Tag: Eurozone

Weekly Geopolitical Report – Between a Rock and a Hard Place: The Gibraltar Dilemma (April 24, 2017)

Posted on by Rebekah Stovall

by Thomas Wash

Days after Theresa May triggered Article 50 of the Lisbon Treaty, Brussels issued a nine-page document outlining its guidelines for Brexit negotiations. One of the guidelines gave Spain the authority to veto any deal between Gibraltar and the European Union (EU). The U.K. is currently recognized as holding sovereignty over Gibraltar and thus took exception to this provision, vowing to defend the will of the people of Gibraltar.

The provision is likely the result of heavy lobbying by the Spanish government, who would like to end this 300-year dispute once and for all. A war of words between Spain and the U.K. has already started in response to the announcement. Former Tory leader Michael Howard stated that the U.K. is willing to fight for Gibraltar. Although not responding to the threat, Spain has hinted that it would not block Scotland if it were to apply to the European Union upon a potential Scexit.[1]

Despite the bravado, it is likely that the two countries will come to some sort of agreement as they have deep trade ties. In fact, Spain has been the most vocal backer of a soft Brexit. That being said, the people of Gibraltar are stuck at a crossroads regarding the dispute. On the one hand, they voted 96% to remain in the EU, but on the other hand, they voted 99% against joint sovereignty with Spain. The situation becomes even murkier when its economy is taken into account. Gibraltar is dependent upon the U.K. for trade and Spain for labor. Nevertheless, it is unlikely that Gibraltar would have emerged from Brexit unscathed as its labor force is dependent on the free movement of immigrants permitted under the EU. Ironically, it was the free movement of immigrants that mostly caused British voters to leave the EU.

In this report, we will focus on the significance of Gibraltar, its historical context and the impact of the current dispute. We will conclude with possible market ramifications.

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[1] During the run-up to the Scottish referendum, it was believed that Spain would oppose any immediate transition by Scotland into the EU if it decided to leave the U.K. because it could encourage Catalonia to move toward independence as well.

Weekly Geopolitical Report – The EU at 60: Part II (April 10, 2017)

Posted on by Rebekah Stovall

by Bill O’Grady

(Due to the Easter holiday, the next edition will be published April 24th.)

Last week, we began our retrospective on the EU.  This week we will examine the post-Cold War expansion of the EU, including a discussion of the creation of the euro and the Eurozone.  With this background, we will analyze the difficulties the EU has faced in dealing with the problems caused by the 2008 Financial Crisis.  We will look at several proposals being floated in the wake of Brexit about reforming the EU and, as always, conclude with potential market effects.

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Weekly Geopolitical Report – The EU at 60: Part I (April 3, 2017)

Posted on by Rebekah Stovall

by Bill O’Grady

On March 25th, European Union (EU) leaders from 27 nations gathered in Rome to celebrate the 60th anniversary of the founding of the organization.  Although the EU currently consists of 28 members, the U.K. was absent due to its recent decision to leave the EU.

On that day in 1957, France, West Germany, Italy, Belgium, Luxembourg and the Netherlands signed the Treaty of Rome, creating the European Economic Community (EEC), which eventually became the EU.  Over time, new members joined the group.  This map shows the current members.[1]

(Source: EU)

It should be noted that this wasn’t the first attempt at a supranational European body.  France proposed the European Defense Community to be comprised of the six original EU members.  However, the French failed to ratify the treaty.  In 1951, West Germany and France built the European Coal and Steel Community which included the other four founding nations of the later EU and it became a forerunner of the EU.  In 1957, the same six nations agreed to cooperate on nuclear power.  Still, the EEC is considered the original source of what evolved into the EU.

The primary goal of the EU was to prevent another world war from being fought on European soil.  That goal, at least so far, has been successful.  The key to meeting this goal was to solve the “German problem.”  That issue continues to evolve.

In Part I of this report, we will discuss the German problem and how NATO and the EU were developed in response to resolving that problem.  In Part II, we will examine the post-Cold War expansion of the EU, including a discussion of the creation of the euro and the Eurozone.  With this background, we will analyze the impact of the 2008 Financial Crisis and the difficulties the EU has faced in dealing with the problems it caused.  There will be an analysis of immigration and European security as well.  We will look at several proposals being floated in the wake of Brexit about reforming the EU and, as always, conclude with potential market effects.

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[1] For the next two years, the U.K. will remain a member.  PM May did submit an Article 50 letter on March 29 which begins the two-year process of exiting the EU.  It is possible that this deadline could be extended depending on negotiations.  Britain is the first nation to exit the EU.

Weekly Geopolitical Report – Future of the Euro (January 30, 2017)

Posted on by Rebekah Stovall

by Thomas Wash

January 1, 2017, marked the 18th anniversary of the induction of the euro, the European single currency. Once praised as the uniting force among European countries, the euro has become a source of populist backlash. From Greece to France, populist politicians have increased their political clout to the chagrin of the establishment.

The primary motivation of the European Union was to create a unified European identity so that countries would not be tempted to fight wars with one another. Special attention was paid to Germany, which had tried to dominate Europe in the past. Ensuring peace throughout Europe meant Germany had to be subdued. In order for this to happen, Germany had to become dependent on its neighbors such that waging war would be against its own interests. Although this worked in the beginning, the 2008 financial crisis exposed the flaws in this plan. Germany’s excess savings and fiscal discipline led to it assuming the dual role as creditor and lender of last resort within the European Union. This gave Germany unparalleled leverage to dictate fiscal and foreign policies over other European countries.

In this report, we will take a deeper look into the factors that contributed to the formation of the European Union, as well as the negative effects the single currency has had on certain countries, particularly those located in southern Europe. As always, we will conclude with ramifications on the financial markets.

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