From NZZ's The Market.ch, March 4:
«This War Comes at a Bad Time for Europe’s Economy»
Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex, talks about the economic consequences of the Russian invasion into Ukraine, the risks to the financial system caused by the sanctions, and the controversial role of the dollar as the world’s reserve currency.
The war in Ukraine is keeping the world on edge. Stock markets are experiencing a high degree of volatility, while commodity prices are rising sharply. As is usually the case in times of crisis, investors reflexively seek safety in government bonds and the dollar.
«The world wasn’t headed in a good place before Russia’s invasion of Ukraine, and Russia’s attack doesn’t put us on a better road,» says Marc Chandler, Managing Partner and Chief Market Strategist at Bannockburn Global Forex.In his view, Europe in particular is in a tough spot, with the economy cooling while inflation remains stubbornly high. The military conflict in Eastern Europe and the rapid rise in energy prices are exacerbating this problem.
In this in-depth interview with The Market/NZZ, which has been lightly edited and condensed for clarity, the foreign exchange specialist with more than thirty years of market experience comments on the impact of the war on the balance of power among the major economies, on possible risks to the global financial system caused by the tough sanctions against Russia, and on the dollar’s controversial role as the world’s reserve currency.
Mr. Chandler, it has now been a good week since the war broke out in Ukraine. How do you assess current developments?
Russia’s invasion of Ukraine and the global response is a game-changer. Putin is able to achieve what many U.S. presidents have failed to do: Reinvigorate NATO, get Finland and Sweden to think about joining. Europe is boosting its spending on defense. Bush, Obama, and Trump all failed to achieve that. Think about what happened when Trump was President: He was talking about pulling out of NATO, reducing U.S. troops in Europe, cutting off weapons sales to Ukraine. But now, we are at a point where NATO is getting stronger and more unified. Much to Putin’s surprise, Pax Americana is probably as strong as it has been in decades.
On an economic level, America and Europe are imposing tough sanctions on Russia almost without precedent. What are the consequences?
It’s not just about what it means for Russia. If I’m sitting in Beijing right now, and I’m looking at what’s happening in Ukraine, I’m thinking that the cost for me to take Taiwan just went up. The financial sanctions are incredible: Freezing central bank assets, sanctioning major banks, and going after the oligarchs. Even a neutral country like Switzerland is committing to freeze some of those assets. Of course, the Chinese have to be watching carefully how the U.S. and the West in general respond to Russia’s attack on Ukraine.
Thus, China seems to be extremely anxious to stay out of this conflict.
Russia has very few friends, besides Belarus which it owns. Maybe Russia thought they could play the China card against the U.S: China is going to get us out of some of these crippling sanctions. But even China is distancing itself. This week, it didn’t veto the UN resolution against the Ukraine invasion, but it abstained. Chinese banks don’t want to be sanctioned by the U.S. either. They want to have access to the dollar market. Also, from a business point of view: As a counterparty, Russia’s credit rating has just been downgraded to junk, they probably don’t even make their payments. Several Chinese banks have said that they are going to stop financing commodity trades with Russia. So China is doing this big push to boost its steel output for infrastructure, and they say they might not buy any more Russian coal.
The price of coal has experienced another strong boost in recent days, as have oil and gas prices. What impact will the war in Ukraine have on the European economy?
It’s not a surprise that the Euro falls to the levels we haven’t seen since the pandemic first struck. Europe is in a difficult position. Think about a scissor. It has two blades: One is inflation, the other is growth. Europe is going to get cut by both of them. Inflation is likely going to be higher, and we’re going to see slower growth. So this war comes at a bad time.
What exactly is the impact of this crisis on the European economy?....
....MUCH MORE
