The three biggest factors threatening the Eurozone today

At the CFO Rising Europe Summit in London, Ben Chu, economics editor for The Independent, discussed the three most disruptive factors impacting the Eurozone


In the 10 years since the economic crisis of 2008, the global economy has stabilized and begun to thrive. Global GDP is growing healthily, with growth at an average of 3.9% predicted over the next two years, driven mainly by the US, China and the Eurozone.

In the wake of this recent global stability, the Eurozone has been predicted to grow in 2018 after a strong fiscal year in the region in 2017. Yet, according to data gathered by The Independent, 2019 will see noticeably reduced growth, with the UK in particular predicted to struggle.

At the CFO Rising Europe Summit in London, Ben Chu, economics editor at The Independent, outlined what he believes are the three largest factors threatening to slow and destabilize the Eurozone's economy today.

Trump and the threat of "trade wars"

Perhaps unsurprisingly, the name on everyone's lips, US President Donald Trump, was the first dangerous factor Chu highlighted as a cause for concern both globally and within the Eurozone. Trump's recent enthusiasm for tariffs and trade wars has been widely reported, and he has been famously quoted as saying "trade wars are good, and easy to win".

"Trump has so far slapped new levies on roughly $85bn worth of US imports, on things ranging from raw steel to washing machines," Chu remarked. "That's just around 5% of all US imports, but I wouldn't underplay it because some commentators predicted that tariffs would never happen at all. It was the view that the "grownups" in the White House would stop it."

So, where is this trade war that we're living through going to leave us? Could we end up seeing tariffs applied to all $180bn worth of cars and car parts that the US has imported a year? Will tariffs be applied on $500bn worth of Chinese imports? Both of these situations have been explicitly threatened by Trump.Assuming a 10-point increase in tariffs on US trade substantial over the next three years and the possible retaliation from other nations, the Bank of England has predicted a loss of 2.5% from global growth. This would mean a loss of more than 5% on US GDP, with just under 2% in the UK and around 2.2% for the Eurozone.

This may not be the worst of it. "It's impossible to quantify the institutional damage of a trade war" states Chu.

He referenced a warning delivered by Maurice Obstfeld, the IMF's economic counselor, noting: "The multilateral rules-based trade system that evolved after World War Two and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart."

Brexit and the cost of a no-deal Brexit

With the UK set to leave the EU on March 29, 2019, the UK government faces a tight deadline to complete its plans for Brexit, and Chu noted that while Theresa May's cabinet claimed to be trying to find a deal, it is now actively preparing for a "no-deal Brexit". The UK government has announced that it is currently thinking about food supplies, and stockpiling medicines and resources, claiming "it's our duty as a responsible government to prepare for all eventualities, including no deal".

Chu highlighted the potential transport issues if the UK fails to reach a deal.

"We can't unilaterally make decisions if we reach a no-deal Brexit," he stated. "For example, we can launch planes from the UK, but they can't necessarily land in other countries. We can decide not to have tariffs on our borders, but what if, say, the French authorities chose to impose tariffs or time-consuming checks at ports, which is their every right.

"All this will slow down transport, there will be large backlogs which will cause huge tailbacks of lorries leaving the UK through the Channel Tunnel, for instance. The Port of Dover authorities has predicted that a delay of just two minutes [on each check] will cause a tailback of 17 miles.

"Ask yourself this – which continental haulage firm will be willing to send their haulage fleet to the UK with the serious possibility that a haulage truck won't be able to return due to the chaos going the other way?"

Chu added that there will be little we can do in advance to mitigate this disaster.

Charting the potential outcomes, the government has predicted that in more than 15 years the UK will experience an 8% loss to potential output relative to the status quo if the UK is forced the apply WTO mitigated guidelines.

Although Chu pointed out that it was scientifically impossible to chart the effect of Brexit or, in particular, a no-deal Brexit due to the fact it is an unprecedented event.

"We can look at the signs and presume it's not going to be positive. It's very likely to damage spending, both in terms of households and businesses," Chu remarked.

Chu referenced a quote from L. Alan Winters, Professor of Economics and director of the UK Trade Policy Observatory in the University of Sussex, who said: "In the event of a no-deal exit from the EU, Britain's trade with the EU will be badly hit, hundreds of thousands of jobs will be at risk and real wages are likely to be cut."

The European populist surge

Another factor that could stand to seriously economically impact the Eurozone for the next few years for the trend toward populist political parties, which Chu defined as "parties which conceive of a pure people in opposition to an inherently alien corrupt elite. Parties which disrespect democratic convention".

As data from The Economist demonstrated, the popularity of far-right leaning politics has been growing steadily throughout Europe for some time. Chu noted that this had been driven by weak wage growth in European countries, as well as the increase in refugee and migration flows in the wake of conflict, in particular in Syria, causing discord and boosting support for far-right groups. A spike in either of these factors could cause spikes in populist support.

How does this influence the Eurozone economy as a whole?

"Politics can move markets," answered Chu. "We saw that in May when the Italian economy disabled alarmingly after the populist Five Star Movement and far-right League managed to agree on a common agenda and form a coalition. Markets sensed a potential showdown coming and it looked for a moment like there was going to be a reactivation of the Euro Crisis."

While the political situation has calmed down somewhat in Italy in recent months, if populist parties continue to grow throughout Europe as they have, the impact on the Eurozone could be incredibly significant.

There are other global macroeconomic factors that stand to affect the Eurozone as well, Chu noted. Factors such as domestic Chinese financial crisis brought on by the surge of borrowing over the last decade; wider emerging markets collapsing; the US rising interest rate causing capital to flow out of the country; and a bond market crash as central banks sell off huge stocks of financial assets to name a few.

But what insights can we get from these factors?

"We live in a time of the 'political economy'. In the current climate, any economic outlook that fails to include geopolitics and the potential spillover affects has a very doubtful value. Almost as doubtful as planning your day by reading your horoscope," Chu concluded.

Ben Chu, economics editor for The Independent, was speaking at CFO Rising Europe Summit taking place in London on September 12–13, 2018. To find out more about future CFO Rising events, visit CFO Rising West Summit and CFO Rising East Summit.

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