How Will the EU’s Shifting Partnerships Affect ForEx Trading in Europe?
It’s no secret that in the past few years European politics and policies have experienced a rollercoaster of party changes, shifts in public perception of trade agreements, immigrants, and national security, contentious battles with foreign allies as well as adversaries, and a renewed sense of purpose and strength as competition with Britain, the United states, China, and Russia has increased.
When Britain voted to leave the European Union in June 2016, their disgruntled voices were mirrored across Europe, suggesting that Britain was not alone in its criticism of the EU. Prime Minister Theresa May recently attempted to ride that wave of EU discomfort by calling for an emergency Parliament election three years early that she had hoped would expand her majority in Parliament and win her a Brexit mandate. The opposite happened.
May suffered an embarrassing setback, losing her overall majority in Parliament. She has since had to piece together a majority coalition with Ireland’s Democratic Unionist Party.
So what changed in the span of a year? And how will this affect Foreign Exchange Market (ForEx) trading in Europe?
Public change of heart
Following Britain’s successful Brexit vote, conservative activists and party officials in France had hoped to capture the same anti-EU positions in their recent Presidential election, held May 2017. While Emmanuel Macron promoted an unabashed liberal, globalist, and independent economic centrist platform, far-right candidate, Marine Le Pen, embodied the rise of populist extremism in Europe and Britain
For many pro-EU countries and organizations, such as the G10, North Atlantic Treaty Organization (NATO), and United Nations (UN), a vote for Le Pen would have boosted and validated the perceived call for isolationism and economic protectionism.
Such a referendum would have had negative consequences for global ForEx trading, climate protection, and human rights. Economic analysts’ immediate reactions to a potential Le Pen win were “extremely negative.” Diego Iscaro of IHS Markit warned that the impact would spread beyond France, negatively affecting asset prices in other EU countries and weakening the Euro v the Dollar.
However, just two months following the Brexit vote in Britain, Bertelsmann pollsters found an average 7% increase across the EU continent in favor of maintaining EU membership. This trend only continued upward over the next year as economists predicted negative ForEx trading in Europe for Britain because of their exit from the EU. All of a sudden the EU was popular again!
Bertelsmann chairman and CEO, Aart de Geus, captioned the pro-EU sentiment perfectly when he stated, “The looming Brexit seems to have been the best advertisement for the EU.”
By the time the French election rolled around, there had been a perceptible shift in popular support for the EU that buoyed Emmanuel Macron to a decisive win.
A bolstered Franco-German partnership
Macron’s electoral victory was considered a win for the EU. Immediately following his ascent as the new French president, he and German Chancellor Angela Merkel made a public pledge to relaunch the partnership between their two respective countries in order to “reconstruct” the EU.
Though France and Germany have had years of strained relations, the two leaders stated they would hold a Franco-German ministerial meeting in the coming year to work on proposals to amend existing EU proposals and rules; specifically educational, social, and economic reforms. Macron has insisted that any future trade agreements formalized by the EU put an emphasis on “buying European” that boost EU companies bidding on public contracts as well as global ForEx trade reciprocity.
European stocks get a lift
Recent stock reports following Macron’s win have provided credence to economic fears about an expanded Brexit. European stocks have consistently led world markets in the past month, giving Macron ammunition to push ahead and implement new legislation aimed at reforming French labor laws.
This has led to a troubling drift of investors away from U.S. stocks to the European markets. According to Merrill Lynch’s chief investment strategist, Michael Hartnett, “investors are showing love for Europe and scrambling out of U.S. equities” as allocation to U.S. stocks has plunged to the lowest level since 2008 and ForEx trading in Europe gets a boost from an influx of U.S. cash.”
The issue many investors are currently experiencing is that U.S. stocks have become just too expensive. Bank of America surveys in March and April found that 34% of hedge fund managers believe U.S. stocks are overvalued while 8 in 10 argue that the U.S. is the most overvalued region in the world, the highest proportion in the survey’s 17 years of polling.
Trade deals on the horizon
The EU is now in a prime position to define global ForEx trade and reinvigorate European nations as economic leaders. The openness of the EU trade regime continues to make it an attractive trade partner for other top-performing countries worldwide. Additionally, the EU leads in both imports and exports of manufactured goods and services accounting for nearly 20% of the world’s total exports and imports.
If Macron and Merkel are able to restructure the EU’s treaties and labor laws to the benefit of European companies and markets, there is a huge opportunity for economic growth through increased trade and investment in other financial hubs worldwide.
The EU’s trading success is directly linked to the advances of its partners, both in developed and developing countries alike. For this reason, there are a number of nations with which the EU is currently in talks to expand its global ForEx trade. The end goal here is to offset the delay in implementing the Trans-Atlantic Trade and Investment Partnership (TTIP).
The EU has forecasted that potential trade between the two countries could increase by a third, which would cause an economic boost by 0.8 percent for the EU and a 0.3 percent for Japan in the long term.
A strong trade partnership between the EU and Japan is considered an ambitious venture; one that would maintain each as leaders when it comes to globalism and free trade. Initial negotiations started in 2013 with the 18th round just coming to close this past April with key areas that still need resolution, such as Japan removing tariffs on EU wine and Europe opening up its markets to more Japanese cars and electronics to promote new ForEx trading in Europe.
Mexico is another key region of interest for global ForEx trade. In 2016, the EU and Mexico initiated accelerated trade negotiations to update the existing Free Trade Agreement (FTA), originally formalized in 2000.
