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Tags: europe | meltdown | pot

Trump Stirs Up Europe's 'Meltdown Pot'

Trump Stirs Up Europe's 'Meltdown Pot'
Andrey Politov | Dreamstime.com

Dr. Edward Yardeni By Monday, 25 June 2018 09:54 AM Current | Bio | Archive

Europe I: Immigration Crisis.

The European Union (EU) survived the Great Recession and the ensuing debt crisis only now to be possibly undone by an immigration crisis. At least that’s what conservative British historian and commentator Niall Ferguson thinks. In a 6/18 opinion piece in the South China Morning Post, he referred to the EU as the “meltdown pot” and said he now sees immigration as the “fatal solvent” of the EU.

On Friday, there was lots of good news about Greece after Eurozone members provided the country with a last round of debt relief, which was widely held to mark the end of a decade of financial assistance and austerity.

Still, a worrisome nationalistic, anti-immigration fervor is sweeping across EU member states, dominating the political discussion and threatening to destabilize the region. There is talk among some member states of forming a splinter “axis” group to address the refugee and asylum issue rather than look for an EU-wide solution, according to a 6/15 Reuters report.

The root of the problem is the unrelenting wave of refugees seeking asylum from conflicts around the world, particularly in Africa and the Middle East. An uneven and inequitable response to the problem by EU member states and rules that place a greater burden on “front-line” countries such as Italy, Spain, and Greece have led to deep divisions and given rise to nationalist groups that are gaining in strength.

Recent elections in Europe have underscored how fraught the immigration issue has become:

(1) In Germany, the Alternative for Germany opposition party became the third-largest political party in 2017 and won seats in the Bundestag for the first time since it was founded in 2013. Two weeks ago, German Chancellor Angela Merkel faced a challenge on immigration policy by her interior minister—a member of the Bavarian Christian Social Union, a conservative sister party to Merkel’s Christian Democratic Union.

(2) In Italy, a new coalition populist government formed by two anti-establishment parties, the League and the Five Star Movement, has made its anti-immigration agenda a top priority.

(3) In Austria, a new far-right populist anti-immigrant government, which is scheduled to take over the rotating six-month presidency of the EU in July, has vowed to cut benefits to immigrants and make passing a German language test a requirement to receiving benefits, in open defiance of EU rules. Austrian Chancellor Sebastian Kurz also favors doing away with quotas and establishing more secure borders, taking his lead from the Eastern Bloc countries such as Poland, Hungary, and the Czech Republic, which have refused to accept refugees.

(4) In Sweden, the anti-immigration Sweden Democrats have been surging in the polls and have vowed to bring down any government that doesn’t take a hard line on immigration in the elections scheduled for September 9.

Remember, too, that a key driver of the UK’s 2016 Brexit vote to leave the EU was a repudiation of immigration policies. Ultimately, what’s at stake is the cornerstone of EU citizenship that assures “freedom of movement and residence,” especially within the 26 states that compose the Schengen area, which operates as a single jurisdiction without internal border controls. Since September 2015, some member states have reinstituted border checks in response to the heavy flow of refugees as well as the threat of terrorist attacks.

Italy’s Interior Minister Matteo Salvini, who is also deputy prime minister, said that whether a united EU “still exists or not” will be decided within a year, adding that he’s aware his stand on migration could topple German Chancellor Angela Merkel from power. He told German magazine Der Spiegel, published on Saturday, that talks on the EU’s budget, as well as the European Parliament elections in 2019, will reveal “whether the whole thing makes no sense anymore.”

All of this, of course, is unfolding in the EU as the Trump administration faces a backlash about its approach to discouraging illegal immigration along the border with Mexico.

Trump also may have started a multi-front trade war that is turning America’s traditional allies in the EU into adversaries. On Friday, the President tweeted that he would place a 20% tariff on European cars, if the barriers on US exports of farm products “are not soon broken down.” Volkswagen, BMW, and Daimler are the biggest European exporters of cars to the US, followed by Fiat Chrysler. Also on Friday, Europe retaliated for the administration’s tariffs on steel and aluminum imports with tariffs on $3.2 billion of US goods.

