News of Turkey’s plans to conduct comprehensive tests of the Russian-made S-400 air defense system has added to the country’s economic pains and is helping send the Turkish currency to a record low against the US dollar.

Washington Warns Turkey Against Activating the S-400s

According to Bloomberg, Turkey will test the advanced missile system next week at a site in Sinop province on the Black Sea coast. The news immediately drew fire from Washington, which warned Turkey against testing the Russian missiles.

Washington and its allies are worried that the S-400 system will enable Russia to gather intelligence about NATO’s air defense capabilities, specifically the US-made stealthy F-35 fighter jet.

The S-400s, known in Moscow as the “F-35 killer,” are considered the most modern long and medium-range surface-to-air missile system. The missiles can engage targets at a range of up to 400 kilometres, up to six times the speed of light, at heights of up to 30 kilometres. The S-400s can also launch 40N6 missiles (long-range, hypersonic, surface-to-air missiles) to engage low maneuverable aerodynamic targets.

Turkey’s Decision to Buy the S-400 Missile System from Russia

The government of Recep Tayyip Erdogan moved to buy the Russian missile system after the US hesitated to provide Turkey with the Patriot air defense system. As the first equipment of the Russian system arrived in Turkey last year, the Trump administration kicked Ankara out of its F-35 program, in which Turkey was a manufacturer and buyer.

The US also threatened to impose economic sanctions on Turkey if it deployed and activated the Russian-made S-400s, but has not yet imposed these measures.

“We continue to object strenuously to Turkey’s purchase of the S-400 air defense system, and are deeply concerned with reports that Turkey is continuing its efforts to bring the S-400 into operation,” a spokesman for the State department said. “We continue to stress at the highest levels that the S-400 transaction remains a major obstacle in the bilateral relationship and at NATO, as well as a risk for potential CAATSA sanctions.”

Ankara reportedly tested the S-400’s communications systems by scrambling the US-made F-16s last year, in a move seen by Washington and its allies as hostile to the NATO members.

The Turkish Lira Takes a Nosedive

As tension mounted over the planned test of the S-400 system, the Turkish lira plunged into a historic low on Thursday, registering 7.9 lira against US dollar. The drop was the latest in more than two years of continuing depreciation of the Turkish currency amid military tensions between Turkey and its neighbors.

In 2018, Turkey’s relations with Washington further nosedived over the detention of Pastor Andrew Brunson on terrorism charges, with the Trump administration imposing devastating economic sanctions on Ankara. These sanctions have caused the lira to plunge and forced Turkey’s economy into recession.

Turkey has been considered among the riskiest emerging markets in recent years. The Turkish economy is categorized as one of the fragile five, along with India, Brazil, South Africa and Indonesia, mainly due to the country’s large current-account deficits.

Ankara’s Growing Foreign Trade Deficit and Rising Unemployment

According to the Turkish Statistics Institute, Turkey’s foreign trade deficit leapt 168.2% year-on-year in August to $6.278 billion under the general trade system. Exports fell 5.7% and imports jumped 20.4% compared with August 2019. Turkey’s annual consumer price inflation rate registered 11.75% last month and the unemployment rate climbed to 13.4% in the three months to July.

Turkey has long survived by attracting strong capital inflows, prompting strong credit expansion which in turn encourages economic growth. But this virtuous cycle turns vicious in bad times, dragging the lira to the brink.

Erdogan’s political and military adventures have also contributed to the country’s economic woes. On the political scene, Turkey has had at least one election every year except 2016. There were local elections in 2014, two general elections in 2015, a referendum on the government system in 2017, general and parliamentary elections in 2018, and local elections in 2019. This has put continuous pressure on the authorities to spend money and keep stimulating the economy with interest rates low enough to encourage more borrowing.

Turkey’s Numerous Military Engagements

On the military side, Turkey is involved in several conflicts in its neighborhoods. The Turkish army is conducting military operations in neighboring Syria, Iraq as well as Libya, where Ankara is supporting the Tripoli-based Government of National Accord. Turkey is also engaged in a heated standoff with NATO members Greece and France over gas exploration rights in the eastern Mediterranean. Ankara also supports Azerbaijan in its military conflict with Armenia over the disputed region of Nagorno-Karabakh.

Last month, Turkey’s central bank defied pressure by Erdogan to keep the interest rate low, raising the rate from 8.25% to 10.25% in an attempt to strengthen the lira against the US currency.

But as the central bank is facing mounting pressures from Erdogan not to raise the interest rate in order to help curb inflation and amid the ongoing Turkish military disputes with neighbors, the Turkish currency is expected to bleed more in the coming weeks.

L'articolo Will the S-400 Missile System Be the ‘Death Knell’ for Turkey’s Economy? proviene da InsideOver.

As the coronavirus continues to impact upon the global economy, the President of the European Central Bank (ECB) Christine Lagarde has launched an emergency €750 billion package to ease the impact of the pandemic. It will buy government and company debt across the eurozone, including the troubled member states of Italy and Greece.

