US sanctions to be restrictive for European companies

Donald Trump’s announced sanctions on Iran are proving to be quite a headache for European companies that had re-expanded their business in the market since the July 2015 agreement.

It is vital here to draw a distinction between a potential political nuclear agreement between Iran and the other signatories of the previous 2015 accord (apart from the US) on the one hand and the issue of economic sanctions on the other, which would severely hamper Iran’s economic growth as foreign companies working with the country would be subject to hefty penalties from the US. Before 2015 we witnessed the extent of such penalties on banks that had tried to evade sanctions, and a number of banks had actually continued to steer clear of Iran, even after the 2015 agreement as they were not convinced it would last. In this respect, the timing of the ZTE affair is perfect. The Chinese company operating in the telecoms sector and specializing in 5G technology is highly dependent on US components to pursue its growth. After pleading guilty of shipping US components to Iran and North Korea in 2016, it is now facing legal action for failing to comply with measures it was supposed to take against managers involved in the affair. Continue reading

Oil above $75/bbl for long

Oil price trends have shifted since the start of April, with figures set on a range of $70–75, compared with a previous figure of around $67 on average, i.e. higher than figures seen since late 2014. This reflected the impact of demand driven by world growth.

The chart below shows that trend altered after April 6, when the White House implemented sanctions against Russia, with subsequent threats on Iran merely serving to amplify this trend. This morning after Donald Trump’s decision on Iran it is above 75 as shown on the graph. Continue reading

Economists are rebelling on economic protectionism

US economists are mobilizing against Donald Trump’s protectionist measures. The interdependence of developed and emerging countries, but also the dependence on global trade are today too important to take the risk of changing the rules abruptly. In view of the on cooperative political climate, we can not rule out retaliation and escalation that would be very detrimental to growth, employment and standard of living. The experiences of the past must necessarily help us to think.

“Over a thousand economists have written to Donald Trump warning his “economic protectionism” and tough rhetoric on trade threatens to repeat the mistakes the US made in the 1930s, mistakes that plunged the world into the Great Depression.

The 1,140 economists, including 14 Nobel prize winners, sent the letter on Thursday amid an escalating row over trade between the US and the European Union. Trump has imposed tariffs on steel and aluminium imports but has granted temporary reprieves to the EU, Australia and other countries.

“In 1930, 1,028 economists urged Congress to reject the protectionist Smoot-Hawley Tariff Act,” the authors write, citing a trade act that many economists argue was one of the triggers for the Great Depression….”

Continue reading here in the Guardian

Soaring US deficit is a source of concern

When our grandchildren study economics one day, will they systematically have to add a dummy variable* to their econometric equations for the period covering the Trump administration? Will the US economy over this period have something of a “special status” due to Trump’s and Congress’ decisions? This question is worth raising in light of moves to cut taxes and raise spending, with the ensuing effects on the appalling US public deficit.

The state of public finances is the trickiest of questions. The sustainable rise in the public deficit seems to show that the economy is undergoing a severe recession, yet this is far from true as Janet Yellen took the economy to full employment (see analysis from Jason Furman). So economic stimulus moves from the White House and Congress raise very real questions on the rationale behind this policy. Governments do not embark on economic stimulus programs when the country is running on full employment, otherwise major long term imbalances are created, which are bad news for all concerned. Continue reading

Davos, Trump, China and French growth – My Monday column

The world balance is changing under the influence of China as it seeks to establish a different path for globalization. America is trying to stage a response at Davos with the White House realizing that America needs its partners in order to be great again. Meanwhile, French growth is running into physical obstacles: the 2% trend is a peak, at least in the short term. 

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We saw a surprising development in Davos last week when the US President backtracked on world trade and his global economy model, as the White House indicated that it no longer sees the economy as a zero-sum game, contrary to its stance so far. Continue reading

Shutdown and oil prices – My Monday column

The US administration’s partial shutdown marks a first in the country’s history: this is the first time that we have witnessed this type of situation when the same party occupies both the White House and Congress. It was somewhat different during Barack Obama’s presidency in 2013, as Congress was not in Democrat hands, and looking further back, President Jimmy Carter came up against difficulties in financing his budget with his Democrat majority at the end of the 1970s, but there was no shutdown.

 This failure for President Trump and Congress to get along has been the hallmark of the current Republican administration’s first year. The power dynamics between the two institutions ends up creating a puzzling sort of inefficiency. The disagreement of the moment is on the Deferred Action for Childhood Arrivals program, which involves young foreign-born individuals who arrived in the US as children. It turns out that Trump is in favor of a law to welcome them in the end, but the Republicans are unhappy with a bill partly drafted with Democrat agreement. This is a power struggle and not a cooperative political relationship between the President and Congress.

We had already witnessed this dysfunctional situation during attempts to repeal Obamacare, when Congress rejected Trump’s proposals. Continue reading

The revival is European*

European citizens are now optimistic on the future of Europe and they feel European. A survey published in a report this month by the Pew Research Center testifies to this, with favorable views of Europe increasing everywhere in 2017, even in the UK. The only country that saw a deterioration was Greece, but this is understandable given the austerity measures imposed on its citizens by the hefty economic adjustment process from Brussels. We can also read the French presidential election result as a referendum primarily fought and won on Europe.

The old continent is regaining greater political strength at a time when growth is also picking up speed. The planets are finally aligning and the outcome is positive. The region’s political environment is more stable and the risk of populism has dwindled.

In a complex, tough and unpredictable world, Europe is now a safe haven of stability, and this haven looks more assertive, particularly with Germany’s impetus.
We all heard Angela Merkel indicate that Europe should take its fate into its own hands as yesterday’s allies look less reliable and yesterday’s enemies are still there, and talking about the need to reform Europe, even if that means setting up a finance ministry and having a joint budget. Continue reading