US goes solo, Europe grows stronger with new alliances

The continent is making good of opportunities with trade ties and rising euro

By Jon Van Housen & Mariella Radaelli (Euroscope)

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Published: Mon 7 Aug 2017, 8:48 PM

Last updated: Mon 7 Aug 2017, 10:52 PM

As 2016 drew to a close, economists and investment analysts predicted that the dollar and euro could soon reach parity as beleaguered Europe continued to stumble along facing continued uncertainty, stagnation and challenges from populist movements.
In contrast, the US had led the recovery from the 2008 economic crisis. All the signs pointed to a continued surge, and although the US had itself elected a populist leader, he was from the pro-business Republican Party and promised vast infrastructure spending that would add additional firepower to world's biggest economy.
What a difference six months makes. Far from joining the populist wave that started with Brexit and continued with the surprise election of Donald Trump in the US, European voters clearly opted for traditional parties and mainstream ideas. Elections in the Netherlands, France and Austria rejected populist anti-euro candidates, and success for extreme parties in Germany in September polls appears very unlikely.
The euro is now trading at a 31-month high against the dollar, and has posted its best run in five years. Growth in the Eurozone was more than twice as fast in the first quarter of 2017 than in the US as the so-called "Trump Bump" proved a minor blip on the screen of US economic activity.
"The euro move above $1.18 has been a story about dollar weakness," Samir Sheldenkar, partner at Harmonic Capital, told business news channel CNBC.
"Political concerns have clearly had an impact on the dollar as it becomes harder to see supportive policy being enacted from a White House in disarray. This has been compounded by economic data suggesting US strength is perhaps not as robust as many thought earlier in the year."
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said the euro surge "is a combination of negative news out of the US and more positive news out of Europe".
And picking up the fallen flag of free trade abandoned by Trump and a White House mired in conflict and confusion, the EU has negotiated free trade agreements with Canada and Japan. The Comprehensive Economic and Trade Agreement plans to eliminate 98 per cent of the tariffs between Canada and the EU, while a deal between Japan and the EU intends to lift two main stumbling blocks in tax-free trade - duties on cars in Europe and cheese in Japan.
The moves came as Trump pulled the US out of the 12-nation Trans-Pacific Partnership (TPP) pact arduously negotiated by the Obama administration. The economic indicators, sentiment and leadership in Europe all seem to say that a new day has dawned, that it is Europe's time in the economic sun.
Benoît Couré, member of the Executive Board of the European Central Bank (ECB), tells Italy's La Stampa newspaper that "it's true that in the space of one year the situation has improved considerably. The recovery has finally arrived. It has spread to virtually all sectors and countries."
But "there is still much to do - structural growth needs to be strengthened in each country and the euro area must be made more resilient to shocks." The level of improvement seemed to take even planners by surprise. "The upswing is stronger than expected, stronger than the ECB expected," says Johannes Mayr, senior economist at Bayerische Landesbank in Munich.
Euro-area economic sentiment rose to a decade-high of 111.2 in July amid increased optimism in services and construction, according to the European Commission. Confidence in industry is at the highest level in more than six years, according to recent statistics.
But Mayr notes "it's a difficult path to navigate - the ECB has to scale back while staying dovish, tighten without endangering the recovery".
The big question mark in Europe is now Italy. The third-biggest economy in the Eurozone following Germany and France is still burdened with massive debt and has not held national elections.
Italy must hold elections by May 2018, but if the vote were held today, polls say the anti-European Five Star Movement would garner 40 per cent of the vote, about equal to the Democratic Party now in power. It would not give either party enough of a plurality to govern alone, so a coalition would be needed, but what form that could take is hard to imagine in Italy's fractious politics.
Yet despite uncertainties, Italy's economy is growing. A rising tide lifts all boats, so it too is improving at a better rate. Painful as it is, prolonged economic downturns have a way of cleaning the system and motivating innovators to create ways of doing things. Europe seems to have emerged from a decade of doldrums more fighting fit to face the challenges of today. Now, if they would only stop arguing so much.
Jon Van Housen and Mariella Radaelli are editors at the Luminosity Italia news agency in Milan


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