The Week Ahead: 3-9 June 2018

The Week Ahead: 3-9 June 2018

The G7 meets in Canada as EU and North America struggle with US tariffs. Swiss monetary referendum potentially complicates markets. New Spanish government grapples with nationalist challenges. All in The Week Ahead.

CANADA: G7 meets as EU and North America struggle with US tariffs

  • This Friday, members of the G7 will meet in La Malbaie, Quebec to discuss global macroeconomic issues. Similar to last year’s G7 summit in Italy, this year’s summit is likely to be overwhelmed by the U.S. government’s actions before and during the sumit. Last year, the G7 summit in Italy was marked by the United States refusing to sign on to a G7 commitment to meet its climate change commitments. This year, the G7 summit is likely to be marked almost entirely by the Trump administration’s decision last week to levy tariffs on aluminum and steel from 5 of the 6 other G7 countries: Canada, Italy, Germany, France, and the UK (Japan was not included in the announcement).
  • Particularly galling to the other G7 states, the enactment of these tariffs was under the auspices of national security, and Canada is one of America’s closest allies and the G7 EU states are NATO allies. Canada and the EU have already responded to the tariffs with retaliation, as has Mexico. Canada has indicated it will place retaliatory tariffs on U.S. aluminum and steel, and the EU has responded with tariffs on U.S. alcohol, motorcycles, jeans, juices, and peanut butter (all of which are designed to hit US regions with particular political sensitivities for the Republican Party, like Wisconsin and Kentucky).

GRI Take:  It is unlikely that either side will back down during the summit, though comments from leaders may inform whether either side intends to escalate. A few days ago the EU announced its own escalation by bringing a WTO case against the United States on its tariff action.

SWITZERLAND: Monetary referendum may complicate financial markets

  • This Sunday, Swiss voters will decide whether to vote in favor of a referendum that will make the Swiss National Bank the sole source of money from Switzerland, removing the ability of commercial banks to extend credit. The initiative, Vollgedd, is not expected to pass, though polling has been limited. However, even the possibility of the referendum passing has led to swings in money markets, particularly impacting the Swiss franc.
  • Markets have also responded to this uncertainty by buying risk-hedges for Swiss stocks and the franc. Should this referendum pass, the Swiss National Bank would be forced to alter the way it enacts monetary policy: rather than steering money supply through interest rate policy decisions, the referendum would compel the SNB to control the amounts of money available to affect interest rates. A UBS report indicated one of the consequences of this would be a restriction of credit and increased costs to take out loans.

GRI Take: One poll has put the race at 42-45 for/against, so it’s important to watch out for this referendum, and the likely immediate impact on the Swiss franc and longer term impact on the SNB’s operations.

SPAIN: New government grapple swith nationalist challenges

  • This week, newly inaugurated Spanish prime minister Pedro Sanchez will have to deal with one of the most enduring problems of contemporary Spanish politics: resolving the nationalist challenges of Spain’s major regions (particularly Catalonia). Prime Minister Sanchez indicated a willingness to open dialogue with nationalist groups and political parties, which had been strongly rejected by former Prime Minister Rajoy and has historically been opposed by both the Socialists and the PP. This will become easier (or more difficult, depending on the perspective) with the inauguration of Catalonia’s government, which had been suspended by the Spanish government after its independence referendum.
  • The regional government will now be led by Quim Torra, a close ally of former Catalan president Carles Puigdemont, who may present one of the biggest challenges to Prime Minister Sanchez. With the Sanchez-led minority government indicating a relatively stable consistency with its economic policy, nationalist discussions may become more elevated, and may also introduce instability to the government. With only a minority of Parliament under control of the Socialists, it will rely on some nationalist and regionalist political parties for major legislation.

GRI Take: The current government may end up in a similar position to the Conservatives in the UK Parliament: relying on the smaller, regionalist Northern Irish Democratic Unionist Party to form a slim majority, it has had to concede substantial portions of its policy (in this case, the Brexit Ireland border negotiations) in order to maintain a razor-thin level of support. Prime Minister Sanchez may end up in a similar position, placing potentially substantial power in the Catalan regionalist parties. Early indications this week from Torra and Sanchez could provide an indication of this potentially crucial future relationship.

Stay ahead of the news cycle with GRI. Drawing on expert knowledge and local sources, The Week Ahead provides analytical foresight on the consequences of key upcoming political developments.

This edition of The Week Ahead was produced by GRI Senior Analyst Brian Daigle and Senior Editor Luke Iott.

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