Details of the ECB Package

However, it will only be a short-term asset-purchasing scheme and it will end once the ECB determines that the Covid-19 crisis phase is over. Furthermore, the US Federal Reserve stated it would cooperate with other central banks to boost the availability of dollars for commercial banks. This is an important tool that was used to preserve stability during the 2008-09 financial crisis.

What Motivated the ECB’s Decision?

The ECB President’s actions have been motivated purely by politics. Lagarde said herself that “there are no limits to her commitment to the Euro.” The ECB is restricted to purchasing up to 33 percent of a member state’s debts, which shows that the central bank is willing to smash its own fiscal rules in order to preserve the single currency.

Before Covid-19 spread throughout the globe, many journalists were anticipating that Italy would crash out of the Eurozone at some point. The ECB President’s latest move shows that she will not let a global pandemic destroy the Euro by buying not only Italy’s debts, but Greece’s, too.

Even the Daily Telegraph’s Jeremy Warner writes that many EU member states have spent so much political capital on the European Monetary Union (EMU) that policymakers are determined to prevent the coronavirus from destroying the eurozone, even if that means the single currency has to stagger on.

The reality is that the EU is doing everything it can to minimize the impact a recession is going to have on the European economy. The Organization for Economic Cooperation and Development (OECD) slashed the Eurozone’s growth rate to 0.8 per cent from 1.2 per cent earlier this month.

European Commission President Ursula von der Leyen has promised “maximum flexibility” in the implementation of state rules and the Stability and Growth Pact. In addition, member states are holding on to €8 billion of unspent funds that would be redirected to urgent needs related to the pandemic, which could potentially unleash €37 billion.

No Guarantees That the Eurzone Will Survive Post-Coronavirus

But this stimulus will not solve the eurozone’s problems in the future. As Doug Holtz-Eakin, the President of the American Action Forum and a former top economic adviser to George W. Bush and John McCain, told NY Mag when discussing the same situation in America, there is no evidence that supply shocks can be fixed through fiscal stimulus. Demand is likely to rise sharply once the number of Covid-19 cases drops over time, and that will boost economic activity. Fiscal measures only increase debt in the longer term, which will not help any European states when this is over.

Many EU members know that the financial consequences of tearing apart the Eurozone will be catastrophic. Martin Wolf of the Irish Times stated that the single currency can survive through the creation of cross-border finance and it must be easier for Eurozone states to restructure debt. Banking and capital unions are vital to ensure the single currency survives. Of course, all single currency members would need to agree with each other that this needs to happen, and the current climate might persuade many nations to adopt measures that can preserve the Euro’s existence.

Nonetheless, the Eurozone’s survival beyond the coronavirus is not guaranteed. It will require a tremendous amount of political will to persuade all Eurozone states to strengthen the mechanisms necessary to secure the single currency’s future. It remains yet to be seen whether that will happen or not.

L'articolo Will Lagarde’s ECB Stimulus Ease the Coronavirus’s Economic Impact? proviene da InsideOver.

From the US, policy of no limit to prosperity and broadly shared prosperity to the era of import tariffs imposed by US President Donald Trump on China, Brazil, and Argentina indicate that the US is hell-bent on rattling the global economy for its benefits. US President Donald Trump announced that a trade agreement with China might have to wait until the US presidential election in November 2020, which means the trade war could drag on until 2021. The US president’s quote “I have no deadline” has dashed all hopes of a solution to the trade dispute that has severely impacted the global economy. In the hope of a deal, investors pumped billions of dollars in the share market, but Trump’s quote came as a rude shock to the investor’s community across the globe. With Trump’s comments, European share prices, US stock futures, and the Chinese Yuan currency fell, causing jitters in the business community.

According to some economists, Trump’s comments might be a ploy to gain an upper hand in the negotiations and compel China to toe the US line. Reportedly, China and the US have made progress in the trade deal, but the deal is stuck on whether existing US tariffs will be removed and over the quantum of Chinese purchases of US agricultural products as part of a “phase one” trade deal. The Chinese side believes that President Trump needs an agreement before the end of the year due to the presidential election.

Impact of the trade war

Both developed and developing nations are feeling the pain of the trade war. A developed economy, such as Iceland, which is dependent on tourism, is witnessing a drastic reduction in tourist arrival since the crisis. European countries that are open to trade and rely on exports are feeling the heat of the trade war.

The German economy, which gains maximum from exports, is on the verge of recession. Uncertainty in the business community is prevailing across the globe. Many companies are scaling back their investment plans, something that will have repercussions for years to come.

Trade links between countries have led to prosperity and a more peaceful world. Even the United States hasn’t been immune from the impact of the trade wars. American farmers have been hurt by Chinese retaliatory tariffs on US agricultural products, compelling the Trump administration to shell out billions for farmers’ aid. According to economists, businesses in China have passed on almost all tariffs’ costs to American importers. But retailers in America are absorbing at least some of the duties, rather than passing the entire cost on to their customers. It shows that American businesses have had less success in passing on the values of tariffs to Chinese importers because of the types of goods being sold. The types of specialized consumer goods, like laptops and smartphones, that China exports to the United States are difficult to substitute, while China can easily swap Brazilian soybeans for American ones.

