– EU and euro face growing risks including trade wars, energy independence and war with Russia in Middle East
– Middle East war involving Russia may badly impact energy dependent & fragile EU
– Trade and actual wars on European doorstep show the strategic weakness of the EU
– Toxic combination due to growing anti-EU and anti-Euro sentiment in many EU nations
– Investors should diversify to hedge investment, currency and systemic risk
Source: Bloomberg
Recent economic data in the Eurozone has pointed to slowing economies. Retail sales and industrial production is down in many nations (see Bloomberg chart above – source). Germany, the prime driver of growth in the region has seen exports plunge due to the euro strengthening against the dollar and due to the risk of tariffs and a potential global trade war on the horizon.
Brexit has disappeared from the headlines, debt crises are yesterday’s news and frequent terrorist attacks in different EU nations seem to be taken in their stride. So one might think that things are on the up for the European Union.
This could not be further from the truth. The single-economic area has a major flaw: it is in a permanent state of dependence. Whether on democratically elected national leaders to tow the EU line, governments not to overspend, the rest of the world to tolerate the EU’s current account surpluses, Russia to supply energy and the powder keg that is the Middle East not to explode into a major conflagration and war.
Not to mention many chronically indebted nations with still fragile banks and banking systems. Contrary to perceptions, systemic risk has not gone away.
Many events going on both within and around the EU have exposed these major cracks in what is supposed to be the answer for peace and economic prosperity in Europe. The dangers to the union right now are manifold and look soon to manifest.
Going to war with our energy supplier
In recent days, we have covered the tragic state of affairs that is Syria, Trump tweets and the risks that a ‘Franz Ferdinand’ moment leads to a wider world war involving many nations who appear gung ho to eschew diplomacy and adopt military options.
Many western governments, media and indeed social media such as Facebook are keen to finger blame on Russia for literally everything they don’t like right now – whether a chemical attack on civilians or meddling in national elections on Facebook and Twitter.
One problem the EU in particular has with adopting a very aggressive U.S. military stance with Russia in Syria is that it is the EU’s largest supplier of gas. There is also the risk from the fact that Turkey appears to be breaking away from the EU and this could result in war at the borders of the EU. War, terrorism and new immigrant crisis on a scale of what was seen in recent years would be very destabilising.
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Russia supplies of gas have been growing each year. 2017 was a stellar year for Gazprom who delivered record stocks of gas to the EU, with Germany and Austria responsible for record sales. This is despite sanctions.
The EU is much more dependent on Russia then is realised in this regard. For all the talk by France’s and the UK’s foreign secretaries of coming down hard on Russia’s involvement in Syria, Putin knows they can only go so far given the gas tap is in his backyard.
Politico reminds us:
Of far greater concern should be the fact that Slovakia, the Czech Republic and even Hungary, are nearly wholly reliant on Russian gas imports to fuel their economies – an arguably far greater risk to their economies and to their security.
Trade surplus and wars are a danger to the EU
Last week European stocks tanked as China and the US traded angry words with one another regarding tariffs. Europe is firmly caught in the crossfire. The threat is twofold – firstly we are hugely exposed to any trade war between the world’s biggest economies but secondly Trump may decide to impose his own sanctions on the EU too.
Jack Ewing in the New York Times explains the dilemma currently facing the single-market:
One is a good customer, a military ally and an old friend, although lately its behavior has been erratic.
The other is also a good customer, and despite a few spats and some lingering mistrust, it’s getting to be a more lucrative and dependable business partner all the time.
A spiralling war of tariffs and counter-tariffs would interfere with the global flow of raw materials and components for manufactured goods, disrupting the European economy. And some European companies, like the German carmaker BMW, manufacture in the United States and export to China. Such companies would see their sales suffer if China were to slap tariffs on American goods.
The EU cannot afford to have its trading relationships screwed up by Trump or Xi Jinping. The recovery, post-crisis, is now losing momentum and industrial production figures are slowing down. There is a danger that countries within the EU will be forced to negotiate separately with both China and the US, rather than collectively, as each fights to protect their economy.
As a collective the EU will have to work hard to persuade trading partners that it should not face trade tariffs. But this will be tricky given its trade surplus and Germany’s trade surplus in particular, which (until now) countries have put up with.
The macroeconomic dependency is more subtle, but it shows up in trade policy. The eurozone had a current account surplus of 3.5 per cent o