Europe seems to be in economic and political crisis. Americans need to prepare.
Commentary
New York — While many governments are in turmoil, I can’t remember the 40-year adult life of so many crises hitting Europe at the same time in so many different countries. Brexit was important, but it was a peculiar phenomenon. This chain of problems in Europe risks serious economic and geopolitical consequences not only in Europe, but throughout the Atlantic Ocean and, in fact, around the world.
Boris Johnson has resigned from the Prime Minister of the United Kingdom and will resign in August.Italian Prime Minister Mario Draghi has expressed his support for Kyiv in the Ukrainian-Russian war in a country Historically friendly to Russia, Resign this morning..German Prime Minister Olav Shorts turned back About the pledge he made to support Ukraine, as the polling there suspects that Ukraine could repel the invasion of Russia by the majority of Germans. Therefore, for the time being, no clear national leader has expressed strong support for Ukraine’s efforts among the major European economies. Christine Lagarde, head of the European Central Bank (ECB), is currently Ukraine’s most vocal defender of Europe, and she revealed at an ECB press conference this morning.
Note: Putin may be using natural gas as a political tool, carrots and sticks. Russian natural gas distributor Gazprom said just minutes after Draghi’s resignation. Increase the supply of natural gas To Italy. However, the correlation is not necessarily a correlation, as the Nord Stream natural gas pipeline is set to go online today and Dragi was looking for an alternative natural gas supply from Algeria that would permanently lock Russia out of the Italian natural gas market.
All European currencies are depreciating. The euro is on par with the US dollar for the first time in 20 years, and the pound sterling (GBP) is at that level.West point Since the height of the pandemic in March 2020.
In the UK, the consumer price index (CPI) is 9.4%..In the European Union (EU), the rate is 9.6%And 8.6 percent Eurozone..
yesterdayConsumer confidence in the EU and the euro area (a / k / a euro area) has reached its lowest level since statistics began to be maintained.
This morning Christine Lagarde reported that the European Central Bank (ECB) will raise interest rates 5 basis points (Bps), or 0.5 percentage points. The forward guidance from the ECB was a bit surprising, as the rate hike was mostly a quarter point up until the last few days. In addition, the market assumed ECB interest rates to be more dovish, as Europe is expected to slow in the second half of the year. This is the first ECB rate hike in 11 years.
In Germany, there are considerable concerns about the supply of natural gas, one of the largest distributors. About life support To continue business from the German government.Germany’s natural gas prices will rise due to expected transactions this month Get higher..
As in Italy, Russian President Vladimir Putin seems to intend to use gas from the Nord Stream 1 pipeline as a leverage for his political goals. The gas flow started today, but slowed down as a result of what was called “regular maintenance.” (For now, Putin has accused the reduction of gas flow Turbine Under repair in Canada. ) Putin’s Mercurial Due to policy making, EU authorities Request a 15% reduction Gas usage from August 2022 to March 31, 2023. (You should expect a mild winter in Europe.)
Europe was hit by heat waves and temperatures culminated, as if all these man-made troubles weren’t enough. 100 degrees Marked for the first time in recorded history. Although more modern office buildings are air-conditioned, this is a nuisance for Europe because their infrastructure is not built for large residential air conditioning. In Spain and Portugal, about 1,900 people have already died in the heat. More people are expected to die.
When the world economy is bad, the United States saysThe tallest pygmy.. People are putting money here for a variety of reasons. (I explained these more completely here.) That’s the case today.The US dollar is currently stronger than other currencies G-7, the seven major industrial economies of the world. Both the British pound and the euro are losing value against the dollar as Europe shows signs of recession.
The ECB rate hike this morning EUR / USD pair For the time being, the euro has risen and is now one or two penny above the dollar. Nonetheless, the depreciation of the euro / dollar exchange rate since this time last year will have a negative impact on the profitability of US companies doing significant business in the euro area. This is because these companies lose their profits when converting the average euro to dollars. .. The euro a year ago was about $ 1.18, but as of this writing, the euro today is only about $ 1.02.
The advantage of American exchange rates over European currencies allows U.S. tourists to travel, for example, across New York and Italy to the East End of London to see shows and visit museums, respectively. There is sex. That could impact tourism around the United States, as Americans are considering including more Europe than their domestic destinations in their summer travel options. Europe is effectively “for sale” not only to Americans but also to tourists from all over the world.
The appreciation of the US dollar also affects exports. Airlines, including US airlines, may choose to buy an Airbus jet airliner over Boeing because the exchange rates have made Boeing’s aircraft relatively expensive. Companies like Caterpillar may reduce orders as heavy equipment buyers may choose to go with companies such as: Japanese Komatsu Or some one India..
Natural gas prices in the US and Europe Power grid From the apparent use of Russia’s natural gas restrictions as a retaliation for heat waves affecting both continents, the Ukrainian war, and European sanctions against Russia.
Conclusion
The euro is expected to continue to fall against the US dollar as Europe falls into recession. We do not expect a US recession to be declared as early as the first quarter of 2023, reflecting the negative GDP in the third and fourth quarters of 2022. This will allow US multinationals to sell the euro and British pound to the US dollar and the US export market. (See this Copyright protected graph For good visualization of the largest US trading partners by country or region. )
European problems are clearly at risk of transmission to the United States and throughout North America. The only biggest factor that will help improve all of this is the Ukrainian War, as natural gas flows freely from Russia, Ukraine’s agricultural production and exports resume, and Ukraine and Russia’s fertilizer prices normalize. It is a peaceful solution. If that happened, we could see a significant turnaround in the European economy and ours.
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JG Collins is Managing Director of Stuyvesant Square Consultancy, a strategic advisory, market research and consulting firm in New York City. His writings on economics, trade, politics, and public policy have been published in Forbes, the New York Post, Crane’s New York Business, Hill, The American Conservative, and other publications.