Anyone trading extensively (or even in a limited fashion but for key components) with Russia is no doubt anxiously watching developments in Ukraine and the almost-daily ramping up of tensions on both sides, with threats of sanctions countering military posturing.
Reuters reports that both the ruble and Russian stocks are down sharply on Thursday and Friday of the week before last, respectively. This was largely as a result of comments by US President Barack Obama that Washington was considering sanctions against key economic sectors in Russia, including financial services, oil and gas, metals and mining and the defense industry, if Russia made military moves into eastern and southern Ukraine.
Trade in goods between the two countries was worth $38.12 billion in 2013 and US firms have $14 billion in direct investment in the country. Firms from Boeing down to mom and pops regularly import metals and metal products from what is one of the world’s largest commodity exporters.
Across Europe, figures understandably vary. Whereas Germany and France’s jobless rates held steady at 5.7 percent and 10 percent, respectively, Spain’s hit 23.6 percent in February, up from 23.3 percent in January and Greece’s was at 21 percent in December — since then, the authorities have been unable or unwilling to continue reporting the numbers. Unemployment among 18-25 year-olds though, is greater than 50 percent in both countries.
Meanwhile, PMI numbers are falling. Spain’s fell to a three-month low of 44.5 in February and Greece recovered to 41.3 from a record-low 37.7 in January, the economy is clearly still contracting fast. In Germany, manufacturing contracted last month while in France activity dropped at the fastest level in two and a half years, according to the WSJ.
With China slowing (the latest official PMI figures conflicting with HSBC’s showing a decline suggest no more than the general trend is still positive, if slower) and raw material costs rising, Europe will continue to be a drag on global recovery.
Indeed, it is those rising raw material costs that probably present the greatest challenge. Globally, input price inflation in March was the highest in eight months, with rising oil prices presenting the drag on GDP, representing a massive transfer of wealth from developed economies to oil producers.
It is possible the US’ recovery over the last 12-18 months has in part been due to the historically low natural gas prices and the knock-on suppression of chemical feedstock prices. It could also be argued that the large delta between global oil prices (as displayed by the Brent crude price) and US crude prices (as displayed by West Texas Intermediate) has also benefited the US relative to Europe.
As the US gradually adds unconventional oil to its reserves of unconventional natural gas, this advantage may be enhanced, but the economies of scale, unified politics, and integrated redistributive taxation — not to mention single official language — continue to support the more dynamic nature of the US market relative to Europe’s, debt crisis or not.
Outside of Europe, the Netherlands is often overlooked in the debt crisis debate and analysis, largely because it lacks the GDP of other core countries — $780 billion as compared to Germany’s $3.28 trillion and France’s $2.56 trillion. (Even Spain at $1.41 trillion and Italy at $2.01 trillion are considerably larger.) But the Netherlands is also overlooked because of its relatively small landmass and population.
It is a mistake to dismiss the Dutch as peripheral to the workings and future of the EU. The country punches well above its weight both economically and, more importantly, politically. In the halls of EU power brokers, the Netherlands has been a keen advocate of austerity, a natural extension of its Germanic approach to hard work and fiscal conservatism — a doctrine that has served it well over the years, achieving a high standard of living and a pivotal role as the entreport to the industrial heart of Europe.
So the recent political crisis faced by the Liberal-led coalition in the country is all the more intriguing for what it tells us about possible futures for the European Union.
Where the Netherlands Economy Stands
The Netherlands has slid into recession this year, resulting in a sharp rise in its projected 2013 deficit to 4.6 percent. At the same time, the spread between Dutch and German 10-year bonds has risen over 20 basis points as the markets have worried the country may lose its triple-A rating, a fear heightened by the political deadlock.
The crisis is about how to bring that down to the 3.0 percent target, which the country has been at the center of insisting other European states should aim for. Although the Netherlands has led by insisting Greece, Portugal, Ireland, Spain and Italy must adopt harsh austerity measures if they are to qualify for any support, nevermind bailouts, the government cannot now agree on how to bring its own house in order.
A row between the Liberals and the far-right Party for Freedom (PVV) means the government is short on votes needed to push reforms through, even after three weeks of secret talks. A report by the “Euro-sceptic” (as the FT put it) research group Lombard Street, a UK consultancy, is probably not helping things.
Will the Netherlands Leave the Euro?
The FT states the report was prepared for the PVV and is pessimistic about the euro-zone’s future. Under its worst-case scenario that Greece, Portugal, Italy and Spain all have to leave the euro-zone after failed bailout attempts, it concludes that the Netherlands would save €120 billion over three years if it left the single currency now bolstering the PVV’s antagonism toward cuts, which would not be necessary if the country was not part of the Euro.
The report painted a bleak future for European core countries Germany, the Netherlands, Finland and probably France, saying austerity programs and internal devaluation would be unable to restore peripheral European economies to competitiveness, meaning the euro-zone would become a transfer union.
Will the Netherlands drop out of the Euro and go it alone, as the report recommends? No, almost certainly not, but the very fact such hard-line positions are holding any credence in the Hague underlines how troubled the core states are at the almost inevitable prospect of them having to fund bailouts in southern states for years to come.