Shaun Riordan │Many of us are already enjoying our summer holidays. Others are packing now, looking forward to relaxing on the beach, or in the mountains. Wherever we are taking our holidays we should make the most of them. A perfect storm is brewing which could hit Europe hard in the autumn, with devasting economic and political consequences.
Europe on the edge
Europe is not exactly in the best of conditions for weathering a crisis. The European Union is in the midst of changing the guard. A new, and untested, Commission will take up its post in November. A new President of the European Central Bank, lacking banking experience, takes over at the end of the year.
At a national level, German chancellor Merkel is coming to the end of her reign, with questions about her health. German manufacturing teeters on the verge of recession. The Italian, Hungarian, Polish and Romanian governments are enmeshed in various conflicts with the Commission. Spain has no government, and may not have one until the New Year. Even if Pedro Sanchez can secure is re-election, the government will remain weak and unstable.
No Deal Brexit
And then there is Brexit. The first part of the storm. Some form of agreement may be hashed out by the end of October. But the attitude adopted by Boris Johnson and his hard-line cabinet makes a no-deal Brexit ever more likely. This will no doubt damage Britain. But it will also be bad news for Europe, as tariffs impact on, for example, the German car industry and the collapsing pound decimates the number of British tourists able or willing to visit the continent.
But Brexit may not be the hardest blow. President Trump has always made clear his belief that the EU is not in US interests, and that it should be broken up. He has been a firm advocate of a no deal Brexit. The US Department of Commerce has decided that the import of certain cars and car parts represents a threat to US national security. In February Trump told Commission President that he would not impose tariffs on European car imports for now.
Since then, US-EU relations have deteriorated. Trump has argued that laxer ECB monetary policy would amount to currency manipulation. He has threatened to retaliate against the French digital tax, which impacts mainly on US technology companies. Commission moves against the same technology companies for breaching the new European data protection regulations (GDPR) has not improved the mood.
Trump is also in campaign mode. With elections only a year away, he will be looking for new fights in the Autumn to whip up his base. Further ratcheting up the trade war with China risks hurting US farmers, who are part of that base, as well as US technology companies. Picking a fight with the Europeans, especially as Trump will phrase it in terms of “fighting the Germans”, will be more popular, and do less short-term damage to the US economy.
So, expect US tariffs on European car imports in the autumn, possibly accompanied by other punitive measures. And here lies the third blow. Europe can no longer look to China to soak up excess car exports. China´s economy is already slowing significantly as it deals with its own trade conflict with the US. Europe´s exports to China are more likely to fall than increase.
The Perfect Storm
The three elements of the perfect storm: no-deal Brexit, US tariffs on European car imports and a slowing Chinese economy. Enough to drive the German economy, and with it the Eurozone economy as a whole, into a recession. The ECB has limited ammunition left in the locker, and of doubtful utility. Most governments have little room for manoeuvre with fiscal policy.
Spain could enter the crisis without a government. Unemployment is still high (around 14%). Combined sovereign, household and corporate debt exceeds 230% of GDP. Household disposable income and savings are low. Like most Eurozone countries, the data looks more like that for emerging from a recession than entering one.
It might never happen. Boris Johnson might negotiate a deal with the Commission. President Trump might back away from a trade war with Europe. But make the most of the holidays. Just in case.