but they could not agree on irrevocably locking their currencies without any margins of fluctuation.

Trump won’t repeat his first term mistakes

The “Nixon shock” in 1971 was a good wake up call; it set the Europeans on a long, difficult and costly process of establishing a common currency on January 1, 1999.

So, now we have the European Union – the world’s largest trading bloc, the third largest economy in the world (after U.S. and China), and a monetary union with a common currency – the euro – which now accounts for about 20% of global currency reserves, compared to 57.8% for the dollar.

During the first eight months of this year, the bilateral U.S.-E.U. trade increased 9.7% to $710.8 billion, with the U.S. deficit of $165.8 billion, an increase of 9.2% from the year earlier. That E.U. surplus -- i.e., a net trade income -- accounted for 20% of America’s total trade deficit.

President Donald Trump most probably remembers that the E.U. pocketed a net income of $682.6 billion on its U.S. trades during his first term of office.

Can anyone blame him for his decision to put an end to such European free riding this time around?

Security issues are tightly bound with those trade results. Europeans, with all that income on their U.S. trades, cannot provide for their defense, but continue to insist on warfare with the world’s largest holder of nuclear weapons. In other words, the Europeans want to ride into the third world war on Uncle Sam’s coattails.

Is there any wonder that Trump does not want to play that game?

It is important to note that America’s new trade and security policies toward its European allies are far from being half-baked improvisations. The brief historical account I provided of the European economic and political project is no news to Trump. Judging by his own comments, he sounds like a well-informed American politician about the scope and objectives of what is usually called the European unification process.

A deeply indebted America – with its net international liabilities of $26.1 trillion at the end of last June, growing at an annual rate of $3 trillion -- cannot afford a continuation of earlier trade and security policies with its Transatlantic allies.