Is the EU heading into a crisis, and the US into recession?

Is the EU heading into a crisis, and the US into recession?

 

May you live in interesting times” is a traditional Chinese saying. When the Chinese wanted to curse someone, they would say “may live in interesting times.” I think we are living in a time when this curse is actualized because we are living in a truly interesting time. Just as we started to think that the EU was pulling itself together, the Italian crisis started. Just as we started to think that the U.S. is slowing down and Europe is rising again, Brexit happened. Just as we started to think that the U.S. economy is building up again, now there are increasing expectations of a recession.

Is there an upcoming European crisis?

During the past weeks, Italy’s budget was rejected by the EU on the grounds that it wasn’t realistic. It was a first in EU history and created a tension between Italy and the bloc. Last Wednesday, the EU once again rejected Italy’s budget proposal. We have, at times, witnessed disputes between various European countries, but things look much more serious this time.

On the other hand, it is not quite possible to say that Brexit, meaning Britain’s divorce from the EU, is going well. Over the last weeks, millions of British citizens took to the streets of London demanding a new referendum. On top of that, after the Brexit draft was passed in an extraordinary cabinet meeting, three ministers and some government officials resigned from their positions in protest. They did so because the deal entails many compromises and threatens the territorial integrity of Britain.

Another matter which makes reaching an agreement even more difficult is the legal status of Gibraltar. Gibraltar, a peninsula on the southern coast of Spain that has been considered British territory since 1713 that Spain also claims as its own, is an important dispute in Spanish-British relations. Spain has been claiming its sovereignty over this land for quite some time. Ninety-six percent of Gibraltar’s population voted in favor of staying in the EU in the referendum conducted in 2016, however, it is going to leave the EU together with Britain because of its legal status. Spanish Prime Minister Pedro Sanchez announced that Spain will vote against the Brexit deal unless it changes the text regarding Gibraltar’s disputed status as a British territory.

In short, while previously the relations within the union were being discussed, now the “unity of the union” is being deliberated and it is obvious that this has triggered some economic problems. However, it must be noted that this will also have serious economic impacts on the rest of the world.

When will the U.S. recession occur?

In February 2016, JP Morgan predicted the possibility of the U.S. economy going into recession in the coming three years as 92 percent. Although FED doesn’t anticipate a recession, JP Morgan’s prediction in October 2018 was that the possibility of a recession within two years is 60 percent. Of course, these are only predictions but if we take a look at the most recent data we can see that things are getting serious. For instance, the level of debt for companies in the U.S. is greater than the levels of reached before the 2008 crisis.

On the other hand, last week the S&P 500 and Dow Jones Indexes in the U.S. erased all the gains for 2018. The argument between Trump and FED, on the other hand, is still continuing. Although Trump has lowered oil prices by thanking Saudi Arabia (!), the FED is continuing to send messages about gradual rate increases. The U.S. economy is growing but the real growth in salaries is still marginal. When we put the economic outcomes of the trade war with China and sanctions imposed on Iran on top of all this, the risk of recession increases even more. Moreover, if we consider that international institutions revised global growth figures in a negative direction, we can say that two difficult years await emerging market economies countries like us.

 

03.12.2018

yenisafak.com

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