Since then, there have been significant changes to the trade patterns that the agreement is based on. The original agreement is considered too restrictive and limiting; more in line with protectionist views than free trade. Starting in 2005, the flow of goods between the two entities more than doubled from an annual 26 to 53 billion Euros. This pattern has remained consistent.
The current negotiations are based on the EU’s commitment to expanding its investment policies and establishing transparent trade agreements. Currently, there are six European proposals being considered by Mexico that propose various ways of modernizing the current FTA.
Mercosur Bloc (Argentina, Brazil, Paraguay, and Uruguay)
The Mercosur is a sub-regional economic bloc composed of five full members (with Venezuela being temporary suspended in December 2016). Its purpose is to promote free trade and transit of goods, services, and people in South America and with other trade partners.
As a full-fledged customs union, the Mercosur Bloc eliminates customs rights and helps lift non-tariff restrictions. And similar to the EU, it promotes a common trade policy with other nonmember states and coordinates macroeconomic policies relating to foreign trade, agriculture, transportation, and communications, among others.
However, the current political climate within the Mercosur Bloc has presented some obstacles to crafting an open trade agreement with the EU. Current border disputes between Argentina and Uruguay have caused rifts. The acting Eurochamber Argentina’s board has already stated that until problems are resolved, a finalized agreement with the EU cannot go forward.
Despite these difficulties, the Mercosur Bloc is well-positioned to promote ForEx trading in Europe. South America produces desirable agricultural products that could alleviate issues the EU has had with to its own food reserves. Additional opportunities also include the technology and high-quality products sectors as trade relations between Latin America and the U.S. have grown strained since the latter nation’s 2016 presidential elections.
Trumpism, the TTIP, and the TPP
The TTIP is a proposed free trade agreement between the EU and the U.S that was initiated by President Barack Obama in 2013. It is considered a companion agreement to the Trans-Pacific Partnership (TPP) with three primary goals: expanding foreign market access; streamlining trade regulations, and promoting economic cooperation.
The U.S. trades more with the EU than any other partner globally. Total trade between the two partners is currently estimated at $1 trillion, but trade analysts estimate that this number could quadruple if the TTIP is enacted, boosting the U.S. GDP by 5 percent and the EU’s GDP by 3.4 percent.
The TTIP would be considered the largest trade agreement, beating out the North American Free Trade Agreement (NAFTA) and the TPP. The advantages of the TTIP are quite evident, especially for global ForEx trade by European companies. In 2016, European companies accounted for 63 percent of total foreign direct investment (FDI) in the U.S and employ close to 4 million people both within the U.S. and the EU.
Key industries that would benefit include the pharmaceutical sector, the electric car industry, and agriculture. Plus, an agreement of this size and importance would further strengthen the geopolitical and economic standing of the Trans-Atlantic bloc against other rising economic powers, such as China, Russia, and India.
However, following the 2016 presidential election in the US, all movement on the TTIP and TPP were halted. With a campaign promise to topple the two agreements, President Trump views the free trade deals as “America-job killers” despite analysis to the contrary. For many, Trump killing the two agreements has been viewed as “Americas’ Brexit” and has already caused trade with the U.S. to falter.
Since then, China has stepped in to enact its own trade agreements with the EU and other Pacific regional powerhouses, making it the de facto leader for globalization in the 21st century.
Is clean energy the next dot com?
As the world warms and climate change analysts warn of the negative effects global warming will have on food and water sources, the world took a decisive step in 2015 and drafted the Paris Climate Agreement within the United Nations Framework Convention on Climate Change. The agreement has the support of 195 nations, with the exception of Nicaragua, Syria, and the U.S., and its core cause is a coordinated commitment to keeping global temperatures from rising 2 degrees Celsius.
Of the 195 countries that have signed the agreement, 150 have ratified it, committing to its goals and laws. To meet their targets, countries will need to revamp many of their global ForEx trade and investment agreements. China has already started to capitalize on clean energy priorities and is currently the leading renewable biodiesel and chemicals manufacturer. Additionally, China’s construction of over a dozen wave-proof solar panel farms has already brought delegations from Japan, Taiwan, Vietnam, and Singapore looking to replicate the technology.
The leadership vacuum left by the U.S. has allowed China a huge head start on an expensive and expansive campaign to solidify its hold on emerging renewable energy businesses that will have strong effects for the tech sectors, such as software, air travel, and the automotive industry.
Where does the EU go from here?
Many EU leaders have reached their patience with new American protectionist sentiments and policy reversals. France has called for a halt to discussions regarding the TPP and TTIP. Macron’s government has also pledged to join Germany to promote the Paris agreement and work with China on crafting new climate-friendly regulations and trade deals.
As the EU looks to revamp its existing structure, many of the ideas for change revolve around trade and investment strategies that embrace new businesses and emerging technologies. Specifically, these new priorities include: an increase in cross-border resource sharing, as well as the sharing of services and professionals with full transparency, allowing for public scrutiny prior to formalization, and encapsulate democratic principles of fairness and non-discriminatory policies when crafting labor laws and regulations.
This new strategy will be focused on ensuring that the everyday consumer and worker benefits from new ForEx trade in Europe as well as outside the region. New agreements must take into account the role of small and medium-sized businesses as well as mandating human and labor rights in developing nations. Emphasis will be placed on integrating sustainable development into trade policy.
The EU has had a few rough years. Some say the experiment has failed while others see room for improvement. Led by Macron and Merkel, the Commission is looking at being a game changer, challenging for the role of trade headmaster against powerhouses such as the U.S. and China. If successful, the next few years could see tremendous growth and shift away from U.S. dominant policies towards a more collaborative effort, dedicated towards fair, ethical, and open trade.