Immigration and trade issues may be starting to weigh on the EU’s economy. I asked Sandra Ward, our contributing editor, to take a closer look at recent events involving immigration that have raised tensions and triggered concerns about the future of the EU.

Europe II: Mutiny in Germany. Germany is facing a political crisis over immigration, which could lead to the collapse of the three-month-old coalition government. Key points:

(1) Master plan. Interior Minister Horst Seehofer, a member of the Bavarian sister-party aligned with Merkel’s CDU, broke ranks with the Chancellor and proposed closing the country’s borders to some refugees as part of a broader “master plan” to stop illegal immigration, the Associated Press reported in a 6/13 story. Refugees who had applied for asylum in other countries would be turned away at border crossings. Seehofer also said he backed Austrian Chancellor Sebastian Kurz’s plan for an Italian-Austrian-German “axis” to solve the migration problem.

(2) Bavaria first. Seehofer’s hardline stance comes ahead of Bavarian elections this fall. He’s under pressure to win back votes from the far-right AfD party and revive his fading star after being ousted as CSU premier last year. A 6/15 Politico story recalled Seehofer at a CSU conference in November saying “Bavaria is our home, Germany is our fatherland, and Europe is our future,” but adding “For us, Bavaria will always be first.”

(3) Concessions. After first rejecting Seehofer’s proposal outright, Merkel said she would try to negotiate bilateral deals on the asylum issue in advance of an EU summit this week with countries that might be affected by the new policy. The CSU agreed to give her two weeks to find a pan-European solution, a 6/18 piece in the FT explained.

(4) The risks. If no deal emerges, Seehofer has said he would immediately order police to start turning people back at the border. Merkel has said his policy wouldn’t automatically be implemented, suggesting that she might fire him if he acted over her objections. That could lead to the end of the CDU/CSU alliance and the collapse of the government.

(5) Trump attack. In the midst of this internal mutiny, Merkel had to contend with an unprecedented external attack on her government by an ally. US President Donald Trump tweeted that “the people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition,” a 6/18 article in the Guardian reported. His bid to undermine Merkel comes days after he phoned Hungarian Prime Minister Viktor Orban, an authoritarian and nationalist, to congratulate him on his reelection.

A 6/19 article on Bloomberg noted that Merkel pushed back, saying: “‘My answer is this: the interior minister recently presented federal crime statistics and they speak for themselves,’ Merkel said, describing ‘a slightly positive trend.’ ‘Of course, we always need to do more to fight crime,’ she added. ‘But the numbers certainly were encouraging to keep working along those lines to further reduce crime.’”

Europe III: Italy’s Age of Aquarius. Italy’s Interior Minister Salvini—the head of the far-right anti-immigrant League party—denied entry earlier this month to the Aquarius, a ship carrying 629 immigrants rescued off the coast of Libya. He called them “fake refugees,” according to a 6/17 article in the NYT. Salvini also vowed to block other rescue ships operating off Libya from entering Italian ports, singling out two humanitarian vessels operating under the Dutch flag, Bloomberg reported in a 6/16 article.

(1) The Vatican weighs in. The action was criticized by the Vatican, with a 6/12 report in the Economist noting that Cardinal Gianfranco Ravasi, who serves as a kind of cultural ambassador, tweeted a line from the Gospel of St. Matthew: “I was a stranger and you did not invite me in.”

(2) Southern port cities condemn move. Mayors across southern Italy—Palermo, Naples, Messina, and Reggio Calabria—vowed to defy the action and allow the Aquarius to dock but were helpless to do so without the cooperation of the Italian coast guard, according to a 6/11 story in the Guardian.

(3) Spain to the rescue. Spain’s new socialist Prime Minister Pedro Sanchez agreed to accept the Aquarius into the port of Valencia, and after a week at sea, the ship disembarked on June 17 along with two others helping to transport the refugees to relieve overcrowded conditions. The Aquarius’ arrival in Spain coincided with the rescue of nearly 1,000 migrants crossing from Morocco in dinghies over the same weekend.

