The future of the European Union and the dollar - LEVENT YILMAZ

The future of the European Union and the dollar

The European Union, whose future has been open to debate for some time, is currently going through a period in which may lead to one serious fracture on top of another. The budget problem with Italy and the increased risk of the U.K. leaving without agreement is making things harder. The likelihood of tension with especially the Italian government causing a "domino effect," triggering other countries experiencing similar problems, has also become one of the topics discussed on the table now. These two serious problems the EU is facing, while it is still inflicted with the impacts of the debt crisis it encountered after the 2008 Global Financial Crisis, are further slowing down the process.

As you will remember, previously the Greece crisis had become the main agenda topic of EU countries and the plan to save Greece had given European politicians quite the headache. Even though progress was made regarding Greece, it should be remembered that the process led to quite serious concerns regarding the view of the union. Meanwhile, looking at the likely impacts of Brexit and the size of the Italian economy, it can be seen that this time the situation has taken an even more critical state. Because, in a structure which the troubles of a relatively small and ineffective country like Greece have become such a big problem, a no-deal Brexit and Italy's situation can lead to many dire outcomes.

EU countries’ growth rates are slowing down too

Along with all these problems, EU member countries are also getting their share of the downward revised growth expectations as a result of the global economy-related anticipations. In the "World Economic Outlook Report" (WEO) October 2018 issue titled, "Challenges to Steady Growth," the International Monetary Fund's (IMF) had changed global growth expectations from 3.9 percent to 3.7 percent. In the same report, Germany, Spain, France, the U.K. and Italy's growth expectations were also revised downward. As can be seen, problems such as Brexit and the Italy budget and their likely effects stand out as elements to be followed closely, as the European economy is being dragged toward a slowdown period. On top of all this, while U.S. President Donald Trump putting the shelf Transatlantic Trade and Investment Partnership (TTIP) agreement, which was expected to provide great economic support for the EU, is still on minds, the likelihood of a new pressure on the EU by Trump, who became disturbed by French President Emmanuel Macron's "European Army" suggestion, is also rising.

What will happen to the course of the dollar?

The speculative attack we experienced in August increased our sensitivities regarding the dollar. Topics like the foreign exchange debt amounts of the private segments and the pressure of the exchange rate on inflation have led to a period in which we follow the exchange rate level a lot closer. Though we are focused on the matter from our angle only, the dollar is gaining power worldwide. If we look at the gradual interest rise period that is ongoing as a result of the U.S. Central Bank FED policies, it seems as though this trend will continue in 2019 too.

Even though from time to time there are slight downward movements in the dollar, whenever the FED takes a break from this gradual rises or reducing their number comes up on the agenda, taking into consideration the trend direction, the risks of global economy, the downward revisions in global economic growth rates, and regional risks, we are in a period which balancing is quite important. Meanwhile, we need to pay attention to technical data such as the Real Effective Exchange Rate (REER), through which we can follow our competitivity in export, rather than perceptive levels concerning the value of the Turkish Lira.


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