How Brexit, overregulation and US Tariffs explain the current EU weakness

The game of chicken over Brexit continued last week after Boris Johnson revealed his plan

His plan appeared to receive some support from the UK parliament. In a reversal, the plan has been rejected by the European Union.

This is mostly because the plan did not have a provision for backstop, which the EU believes is a good option to prevent friction in North Ireland. In a statement, France president Emmanuel Macron gave Boris Johnson a week to amend the proposal.

This is likely to lead to more friction between the EU and the UK.

Slowing Economy – A big problem for EU

The uncertainty over Brexit comes at a time when the European Union is facing a major challenge: in recent months, data from the region has shown that the economy is slowing.

In Germany and other EU countries, the manufacturing sector has moved into a recession. Inflation rate has remained below the ECB target of 2% while the unemployment rate has remained a bit stable.

Brexit has partly been blamed for the slowdown in the economy.

Could a Worldwide Trade War be Upcoming?

Another major issue that has continued to affect the European Union is the trade uncertainty between the United States and China. The two economies, which are responsible for a third of world trade have been engaged in a major fight.

While the EU is not involved directly with the fight, it has been affected because of the volume of business it does with China.

At the same time, a trade war between the European Union and the United States is getting started.

Last week, the United States unveiled a list of EU goods that it will tariff. The goods to be tariffed will be worth more than $7.5 billion. The country announced this after a big win at the World Trade Organization (WTO). This is after it accused the EU of giving illegal subsidies to the Airbus.

The case at the WTO was going on for more than a decade. Surprisingly, the EU has also accused the US of offering illegal tariffs on Boeing.

Many states in the US are known for offering tariffs to host Boeing, which is the biggest manufacturer in the US. The US also showers Boeing with billions of dollars-worth of defence contracts.

Shortly after the US announced the tariffs, the EU said it would also launch tariffs of its own.

EU’s responsibility about it’s own struggle

The weakness in the European Union is also partly blamed on the region itself.

For years, the region has continued to accelerate its regulations. In 2018, the region implemented the MIFID regulations, which were targeted to the financial sector. The region then started to focus on the General Data Protection Regulations, which targeted anyone with a website.

Perhaps, the most damaging regulations have been targeted towards the automobile industry in the European Union. This is after the Volkswagen diesel emission scandal that cost the company billions of dollars.

Shortly after this, the EU announced various strict standards that led to a significant weakness in the automobile sector. As shown below, the German automobile stocks have continued to weaken.

Meanwhile, the European Central Bank (ECB) has struggled on how to react to the weakening the economy. In the past month, the bank lowered interest rates again.

→ A Review of Global Central Bank Actions

This pushed the interest rates further negative. The bank also announced that it would restart quantitative easing.

The ECB has also continued to ask European governments to implement more fiscal policy such as a boost in spending. This could have significant implications to the market.

Other External Useful Resources

Battle for the skies risks a wider EU-US trade war – Financial Times