Sunday, 30 December 2018

Review of 2018 Predictions - Part 5

“The EU Becomes The Global Leader” 

Let's look at the strands of the argument behind this prediction. 

First, that the US was pulling away from its global leadership role. That has certainly proved to be the case. Having withdrawn from the Paris Climate Accords, Trump also reneged on the US Treaty obligations in relation to the Iran Nuclear Deal. He also pulled out of the nuclear arms limitation treaty with Russia. In the closing days of the year, Trump also pulled US troops out of Syria, and Afghanistan, leading to his Defence Secretary “Mad Dog” Mattis, resigning. As Trump also imposes tariffs and sanctions on many of the world's economies as part of his protectionist global trade war, he has also proposed taking the US out of the WTO. He has taken the US out of a number of UN bodies, and it's probably only a question of time, before he proposes taking the US out of the UN altogether, probably as another diversionary tactic, aimed at his base, the next time he is facing some other issue affecting his standing. 

The Paris Accords did not collapse after Trump pulled out. The other countries of the world have pressed ahead, without the US. In part, this is because, the next few decades will see a lot of capital going into new energy technologies that will replace fossil fuels. That will be true not just in relation to energy generation, where China is seeking to take a lead in relation to the development of solar energy production, but in relation to the development of electric cars, with the development of small electric aircraft not far behind. These technologies will be major value, and surplus value producing industries in the years ahead, and those countries that dominate those industries will have a significant advantage. Trump, by tying himself to a protectionist policy of trying to sustain and subsidise the old fossil fuel industries, is putting the US in a disadvantageous position, which is why, many US states, and local governments have basically ignored his policy, and continue to pursue policies designed to reduce carbon emissions, and to encourage the development of new energy technologies. 

The Iran nuclear deal also did not collapse following Trump not only taking the US out of the deal, but threatening sanctions against any businesses elsewhere in the globe that continued to trade with Iran. Although this threat did have an impact on all those global businesses that also trade with the US, and made difficult the processing of payments, it led to the EU deciding to look at ways by which they could provide support for EU businesses that refused to be blackmailed in that way. It will inevitably lead to the encouragement of alternative global payments systems that bypass the US dominance, perhaps using blockchain technology. It again shows the idiocy of Brexit, because when the EU does develop these alternative systems, the UK outside the EU, will not have their protections, and will thereby make itself even more susceptible to being blackmailed by larger economic powers. So much for bringing back control! 

It's probably only a matter of time before Trump takes the US out of NATO. His decision to take the US out of Syria and Afghanistan not only with no reference to his Defence Staff, but also no notice to his NATO allies, with troops in those arenas, is an indication of his contempt for such organisations. Its inevitable that the EU's decision to establish an EU army, will be ramped up, to better protect EU interests as against those of a go it alone US. With the US's agent, Britain, out of the EU, that trajectory will be even more clear. The need for the EU to protect its borders against an expansionist Russia in the East, the potential of jihadism rising from the South, and even tensions with Britain over the Irish border, if a no deal Brexit goes ahead, and over Gibraltar, as well as over fishing rights, in the North Sea, mean that as part of intensifying efforts at consolidating an EU state, such an EU army is likely to develop rapidly. 

The UN, as currently structured, is probably past its sell-by date. There is no justification for the UK having its permanent seat on the Security Council, for example. In an era when the globe is divided into large politico-economic blocs, it makes more sense to create some kind of organisation that reflects that reality. That is true of the other global para-state bodies such as the IMF, World Bank etc. Such a structure would reduce the significance of the US accordingly. It would mean that countries outside those larger politico-economic blocs would no longer have the undue representation they have, based upon their historical position. Indeed, they would probably have no representation at all, reflecting the growing irrelevance of the nation state in the modern world. 

China has continued to expand its influence across the globe, particularly in Africa. Its One Belt One Road policy is intended to both develop the Chinese economy internally along the path of the rail and road network stretching from the Chinese Pacific Coast through to the Atlantic Coast of Western Europe, and to extend its influence across Central Asia, Asia and the Middle East, and North Africa. But China still does not have the ability to take on global leadership. 

Global growth for 2018 is estimated by the IMF at around 3.7%, just below the 4%, I had predicted at the start of the year. That is in line with the prediction that the three year cycle, running from Q3 2017, to end of Q3 2018, would cause a temporary relative slow down, and that has been exacerbated by the effects of Trump's global trade war, and the effects of Brexit. The IMF estimates that Trump's trade war knocked 0.3% off Chinese growth, for 2018, for example. The US economy continues to grow at a rapid pace, despite Trump's trade war. The IMF estimate US growth for 2018 to be 2.9%. But, US growth has risen at a faster pace, in the second half of 2018, though by slightly less than was earlier anticipated. In the second quarter growth was 4.2%, compared to 3% in the same quarter in 2017, and in the third quarter it was 3.4% compared to 2.8% in the same quarter in 2017. Trump's trade war, clearly has not significantly depressed US, growth, yet. 

US employment has also continued to grow rapidly. The medium term effect will be to reduce global growth relatively, due to higher costs, and lower productivity, but it will also lead to a restructuring of global trade and production, if it continues. The prediction that the continued rise in global growth would lead to higher interest rates has been confirmed, and as also predicted that has caused a fall in asset prices. US stock and bond markets are ending the year lower than they started it, and some markets are entering, or have already entered, bear market territory, i.e. 20% lower than their peaks. 

As predicted, despite Trump's trade war, the US trade deficit continued to rise, driven on by his tax cuts for the rich. In fact, Trump's trade war has probably exacerbated the deficit. Retaliation meant that US soybean exports fell significantly, for example.  The US Budget deficit, which had exploded as a result of the 2008 financial crisis had been gradually reduced from 9.8% in 2009, to just 2.4% in 2015, as the economy grew under Obama, as a result of the US not engaging in the same kind of austerity policies that European economies inflicted on themselves. Despite that growth trajectory inherited by Trump, and the continued strengthening of US growth alongside strengthening and co-ordinated global growth, the budget deficit has grown rapidly under Trump as forecast, due to his lavish tax cuts for the rich, his increased military spending, and his spending on subsidies to farmers etc. who have lost out badly due to retaliation to his imposition of tariffs. The budget deficit has now risen to 3.5% of GDP, and looks set to rise faster, which means that pressure on US interest rates will intensify, making further sizeable and sustained falls in US asset prices inevitable. 

The EU economy has been hit both by Brexit, and by Trump's global trade war. Trump proceeded to impose tariffs on EU steel and aluminium producers, and with threats to EU car producers. Brexit has meant that investment in the UK has been held back, and uncertainty means that business have held back decisions in the EU too, until a clearer picture of the post Brexit landscape is available. Although political uncertainty in Europe, due to the rise of right-wing populists also holds back growth, this has a double edged effect. The disaster that is befalling Britain as a result of Brexit has meant that even the right-wing populists in Europe, such as the French National Front, and the Italian Five Star Movement, and its coalition partners from the League, no longer call for their countries to leave the Euro, let alone the EU. 

Brexit will have a further impetus to consolidation of the EU project, which will itself give a boost to future EU growth, and as it consolidates more towards an EU state, its position in the world will increase along with it. 

Conclusion, the prediction is a work in progress.

Back To Prediction 4

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