Key Trends for the Quarter
Don't Expect Brexit in the Third Quarter
The ongoing political crisis in the United Kingdom will escalate, but it will not lead to a disorderly Brexit in the third quarter. Several time-consuming developments will prevent the country from leaving the European Union without a deal in the next three months. First, the governing Conservative Party will have to appoint a new leader and prime minister. Even a hard-line prime minister will first try to negotiate an orderly Brexit with Brussels before making any unilateral moves. Second, the British Parliament's summer recess will delay any crucial decisions about Brexit.
While a hard-line leader would increase the chances of a no-deal Brexit in October, the House of Commons will retain the option of a no-confidence vote if a no-deal Brexit looks imminent. Holding an early general election won't be a priority for the new prime minister, but it could become a last resort later in the year to end the parliamentary stalemate. For its part, the European Union will remain united in its support for a deal that keeps the border between Ireland and Northern Ireland open, which reduces the chances of an agreement with London. But debates among member states over whether to grant the United Kingdom another extension will reemerge as the October deadline approaches. Find out what a no-deal Brexit would look like in this Stratfor analysis.
Italy Remains a Hotbed of Political and Economic Risk
Italy will be the main source of political and financial risk in the eurozone this quarter. Rome will face external pressure — from financial markets, credit rating agencies and Brussels — to reduce its deficit. While the Italian government will be willing to introduce some cosmetic measures to reduce public spending and increase state revenue, it will not completely sacrifice its fiscal expansion plans. This will raise questions about the sustainability of Italy's fiscal policies and the resilience of the Italian banking sector. Relations with the EU Commission will remain tense, but Brussels is unlikely to implement sanctions during the quarter.
The League, one of Italy's ruling coalition partners, will push to increase its control of the government, moving ahead with its policy agenda — which includes tax cuts, large infrastructure projects and tougher law and order policies. This will lead to disputes with its partner, the Five Star Movement. The coalition will remain together but exist on the constant verge of collapse. Doubts about Italy's financial and political future will rattle markets at a time when Brexit risk and uncertainty about global trade weigh heavily on eurozone growth, even if a full-on financial crisis is unlikely during the quarter. Northern European countries will use the situation in Italy as a pretext to resist, or at least soften, proposals to increase financial risk-sharing and increase public spending in the currency area. Learn more about the implications of Italy's policies for the broader eurozone here.
The Battle for Political Dominance in the European Union
The appointment of new leaders to key Continental institutions — including the European Commission and the European Central Bank (ECB) — will exacerbate geographic and ideological competition within the bloc. Northern Europe will push for the next commission to focus on issues such as trade, competition and immigration, while Southern Europe will want it to focus on greater public spending and improved eurozone integration. The battle for the ECB will be contentious, pitting countries that defend a continuation of the expansionary policies that were introduced by the current presidency against those advocating for a more conservative approach to monetary policy.
The so-called "Spitzenkandidat" mechanism will be abandoned this quarter. Germany and France will reach a compromise to distribute power within the union through a political negotiation in which a southern-backed candidate will probably head the commission and a northern-backed candidate will govern the ECB — though negotiations over the latter could extend beyond the third quarter. This will open the door for individuals from smaller EU member states to obtain key positions, serving as proxies for Germany and France. To learn more about all the EU institutional battles this year, click here.
U.S.-Europe Trade Talks Heat Up
Trade negotiations between the United States and the European Union will continue, but they won't result in a comprehensive deal during the quarter. Negotiators will spend significant time simply discussing the scope of the agreement. The obstacles to a deal will include Washington's push to include agricultural products, which the European Union will oppose, as well as the bloc's demand that the United States withdraw its threat to impose higher tariffs on European automobiles. On auto tariffs, Washington will probably avoid doing anything before the expiration of a November deadline the White House gave Brussels to reduce its auto exports. Complicating things further, EU-U.S. negotiations will be led by an EU Commission that is in the final weeks of its mandate, meaning that the most crucial decisions will probably be left to the new commission, which should take over around October.
In addition, a new round of higher American tariffs on EU products, which the bloc expects to enter force in July or August as a result of a World Trade Organization (WTO) dispute over European subsidies to Airbus, will worsen the negotiating environment, reducing the likelihood of an agreement. The sides will not reach a comprehensive trade deal during the quarter, but there will be room for progress on the harmonization of EU-U.S. regulations for specific industrial sectors. To learn more about the obstacles to a U.S.-EU trade deal, read Stratfor's assessment on the state of negotiations.
Key Dates to Watch
- June: The Eurogroup will make decisions on the European Deposit Insurance Scheme and the new eurozone budget.
- June 20-21: The European Council will meet. The bloc is expected to adopt its new five-year strategic agenda and could decide on the next EU Commission president.
- June 29: Outgoing European Commission President Jean-Claude Juncker will meet U.S. President Donald Trump at the G-20 summit in Osaka, Japan.
- July 2: The new European Parliament will be officially inaugurated.
- July 7: Greece will hold a general election.
- July 8-9: The Eurogroup will meet, while the European Council could make a decision about whether to implement an excessive deficit procedure against Italy.
- Week of July 22: The British Conservative Party will announce the winner of its leadership contest.
- July 31: EU economic sanctions on Russia will expire.
- July or August: The EU expects the U.S. to introduce retaliatory measures on EU products because of a WTO dispute over Airbus subsidies.
- Aug. 9: Ratings agency Fitch is expected to publish its updated assessment on Italy.
- Aug. 25: The G-7 will hold a leaders' summit in Biarritz, France.
- September: Austria will hold a general election.
- Sept. 6: Ratings agency Moody's will publish its assessment on Italy.
- Sept. 21: The British Labour Party will convene a conference.
- Sept. 29: The British Conservative Party will hold a conference.