(4) Bienvenue. France’s President Emmanuel Macron said passengers from the Aquarius who wished to resettle in France would be welcomed. Macron accused Italy’s new government of exploiting the migration crisis for political gain and suggested it had violated international maritime law in preventing the Aquarius to dock, according to a 6/12 piece in the FT. Macron later urged Italy to work with France, Germany, and Spain to resolve migration issues, rather than aligning with the anti-immigration “axis” forming in the EU, explained Reuters in the 6/15 report linked above. Talk of an “axis” is a reminder of Europe’s darkest times, Macron cautioned at a news conference with the new Italian Prime Minister.

Europe IV: Eurozone’s Economy at Risk. Growth in the Eurozone has cooled this year after expanding at the fastest pace in a decade during 2017. Economic expansion hit a one-and-a-half-year low in May, and June’s flash estimate showed only a slight improvement in overall growth, according to the latest purchasing managers’ survey. Other economic indicators are also showing a slowing so far this year:

(1) Eurozone. The Eurozone’s M-PMI soared to a recent peak of 60.6 during December 2017 (Fig. 1). Since then, it has fallen to an 18-month low of 55.0, according to June’s flash estimate. The region’s NM-PMI is down from a recent high of 58.0 during January 2018 to 55.0 this month, slightly above May’s recent low of 53.8. (Note: Germany and France are the only Big Four Eurozone economies that report flash estimates.)

(2) Germany’s M-PMI is down from 63.3 during December 2017 to an 18-month low of 55.9 this month. That’s still a strong reading, but let’s see whether the downtrend continues over the summer months (Fig. 2). The country’s NM-PMI is down from 57.3 to 53.9 over the past five months through June, though it did move higher this month.

(3) France’s M-PMI also rose sharply last year, peaking at 58.8 during December 2017. Now it is back down to a 16-month low of 53.1 this month (Fig. 3). The NM-PMI is down from 60.4 last November to 56.4 this month, holding near May’s 16-month low.

(4) Italy’s M-PMI is down sharply from a recent peak of 59.0 during January 2018 to 52.7 last month (Fig. 4).

(5) Spain’s M-PMI and NM-PMI continue to fluctuate at relatively solid readings above 50.0 (Fig. 5).

(6) Real GDP and economic sentiment. A somewhat brighter picture shows that the Eurozone’s Economic Sentiment Indicator remained relatively high at 112.5 during May (Fig. 6). That’s down from a recent high of 115.2 during December, but well above readings prior to the steep uptrend in this indicator since late 2016. By the way, this indicator has been highly correlated with the y/y growth rate in the region’s real GDP.

(7) Industrial production and orders. April data for industrial output show that it was on an uptrend since mid-2016, but has stalled so far this year (Fig. 7). No surprise: The production data are following the lead of manufacturing orders, which are down 4.2% over the past four months through April (Fig. 8).

(8) Retail sales. So far, the recent peaking in manufacturing activity hasn’t slowed retail sales at all in the Eurozone. The volume of such sales has been on a solid uptrend since early 2013, and has been making new record highs ever since March 2017 through early this year, and remains on that uptrend (Fig. 9).

(9) MSCI metrics. Our Blue Angels analysis for the EMU MSCI stock price index (in euros) shows that it has stalled since mid-2017, while forward earnings remains in a recovery mode since mid-2016 (Fig. 10 and Fig. 11). The index’s forward revenues has also stalled since mid-2017 (Fig. 12).

Chris Williamson, the chief business economist of IHS Markit, which compiles the PMIs discussed above, noted in the 6/5 IHS Markit report: “With the economic indicators turning down at the same time as political uncertainty has spiked higher, the Eurozone’s outlook has darkened dramatically compared to the sunny forecast seen at the start of the year.”

Darker days may be ahead if the immigration issue continues to divide the EU and if Trump persists in raising the ante in his protectionist campaign against America’s major trade partners in the region and around the world.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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A worrisome nationalistic, anti-immigration fervor is sweeping across EU member states, dominating the political discussion and threatening to destabilize the region.
europe, meltdown, pot
Monday, 25 June 2018 09:54 AM
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