The EU Economy versus risk-volatile International Environment

Following the completion of the Covid-19 vaccination program, the Commission expects an improvement in the economic environment and increased growth rates for the economy of both the euro area and the EU in a more general context. The crucial question on the table is whether any external factors can appear to challenge, jeopardising the economic growth expected for the Commission. But what are these factors potentially.

1. The pandemic does not end but continues through a new resurgence

Most scientists believe that one way or another the pandemic will continue until the summer of 2022 and then turn into a type of seasonal flu. All the leaders of EU member countries have in any way ruled out a general economic shutdown and lockdown respectively in their economies, even if a fourth wave of the pandemic occurs.

by Thanos S. Chonthrogiannis

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2. Inflation is coming back

With increased international liquidity and consumers having large amounts of savings to consume, the appalling demand with the full opening up of economies may create asymmetric inflationary pressures at international level. In April inflation in the US approached 5%.

The ECB has not yet started the tapering policy (please read the analyses entitled “What Possibility there is a tapering in Fixed Income Markets to Stop the Recovery in the US” & “When Does Tapering Start in World Bond Markets from Central Banks“) continuing to implement a policy of cooperative leasing.

Both oil and gas prices are rising without missing the increase in food prices (please read an analysis entitled “Food Prices Are Constantly Rising“) reducing people’s disposable income.

Markets believe that inflation is here to stay while instead the heads of the Central Banks (please read the analysis entitled “Capital Markets (Inflation) vs Central Banks” consider inflation to be a transient phenomenon and will not affect the cost of money, the prospect of recovery and growth.

3. Possibility of financial bubbles popping

Stock prices are constantly rising. Free and limitless public money does not go to investments in the real economy but either to per-financing existing debt or to speculative investments in non-EU and US stock exchanges where returns are higher.

At the same time, “bubbles” are being created in developed economies in the housing sector. Crypto currencies develop dynamically without control by regulators. Shadow banking has grown even more than its size a decade ago. The issues that arise are whether the leaders of the West and their central banks respectively will be able to deal with a negative scenario.

4. Geopolitics as Quicksand

It is well known that US-Russia relations have entered a period of crisis. The EU will be obliged by the US, within this framework, to increase its defense spending on NATO. Russia does not testify without a fight against the former USSR countries which it considers Russia’s spheres of influence.

US-China relations are increasingly absorbing US potential as they should prevail as a model of governance vis-à-vis China while defining the individual “battlefields” between the economic, international trade, digital economy, technology, cyber-security, defense, and space conquest.

The new data is that the US under President Donald Trump was treating China alone. Under President Joe Biden, the EU has also been in the equation of dealing with China, rallying the West. The point is that the degree of flexibility and adaptation that the EU will be able to present if one or more of these scenarios come to the fore.

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