It’s Not All About US

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 3, 2017 3:08:02 PM

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USMost of my posts and media interviews lately have revolved around one country: the U.S. Today, we'll take a break from the “all U.S., all the time" show to look up at the rest of the world. It’s a big planet, with a lot going on.

There are a couple important reasons for doing this. First, with the U.S. economy looking solid, any major disruptive events will most likely come from abroad. Let’s keep an eye out for that bus so we don’t get blindsided (again). And second, although the Trump administration’s policies stand to have significant effects domestically, the impact outside the U.S. is already much larger than any we’re likely to see here.

In the short term, keep an eye on Europe

In the coming months, at least one event has the potential to shake global politics—and possibly global markets. The French presidential election could break up the eurozone and even the European Union, bringing back the central geopolitical problem of the 20th century. The odds are against a National Front victory, which would start that process, but in the aftermath of the Brexit vote and Donald Trump's election, we should be paying closer attention.

Elections in the Netherlands and possibly Italy—as well as an important but probably less globally consequential one in Germany—are also on tap. Simply put, the most troubled part of the world in the 20th century has a real possibility of entering a difficult period in the next year. 

U.S. policies could fuel European unrest

On a political level, President Trump’s statements have encouraged anti-European political movements. On a policy level, emerging U.S. positions on trade are placing core EU economies under greater stress. The U.S. seems to be moving away from its position as a force for stability in the region.

Arguably, European politics and economics are not the business of the U.S. But even if we take that stance, we will still have to deal with the consequences. In the short term, a breakup of the eurozone would rock world financial markets, hurting European economies and global growth. Longer term, a Europe at odds with itself and under significant economic stress might look a lot like the period between World War I and World War II, when collapses in trade and economic stagnation led to the rise of populist movements and, eventually, war. That may sound premature and even alarmist, but we’re already seeing those movements come back—and further stress would only encourage them.

Even in the absence of such a breakdown, a U.S. decoupling from Europe would inevitably mean less coordination between the two blocs. If Europe is paying for its own military, or is less reliant on trade with the U.S., it will have more freedom of action. As one example, what would happen if Germany decided its future lay with Russia rather than with the U.S. and Western Europe? That would radically change trade patterns, geopolitics, markets—essentially everything.

It’s happened before, so it could happen again. The more independent Europe becomes from the U.S., the more possible such a decision would be.

The importance of thinking ahead

There is no real chance this could happen in, say, the next three to five years. On the other hand, when we look at policy changes here in the U.S., we also have to think about the effects that could result elsewhere. We shouldn’t expect to change things here and have everything elsewhere in the world remain the same.

And we haven’t even considered Asia yet. With China rising and Japan starting to rearm, the risks there are every bit as large as in Europe. As the U.S. disengages, is the chance of a confrontation between Japan and China getting smaller or larger?

The U.S. is in a good place now and is likely to remain there for the near to medium-term future. But we shouldn’t just take that position for granted. We need to keep an eye on issues in the rest of the world. After all, it’s not all about us.

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