2018 fourth-quarter forecast

Sep 9, 2018 | 21:23 GMT

5 mins read

Europe

To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.

Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
(canadastock/Shutterstock.com)

Key Trends for the Quarter

EU-U.S. Trade Frictions in the Offing

The European Union will continue negotiations with the United States to end non-auto industrial duties with an eye to ultimately eliminate the threat of higher American vehicle tariffs. But if the White House pushes to include agriculture in the trade talks, as expected, friction will grow between Berlin, which wants to preserve its valuable exports to the United States, and France, which wishes to protect its agricultural sector from American competition. In such a dispute, countries with large agricultural sectors — such as Italy — would side with France. Even if Brussels bows to U.S. pressure and agrees to open up agriculture to discussion, the European Union is unlikely to approve a deal that affects the sector. And if the United States introduces trade measures against the European Union, Brussels will respond immediately with its own tariffs. Discover more about the trade disputes between the European Union and the United States.

A chart showing EU car exports to the U.S. by country, for 2016.

Italy Creates Risks for the Eurozone

Italy will present a budget and fiscal and pension reforms that will increase its deficit, originally expected to reduce from 1.6 to 0.8 percent of gross domestic product in 2019. The measures will concern markets already worried about the sustainability of Italy's debt. Pressure from financial markets could persuade Rome to moderate its plans and keep the deficit within the 3 percent limit established by the European Union, but the mere change of policy direction from deficit reduction to deficit increase could induce market volatility. The European Commission will demand that Italy enact corrective measures, but Rome is spoiling for a fight — and a long one, at that. Italy's membership in the eurozone will remain secure throughout the quarter, but uncertainty about its future will continue. And now that economic growth and inflation have returned to the eurozone, the European Central Bank plans to end its bond-buying quantitative easing program by the end of the year. However, risks associated with Italy, Brexit and Turkey will compel the bank to proceed slowly with monetary tightening as 2019 begins. Read our assessment about how Italy's new government is challenging the European Union.

Crunch Time for Brexit Negotiations

Political leaders in the European Union and United Kingdom will replace technical negotiators in an effort to avoid a no-deal Brexit. A withdrawal agreement establishing the legal terms of the United Kingdom's exit from the European Union is possible during the quarter, since both want to minimize economic disruptions and introduce a transition between March 2019 and December 2020. Less likely, however, is a comprehensive agreement detailing their future trade ties, as Brussels and London have different visions of their relations (a vaguer declaration of intent is possible). The withdrawal agreement will face two main hurdles. The first is the British government, as hard-liners unwilling to make concessions to the European Union could oust the vulnerable prime minister, Theresa May. The second is the British Parliament, which is internally divided and could vote against a deal. If London and Brussels fail to reach a withdrawal agreement by the end of 2018 — or if the British Parliament votes against an agreement — the parties could still salvage a deal in early 2019, but the chances of a no-deal Brexit would be much higher. Delve more into the chaos surrounding the United Kingdom's exit from the European Union with one of our recent assessments.

Make the EU Great Again

France will push to implement its proposals for EU reform but will face a Continental bloc that is focused on more urgent issues (such as trade disputes and Brexit). France will also face resistance from Northern Europe. Ideas to increase investment or strengthen the bloc's ability to handle financial crises could find approval, albeit in a gradual manner. Nevertheless, plans to increase financial risk-sharing, such as a common deposit guarantee for eurozone banks, will likely be postponed. At France's behest, a group of countries may even take steps to harmonize the corporate tax base across the union, but an EU-wide agreement is unlikely. Paris and Berlin will take the lead in a debate on ways to increase the European Union's strategic autonomy on issues such as defense, finance and energy, though the process will take years. The European Union will also debate whether to create a European Monetary Fund and reach decisions regarding foreign policy, defense and security by majority voting rather than unanimity, but these talks are still at an early stage. See our assessment about how the European Union is making a bigger push for strategic autonomy.

Related Forecasts

These Stratfor analyses provide additional insights for the Quarter

Key Dates to Watch

 

  • Sept. 20: The European Union meets to discuss immigration and Brexit.
  • Sept. 27: Italy releases its economic and financial document.
  • Sept. 30: Macedonians vote in a referendum on whether to change the country's name.
  • Oct. 15: EU members present their draft budgets to the European Commission.
  • Oct. 18: The European Council meets to discuss Brexit and EU reform.
  • Late October: S&P and Moody's review Italy's credit rating.
  • Dec. 13-14: The European Council convenes once more regarding Brexit and EU reform.

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