Trump - Juncker Meeting
President Donald Trump tweeted yesterday: “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that — and everybody’s talking! Remember, we are the “piggy bank” that’s being robbed. All will be Great!”
Now, while an economist would not normally comment on a presidential tweet, it does appear that Trump become a little muddled again and missed some words.
If implemented, the tariffs are the greatest tax increase the U.S. consumer faces this year. Tariffs are also the greatest risk to U.S. employment growth. Tariffs are the greatest threat to U.S. and global economic growth. All of those are valid things to tweet.
This is somewhat relevant because one of the many presidents that the European Union will meet Trump.
The EU has three presidents, namely, the President of the European Council, Mr. Donald Tusk, the President of the European Parliament, Mr. Antonio Tajani and the President of the European Commission, Mr. Jean-Claude Juncker who will meet today with President Trump in Washington.
Trade will be the main item on the agenda. The European Union has made it very clear that there will be no new offer on trade and legally Juncker does not have the authority to offer anything new. So, the European Union takes all the surprises out of the negotiations with its legal structures. A big part of Juncker’s task will be simply to try to better understand what Trump is asking the EU to do.
Trump tweeted late Tuesday: “The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready — but they won’t!“
No doubt, if doable which under today’s circumstances it isn’t, that could become a reason to change direction over taxing U.S. consumers who want to buy the car of their choice rather than the car of the U.S. government’s choice. That would be popular with US business. Almost every single witness to the Congressional hearings on auto tariffs said: “Don’t do it.”
However, that seems a too optimistic position to be taking. It seems likely that the U.S. consumer will have to endure another great tax (tariff) burden this year.
UK Brexit Negotiations
Meanwhile in the interminably tedious process of the UK exiting the European Union, Prime Minister May has taken personal control of the exit negotiations. Given that the former Brexit Secretary David Davis, in charge of getting out of the European Union barely ever spoke to the EU chief negotiator Michel Barnier, this may be a reflexion of reality rather than a particular new direction. It does however perhaps reinforce the relative strength of the Prime Minister’s position in terms of domestic politics. To attempt to remove the prime minister from office now would be to disrupt the negotiations in a possibly fatal way.
Emerging Markets – Turkey
On Tuesday, financial markets got surprised when the Turkish central bank held the 1-week repo rate unchanged at 17.75 percent when markets had expected a 100-basis point increase in the repo rate to 18.75 percent after inflation accelerated to 15.39 percent year-on-year in June, which is more than 3 times the central bank’s target of 5 percent and was the highest level since January 2004.
In a first reaction, the Turkish lira tumbled as much as 4 percent, but later in the evening it came somewhat back and traded 2.9 percent lower at 4.8855 per dollar. The yield on Turkey’s 10-year bond surged 184 basis points to 18.67 percent.
The central bank’s decision of not raising interest rates when inflation continues rising adds to speculation that President Erdogan, who is a long-time advocate of alternative economic theories that favor lower rates, is now influencing monetary policy.
The central bank’s decision of not raising interest rates decision essentially confirms the markets’ worst fears about the central bank’s independence.
Turkey’s weak currency, which is down 22 percent so far this year, together with a 500-basis point interest-rate hike year-to-date will wreak havoc on banks’ asset quality and raise alarm bells that flat 2018 cost-of-risk targets are increasingly unrealistic.
For the investor, I think it’s better staying away from Turkey for the moment.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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