Was that the end of the re­bound?

The Malta Business Weekly - - FRONT PAGE -

Two un­re­lated items in the news could mark the end of the eu­pho­ria over global growth, and in par­tic­u­lar Euro­pean growth, af­ter the 2008 cri­sis.

First: The oil price has been driven to its highest level in three and a half years af­ter Don­ald Trump ig­nored the pleas of Euro­pean al­lies and pulled Amer­ica out of the Iran nu­clear deal.

Brent crude - sourced from the North Sea - was swept up to $76.85 yes­ter­day morn­ing, as traders di­gest the prospect of a new cri­sis in the Gulf.

The oil price jumped fol­low­ing Trump’s de­ci­sion to im­pose “the highest level of eco­nomic sanc­tions” on Iran, and to reim­pose sanc­tions on any for­eign com­pany that con­tin­ues to do busi­ness with it.

Luk­man Otunuga, re­search an­a­lyst at FXTM, said: “While it was widely an­tic­i­pated that Trump would pull out of the Iran agree­ment, what is likely to leave a last­ing im­pact on the mar­kets is the threat that he would also pe­nal­ize those who help Iran.

“These over­all risks are en­cour­ag­ing traders to price in some new geopo­lit­i­cal risk premium, and his threat can po­ten­tially be seen as a blow for US al­lies. There is a threat of Trump’s stark tone ques­tion­ing US re­la­tions with its Euro­pean al­lies, es­pe­cially given that the likes of France and the United King­dom had ap­pealed for Trump not to with­draw.”

As Quarz ex­plained; “En­ergy gi­ants like To­tal and Royal Dutch Shell have lu­cra­tive agree­ments to work with Iran, while Re­nault has a joint ven­ture to make 150,000 cars a year, and Fran­coGer­man plane maker Air­bus has re­port­edly de­liv­ered just three out of 100 jets promised to Iran, in a deal worth bil­lions....

“Any Euro­pean com­pa­nies with a US arm that agreed a deal with Iran would now be vi­o­lat­ing US law, says Adam Smith, a lawyer at Gib­son Dunn who is a for­mer Trea­sury sanc­tions of­fi­cial.

“Those not ac­tive in the US could be hit with a “with-us or­a­gainst-us sanc­tion,” in which Wash­ing­ton would tell the com­pany that if it wants to keep trad­ing with Iran they can’t trade with Amer­ica, Smith said.”

The sec­ond item re­lates to in­ter­est rates. As we all know, these have been at his­toric lows for many years now. It would seem they are about to rise, although at dif­fer­ent speeds. The US has al­ready be­gan rais­ing its rates and the UK could be do­ing so in the com­ing months while Europe still has to await the end of the ECB buy­ing of gov­ern­ment stocks which it has been do­ing these past years and only when this is over, the ever-cau­tious ECB might be pushed to raise in­ter­est rates.

These two items, we said, are un­re­lated. To­gether they bring this part of the world back to the situation it was in pre-2008. The hon­ey­moon is over. Though far too early to see, we could be in for a new phase of re­ces­sion.

In the in­ter­ven­ing years, Europe has man­aged to ride the wave and it did in­tro­duce some mea­sures to over­come the cri­sis. But it has not com­pleted the work and the items of heavy lift­ing that are needed are not in place yet as the main Euro­pean gov­ern­ments dis­agree on what needs to be done.

This has al­ways been the Euro­pean les­son: it is only a cri­sis which gets the Euro­pean lead­ers mov­ing.

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