On the flip side, the trade war has resulted in gold prices going up with investors reposing faith on safe-haven assets. The trade tensions are helping the African nations to create a more self-reliant continent. India has emerged as a frontrunner for US giants, such as Apple and Microsoft, to expand their bases due to growing pressure on US companies to shift their headquarters from China. The trade war has also offered India an opportunity to lure firms to use the country as an exporting base.

Talking to InsideOver, Dr SP Sharma, Chief Economist, PHD Chamber of Commerce and Industry (PHDCCI) said that the trade war has impacted 0.8 per cent of the global economy, i.e., USD 700 billion, and the trade war should end at the earliest. Dr Sharma added that the U.S. President Trump’s quote is merely an election gimmick. Elections are around the corner in the US; in the tussle with China, Trump would not like to do anything that would harm the US or the global economy. Other economists, too, echoed the same opinion and added that in cases of dialogues with North Korea and Taliban, Trump earlier had rebuked both of them but later on joined the negotiation table.

L'articolo How Will a Trade Deal after the US Presidential Election Affect Global Trade? proviene da InsideOver.

Following US President Donald Trump’s announcement of more tariffs on Chinese products, Beijing took the rare measure of devaluing its currency. The yuan slipped to 7.0136 on Friday after falling to 7.0039 on Thursday. This week marked the first time since 2008 that the Chinese yuan crossed the threshold of seven per dollar, an event that inspired global markets to slide downward. The People’s Bank of China (PBOC) sets a midpoint each day before the markets open and allow the currency to be traded against the dollar within two percent of that specified value.

Since the beginning of the trade war between Beijing and Washington, the yuan has fallen 11 percent compared to the dollar, although it is still up 3.7 percent since 2008. As it is the second-largest economy in the world and holds nearly 25-percent of the US national debt, any action from China on the value of its currency is sure to come under intense scrutiny. This week, however, the effect was magnified in light of the ongoing trade war. Consequently, the US Treasury Department labeled China a “currency manipulator.” How these two events – the devaluation and subsequent accusation of currency manipulation – impact global trade remains to be seen, but there are some likely scenarios which may play out.

Devalued

China’s currency is traditionally strictly managed as are all aspects of the Chinese economy including foreign investment and trade. Historically, the yuan is also a very stable currency and seldomly experiences great fluctuations. This week’s devaluation of a less than two-tenths of a yuan caused minor pandemonium, a sign of its rarity. The PBOC undoubtably decided to let the yuan slide due to the prolonged trade war and in doing so, will likely influence its trading partners.

Firstly, the currency devaluation was interpreted by other governments as a sign that the US-China trade war will not end anytime soon. Therefore, other nations have rushed to protect their own economies, mainly by lowering interest rates. Banks in India, New Zealand, and Thailand all took this action on Wednesday.

Secondly, a weaker yuan makes Chinese exports more attractive for its trade partners. Trump has often accused Beijing of intentionally keeping the currency weak to the dollar in order to gain an unfair economic advantage, but many economists have argued that it has actually been priced properly in recent years and, given the current trade war, should start to weaken.

Perhaps most importantly for Beijing, the currency devaluation will help offset the negative effects of tariffs. Because goods from China will now in theory be slightly cheaper, the 25-percent tariffs begin to lose their effect. As the currency slides lower, so does the amount levied against imported products. With cheaper products, the dollar has more buying power in China, making Chinese products once again attractive to US importers, even with the tariffs. This puts pressure on American manufacturers to cut their prices in order to win business which would otherwise go to Beijing.

Manipulation

Almost immediately after the PBOC began devaluing the yuan, the US Treasury Department designated it as a currency manipulator for the first time in nearly 30 years.

“This is a major violation which will greatly weaken China over time,” Trump tweeted. According to a Treasury Department statement, it is currently working with the International Monetary Fund (IMF) to resolve the issue, and it presumably hopes to see some sort of punishment against Beijing.

A former head of the China IMF thinks that this is unlikely to happen, however, and that the US is in the wrong.

“This is an extraordinary action of hostility against a major trading partner, with little economic basis and again driven mostly by presidential whims,” said Eswar Prasad, who is also a Cornell University economist.

The labeling of China as currency manipulator could pave the way for further action from the US government. During his campaign for president, Trump often accused China of manipulating its currency and now he finally has that officially declared by his government and can use it as leverage for securing more sanctions or protectionist strategies for US goods. The label also gives Trump something he can bargain with by telling Beijing diplomats that he will get the classification removed if they make economic concessions on their end.

Just the Beginning

This week was possibly just the beginning of China’s new strategy on its currency. It could continue to let it slide, possibly approaching even 8 yuan per dollar. According to the PBOC, the drop was due to “trade protectionism” and given the unending nature of the trade war, its foreseeable that more protectionism might be necessary in the coming weeks and months ahead. The US stock market just experienced its worst week of the year, a sign that global trade issues are beginning to sting. While Trump came into office with a rather strong economy from his predecessor and experienced even more growth under his tenure, economists have been warning about another possible recession. China might be the tipping point towards that eventuality.

L'articolo China Labeled a Currency Manipulator for Devaluing Yuan proviene da InsideOver.