The EU Could Collapse if Germany and France Don’t Step Up
The Dow Jones Industrial Average (DJIA), the NASDAQ, and the S&P 500 remain bullish as investors hang their hopes on U.S. President-elect Donald Trump’s planned tax cuts, infrastructure spending, and reduced regulations.
But the bull market in the United States, the world’s biggest economy, could be in jeopardy as the European Union (EU), the world’s biggest economic region, is on the verge of collapsing.
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French Prime Minister Manuel Valls said recently that the EU is in danger of collapsing unless Germany and France, the economic backbone of the EU, start showing signs of sustainable growth. (Source: “Europe at risk of collapse, claims French Prime Minister Manuel Valls,” Independent, November 17, 2016.)
In light of Britain seeking to negotiate its exit with the EU, Valls said France needs to open up its economy while Germany needs to increase investment to stimulate growth and job creation. All of which has been sorely lacking in the EU.
In the third quarter, the eurozone’s economy increased a paltry 0.3%. The European Commission cut its gross domestic product (GDP) forecasts for the eurozone on fears of political uncertainty and global trade. In 2016, the eurozone’s GDP is projected to grow 1.7% and fall 1.5% in 2017. In 2015, it climbed two percent. (Source: “Economic Forecast,” European Commission, November 9, 2016.)
The European Commission is not the only one skeptical about of growth in the eurozone. The International Monetary Fund (IMF) expects GDP to climb 1.6% this year and fall to 1.4% in 2017. (Source: “World Economic Outlook,” International Monetary Fund, July 19, 2016.)
Germany, the strongest economy in the EU, has been reporting consistently weak GDP data. In the third quarter, Germany’s GDP advanced 0.2%, its weakest pace in a year, and half of what it reported in the second quarter. (Source: “Gross domestic product up 0.2% in the 3rd quarter of 2016,” Statistisches Bundesamt, November 15, 2016.)
Germany’s economy is projected to grow just 1.6% in 2016 and fall to 1.2% in 2017. Fears about Trump’s protectionism and the U.K.’s exit from the EU could put a serious dent in Germany’s exports in 2017. In 2015, the U.S. was Germany’s biggest trading partner, and the U.K is now in its place.
France, the second-biggest economy in the EU, managed to report economic growth in the third quarter, but it wasn’t anything spectacular. The mainstream media has pointed out that France’s GDP doubled in the third quarter, but that’s the joy of math.
France’s GDP increased 0.2% in the third quarter, lower than projected, but up from 0.1% in the second quarter. This is going to make it pretty difficult for France to reach the government’s GDP growth target of 1.5% this year. To reach that goal, France would have needed to report third-quarter GDP growth of 1.2%. (Source: “French GDP increased by 0.2% in Q3 2016,” National Institute of Statistics and Economic Studies, October 28, 2016.)
U.S. Bull Market in Serious Jeopardy
A collapse of the EU would wreak havoc on U.S. stocks. That’s because S&P 500 companies generate half of their revenue domestically. Or, put another way, S&P 500 companies rely on foreign revenue as much as they do domestic.
With the new Trump presidency, chances are good that many of the United States’ biggest economic partners will need to renegotiate trade deals. And no one wants to lose out trading with the most powerful economy in the world.
To get a small feel for the shape of things to come, let’s look at how companies on the Dow Jones Industrial Average did during the third quarter in Europe. Granted, this data is from before the U.S. election, but it does include sentiment about a post-Brexit Europe.
Overall, 11 of the 30 companies in the Dow Jones Industrial Average provided revenue data for Europe in the third quarter. Of these, seven reported a year-over-year decline in sales. This number is higher than the six that reported a year-over-year decline in revenue in the second quarter. (Source: “Key Metrics,” Factset.com, November 18, 2016.)
Admittedly, Brexit was not the biggest topic of concern, with just six of the 11 companies mentioning it in their earnings calls. That said, it’s important to note that for four of the seven Dow Jones companies, this was, at least, the third consecutive quarter of year-over-year declines in revenues from Europe. And frankly, there is more to worry about when it comes to the health of the European economy that just the Brexit issue.
Keep in mind, the U.K. may have a big impact on the eurozone, with its $3.0-trillion economy, but it’s pretty small when compared to a U.S. economy worth $19.0 trillion. Suffice it to say, the economic impact of the U.S. on the European economy is massive compared to the impact of the U.K.
The trickle-down effect of Trump’s trade policies could deal a serious blow to countries like France and Germany. This will negatively impact revenue and earnings for companies in the Dow Jones Industrial Average and the S&P 500, and put the geriatric bull market in jeopardy in 2017.
