The recent attacks in Paris and ongoing conflicts between the West and the Middle East are likely to seriously undermine economic relations among a number of countries, whether they are directly or indirectly involved. This tense situation could slow or halt the recent economic recovery in many Western countries.
In attempt to avoid such a scenario, Italian Prime Minister Matteo Renzi met with leaders of Saudi Arabia during an official visit to the country last year and toured a site of the Riyadh subway, under construction by a consortium of Italian companies. On that occasion, the Prime Minister stressed the need to strengthen bilateral relations between the two countries, at the economic and the cultural level. Following this development, we asked Andrea Mennillo, economist with deep knowledge of the Arab world, for his insights.
1. After the tragic events in Paris, does it make sense to limit trade relations with Islamic countries — even those considered more moderate — as some commentators have suggested?
I think it would be a big mistake. And even if you wanted to do so, it would be impossible to block such a very deep trade network. Let’s consider recent sanctions of the European Union to Russia: Just a few days ago, the press revealed that some member states (not Italy) continue to do business with the Russians, by-passing the prohibitions.
Of course, the Paris attacks had an emotional impact that was devastating. We saw Brussels, the most important European institution at the heart of Europe, under lockdown. The images were surreal – we could not have imagined this in Europe after more than 70 years of peace. Furthermore, the reaction to France’s declaration of a state of emergency revealed that Europe is incapable of making firm decisions and providing a coordinated response. It is therefore inevitable that separate reactions are coming from individual countries. There was talk of canceling the Rome Jubilee, territorial control, closing European borders, and shattering Schengen Agreement.
Actions and measures to thwart terrorist threats appear to be a set of contradictions. It is unthinkable to cut every economic relationship with certain states — this is not the best solution when the objective should instead be targeted action against terrorists. This threat could be addressed with support from the more moderate Islamic countries. Raising economic barriers would certainly not benefit anyone.
I have heard ideas that are more promising than concrete, such as the proposal to interrupt any kind of commercial relationship with states that have adopted sharia law or calls to conduct diplomatic campaigns against countries suspected of financing Daesh. Certainly it is crucial to block the supply of weapons to terrorists, but we cannot achieve this goal by blocking the entire flow of commerce. It would be much more effective to form a true alliance between Western and moderate Islamic countries.
2. At a time when the European economy, especially in Italy, is emerging from crisis and finally looks more positive, what are the potential consequences of conflict in Middle East?
We actually are in a very special moment. Western economies are finally gearing up the recovery; the European Central Bank also noted in its December bulletin that it expected “continuing moderate GDP growth in the coming months.” There is optimism. I think the ECB deserved great credit for continuing to support the economy with an accommodating monetary policy.
This is undoubtedly a positive news. However, this distinct moment is still fueled by emerging economies, which in recent years have provided a reservoir of oxygen to mature economies, and today are showing worrying signs of slowing down. The recent dramatic drops in the Chinese stock exchanges indicate that something lasting is happening. The Chinese engine may slow down more than expected and the price of oil could remain very low for quite some time.
In all of this, tensions in the Middle East and terrorist threats in Europe do not help — they are destabilizing events that are beginning to impede free circulation within the EU. As far as Europe is concerned, I agree with what Pascal Lamy, the former General Manager of the World Trade Organization and current Honorary President of the Jacques Delors Institute, who said: “Schengen and free circulation are not the problem unless you imagine it is correct to put barbed wire at the internal borders.” I hope we do not use barbed wire to protect our security. Any suspension of the Schengen Agreement must remain an exceptional case that is limited in time and cannot be applied to all European states.
3. Emerging economies are important markets for European exports, especially from Italy and Germany. Do you see significant repercussions on European exports in the near future?
Despite the good summer and autumn news that led to a revised upward trend in Italian GDP for 2015, I think the picture is still very fragile and it is still too early to say that we are out of the crisis. With all the money the ECB is introducing into the market, growth around 1 percent for Italy and around 1.5 for Europe seems a little bit small. I do not think this can be repeated if we face a similar occasion in the future. Also, austerity policies have been eased and the EU is now a little more inclined to grant flexibility to national budgets.
So the exports trend vs. emerging economies remains an important unknown that cannot be underestimated, especially for Europe’s export leaders, above all Germany. I’m not surprised that some issues in the efficient German engine begun to emerge. Only China accounts for 6 percent of German exports and its weight increased during the eurozone crisis. In October, when it was reported that about -5 percent of German exports were registered in August, that was worst figure since 2009, and concomitant with an unexpected decline in industrial production. It might have been an isolated case, but it might be the beginning of something more serious. Meanwhile, the most important economics research institutes immediately cut the German GDP estimates for 2015. In Italy, Squinzi stressed the risk that foreign demand in recent years could be downsized by the Italian economy due to world trade dynamics.
Of course, the evolution of the European economy will depend very much on the rates of internal consumption, traditionally a weakness of exporting countries, particularly Germany. The German consumption prospects are now good and the arrival of refugees will give new impetus. Everybody is still waiting for the German government to implement a policy of fiscal expansion, a decision that it can take, considering its excellent public accounts.
4. How do you see the international trade trend in the light of the latest developments?
I believe the repercussions will be important, now that we have just re-opened relations with Iran. The escalation of the Syrian crisis comes at a time when many economies have already been strained by the embargo on Russia. For example, now Finland is in trouble because the embargo could, in the long run, cost Europe over €100 billion of the added value created by exports and 2 million jobs.
Then the Paris attacks came, which caused panic and concern and of course had an impact on consumption. The Bank of Italy expressed concern about the risk of a decline in domestic consumption due to the widespread climate of fear among consumers. The Confindustria and Confesercenti are on the same wavelength. The Paris attacks, according to Confindustria data, led consumers to limit circulation, with important effects on leisure services and tourism. To this concern, you can add exports once again, because there has been a clear decline in good customers, such as Middle Eastern countries, where the collapse in the price of crude oil is having obvious repercussions. I hope that in spite of all the penalizing factors, the government’s target for growth by 2015 will be +0.9 percent, although a national changeover may already be in progress.
5. The Pope has recently spoken about a potential World War III. Do you think he is right?
The United States talked about the risk of a Third World War. While the entire West is still in shock from the Paris attacks in the heart of Europe, it is time to reflect on the meaning of these events and their role in the history of our part of the world. One fact is that, for the first time, this is an act of war rather than an act of terrorism: Daesh responded to French raids in Syria with an attack in the heart of the French capital. There are many ongoing military interventions these days. Some people, perhaps exaggerating, are wondering whether the West, which has always made so-called imperialist wars around the world and economic wars for oil in the Middle East, do not deserve what happened. This self-criticism is, to me, too extreme even though it is no secret that mistakes have been made in the past, such as opportunistically supporting allies who turned into dangerous enemies. Before it was rebels who became the Taliban in Afghanistan, and today it is Daesh, whose rise seems to be tied to funding from our best “allies” in the Middle East. The West has exposed itself with imprudence and these are the consequences.