Expanding BRICS and EU Challenges

You may have noticed that major energy producers Saudi Arabia, UAE and Iran have joined BRICS or plan to do so. The block already includes two of the world’s largest economies China and India. Add to this the global heavy weights in the energy sector and the block’s power appears to be growing apace.

Now, Saudi Arabia has historically demanded payment in US dollars, earning the greenback the petrodollar name. As part of BRICS it is likely that Saudi Arabia would be encouraged to accept payments in other currencies. This could spell the end of the petrodollar and negatively impact the US dollar’s prominence as the world’s reserve currency. End of money printing? And what does that mean for the US allies across the Atlantic, the EU?

Indeed, the potential decline of US hegemony could have significant implications for the European Union (EU), particularly regarding trade dynamics and economic stability. Some thoughts on this:

EU Depends on US Demand

It’s no secret that EU relies a lot on the US as a trading partner. In fact the United States accounts for approximately 19.7% of EU exports and 13.7% of EU imports as of 2023.

A decline in US economic performance could reduce American consumers’ ability to afford European products, leading to decreased demand for EU exports.

Importantly, if US customers struggle financially, EU countries may face economic challenges as they seek alternative markets. The EU’s trade surplus with the US has historically supported economic growth. So a downturn in this relationship could hinder growth, particularly in sectors which rely on American demand.

Challenges in Finding Alternative Markets

Competition from China and India is a real concern here. As the EU looks to diversify its markets, it is sure to face stiff competition from China and India, both of which are rapidly expanding their economic influence globally. These countries offer lower production costs and can provide similar goods at competitive prices, making it difficult for EU products to compete successfully.

Does EU Have Good Market Options?

The EU has sought to strengthen trade relationships with other regions, such as Asia and Africa. But these markets may not yet provide sufficient demand to compensate for potential losses from the US market. Entering new markets is no easy task. Will the EU firms be able to establish strong and lasting trade partnerships that can absorb the volume of exports currently directed toward the US? Only time will tell.

Shift Away from the Dollar

What if alternative currencies gain traction for international trade, especially in energy transactions? This could undermine the US dollar’s status as the world’s reserve currency. What is the likely effect of this? The increased borrowing costs for the US which would act as a drag on the country’s economic performance.

Tight Budgets Stateside

A decline in dollar dominance could necessitate a more balanced budget approach by the US. And this would limit fiscal flexibility and potentially lead to austerity measures that could further affect domestic demand for foreign goods, including those from the EU.

Potential Reset for the EU

The EU may need to implement structural reforms to enhance competitiveness in global markets. The EU companies could decide to focus on innovation and efficiency improvement to better compete with emerging economies like China and India.

For example, the block could prioritize strengthening its internal market through initiatives that promote trade and investment within the EU. This has the benefit of reducing reliance on external markets. With more diversified supply chains and less dependence on any single market or currency, the EU can improve its ability to withstand global economic shifts.

The Takeaway

If the US slides economically, the EU is likely to face headwinds, particularly regarding its reliance on American demand for exports. Moreover, the block could have a tough time finding new markets as it faces competition from the likes of China and India. To mitigate these risks, the EU may need to focus on becoming more competitive, strengthening internal markets, and diversifying supply chains. These strategies will be crucial in navigating a changing global economic landscape where traditional alliances may be tested and redefined.

See Valuation Tour