The highly touted trade truce between the US and Europe was political theater at its best. Europe will continue what it had been doing. With US soy being priced out of the Chinese market, the PRC import more soy from Brazil. European soy buyers may be displaced and may turn to the US. US soy faces no EU tariffs. Europe’s energy needs are growing, and it needs to import more liquid natural gas. While it is open to buying more US gas, Russia is more competitive. Moreover, as we mentioned when the deal was initially struck, the EC President Juncker may not have the authority to promise to buy more US soy or LNG as it is a decision state officials make.
In any event, for the US part, it will suspend the threat to impose tariffs on auto. It seemed like nearly everyone, but a few administration officials warned of disastrous consequences from such protectionism. The steel and aluminum tariffs stay in effect but could be addressed in new trade talks. For all the drama, we are back to status quo ante. The US and Europe had been engaged in extensive negotiations to ease tariff and non-tariff barriers to trade under the rubric of TTIP negotiations. If anything, the new round of free-trade talks might be a bit less ambitious than TTIP.
It is not sufficient for the US President to be a disruptive force. Part of his strategy is to facilitate others to defect from the multilateral system. Trump has tried cutting Mexico out of a new NAFTA. He tried getting Saudi Arabia to break from its OPEC agreement. Trump, for example, had reportedly offered France’s Macron a better trade deal than the EU. No matter what kind of deal the US could offer it would not be enough to get France to abandon its existential strategy of tying itself ever closer to Germany.
Trump may have a more receptive audience today. The Prime Minister of Italy’s populist-nationalist government Conte visits the White House. There seem to be three broad forces in the Italian government. The League, which is nationalist, headed by the firey Salvini, who fiercely anti-immigration and wants to register the Roma population. He appears itching the combat the EU.
Over the weekend, Salvini encouraged the UK to take a tough line in its negotiations with the EU, or he said risk being “swindled.” Salvini’s domestic agenda outside of immigration is a dramatic cut in income taxes. Although the League dropped the “Northern” in its name to appeal to the south part of Italy, income tax cuts appear to the richer north than the poorer south. To benefit from a cut in the income tax one needs to have income and a job.
The Five-Star Movement, led by Di Maio, heads the up larger of the two-party coalition. However, Di Maio is not as combative as Salvini and offers a less dramatic public persona. Although the MS5 is looking around to build its agenda, Di Maio is strongly advocating a new transfer payment scheme that is not linked to past employment, but no a universal basic income either.
There have already been some disagreements within the two-party coalition and going forward there will likely be more sparks and friction. Finance Minster Tria seems to be part a third force within the government. He is more committed to Europe and also appears to recognize the need for structural changes in Italy. It is tempting to put the Prime Minister in this camp as well. However, Conte has seen weak prime minister given the leaders of the coalition partners are in the cabinet and are Deputy Prime Ministers. Conte may make a virtue out of necessity by seeing his role as helping give expression to the government itself rather than being an opinion-maker in his own right.
Trump may find a sympathetic ear for his call to re-invite Russia into the G7. Russia has been excluded since its annexation of Crimea. Although Trump stopped short of recognizing Crimea is part of Russia, he seemed sympathetic to the desire for a sphere of influence and also mused about whether Article 5 of the NATO Treaty, which has been invoked exactly once since the agreement and that was after 9/11 is in the US interest. For various reasons, Italy is often more sympathetic to Russia than many other west European countries, and Conte also was willing to have Russia back at the G7 meetings.
Conte may seek Trump’s support for a dispute with France over Libya. Macron is pushing for early elections (December 10) in Libya. Rival Libyan leaders have agreed to hold elections before year-end, but it is not clear. Italy sees the election as the end result of the reconciliation process. Italy and France also have clashed over dealing with the migrants and refugees fleeing Libya.
Many investors remain wary of Italy. The 10-year bond has held its own. The yield has risen 11 bp this month to 2.78%. The increase is a single basis point more than Spain, and three basis points less than Germany. However, the two-year yield shows more strain. The yield has risen 12 bp this month (to 78 bp) compared with a 9 bp increase in Germany (-60 bp) and a seven basis point fall in Spain (-32 bp) and a four basis point decline in Portugal (to -21 bp). The FTSE Milan Index has also underperformed. It is up 1.4% over the past month. The DAX has risen 4.1%, France 3.3%, and Spain 2.2%. Italy’s bank share index has risen 3.6% this month. It is the second monthly gain, the first back-to-back monthly gains since March-April 2017. That said, it is still off about 5% since the end of last year.