Thread by @bopinion

This is a reminder to Christine Lagarde of a harsh truth: The euro zone is in danger of becoming the biggest collateral victim of the U.S.-China trade war.

.@FerdiGiugliano says she’ll need all her political skills to escape the threat of recession bloom.bg/31FoaE2

https://twitter.com/economics/status/1161524873749024768

@FerdiGiugliano The euro zone is uniquely vulnerable to any blockages in international trade.

Exports account for a much greater share of its GDP compared to other regions:

🇪🇺Euro Zone: 27.9%
🇺🇸U.S.: 12.1% bloom.bg/31FoaE2

@FerdiGiugliano The trade war poses two big problems for Europe:

1⃣ It can do very little to stop it
2⃣ The currency area has limited tools with which to combat a trade-induced slowdown bloom.bg/31FoaE2

@FerdiGiugliano The euro zone ought to rely more on fiscal policy, where it’s in a much better position than the U.S. In 2018, aggregate debt was:

🇪🇺 85.1% of GDP
🇺🇸 105.8%

Deficit levels are much lower too, with Germany enjoying a hefty surplus bloom.bg/31FoaE2

@FerdiGiugliano Germans haven’t felt too much pain from weakening demand for its export goods, especially cars and machinery.

Unemployment dropped to a record low of 3.1%
bloom.bg/31BGyOj

@FerdiGiugliano Many are now calling for an re-examination of Germany's deficit-free policy:

✳️Greens
🔴Leftist Social Democrats
🛠️The Federation of German Industries, a mighty industrial lobby bloom.bg/31BGyOj

@FerdiGiugliano Germany’s negative borrowing costs make the government’s stinginess illogical to many, but @bershidsky thinks it’s sensible for Merkel not to rush into spending.

With low unemployment and strong domestic demand, there’s time to ponder the right timing bloom.bg/31BGyOj

@FerdiGiugliano @Bershidsky Even if Germany did change the habits of a lifetime, it wouldn’t solve everything.

Countries in trouble, such as Italy, would benefit only a little from any cross-border spillover effects of extra German spending bloom.bg/31FoaE2

@FerdiGiugliano @Bershidsky Lagarde’s challenge will be to convince Berlin that it’s time to build a euro zone budget. That alone will require a seismic shift.

Chances of success: Slim. The euro zone has a masochistic tendency to act only in a crisis bloom.bg/31FoaE2