Euro and European Stocks Under Pressure as Trade Tensions Rise

The euro and European stocks are
under pressure as attention on trade shifts to Europe. Late last week, the
commerce department submitted a report on European autos to the White House.
The report was commissioned by the president with the goal of investigating
whether the European autos posed a national threat to the United States. This
came shortly after the US president met with EUs Jean-Claude Juncker.

In the past, American presidents
have tried to cultivate a close relationship with Europe. This is mainly due to
the trans-Atlantic alliance formed after the end of the second world war to
prevent more wars. The European Union is a close member of NATO of which the US
provides most of the funds. The two sides pride themselves as the leading
promoters of democracy around the world.

However, under Donald Trump, the
relationship has been strained. This is because the US president has always
reveled against the idea of the European Union. He was also a key supporter of
Brexit, when the United Kingdom decided to leave the union. Trump believes that
the European Union was created for the goal of countering the US influence.

He also believes that the EU
takes advantage of the United States. He has argued that the region has failed
to meet the required defense spending threshold, even as the United States
continues to ramp up spending. He has also pointed to the high tariffs the
region has put in place for American exports like cars. For example, American
automobiles going to the union receive a tariff of 25% while those entering the
US receive a tariff of below 2%.

While the report from the
commerce department has not been made public, there is a likelihood that it
will recommend more tariffs on European cars. This could have major
implications for the relations of the two countries. It could also have major
implications on the trade. Estimates believe that EU auto tariffs would cost
the region more than $10 billion a year. The US too may be affected because it
continues to host a number of European manufacturers. For example, the biggest
BMW plant is located in South Carolina.

These challenges come at a time
when the European economy is facing a challenging period. Germany, its biggest
economy, recently avoided a technical recession in the fourth quarter. Its
factory orders and exports declined while the industrial production declined
for the fourth consecutive month. In the same month, retail sales declined by
the fastest rate in 11 years. At the same time, business executives have
continued to be more pessimistic as evidenced by the IFO climate data that fell
to the lowest level in three years. The same trend has been seen in other
countries like Italy, which is in recession and Spain which is facing some
political pressure.

The uncertainty in Europe has led
to the slowdown in euro and a sluggish growth in stocks. The chart below shows
the performance of the euro and the Stoxx index. While the Stoxx has made some
gains, it still trails the performance of comparable indices like the Dow and
the S&P 500.

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