The U.S. killing of Iran’s Revolutionary Guard leader, Qassem Soleimani, blindsided almost everyone, but it puts Europe squarely in the crosshairs for retaliation by association and they are ill-equipped to handle it. As the UK continues to pursue an exit from the EU, the remaining monetary union remains divided. The major economic shock that may result from these events remain uncertain, but the role of oil most probably doesn’t play as critical a role as it did during the Iranian Revolution back in 1979. Nevertheless, current imbalances in the global financial system, including stocks near record levels, massive corporate debt leverage, and low to negative interest rates, place European economies into a potentially dangerous brew.
European governments have failed to equip the monetary union with the tools necessary to deal with current conditions. Individual countries that encounter immediate difficulty might very well find themselves as an economic island given today’s “instant isolation” response to most developments. Associated EU governments have failed to agree on the end of the unanimity rule, which is currently required for a needy member to receive assistance from the EU’s bailout fund. Continued argumentation will not assist anyone in a timely fashion, but then again, the extent of need may increase dramatically and quickly, depending on developments. Regardless though, increased tensions in the Gulf region are sure to exacerbate already existing economic difficulties.
EU governments have also failed to agree on fiscal policy that could be implemented in response to such external economic forces. Many EU members are still trying to get their governments to focus and finalize internal solutions before spending the time necessary to identify and solve the monetary union’s concerns. The group’s common response to immediate need situations has been one of dithering and discussing, rather than solving and implementing. The common response has typically served only to make the cost of a solution more expensive and when finally implemented, less successful.
Adding to the sudden confusion is the fact that Christine Lagarde was installed as European Central Bank President just two months ago and two new executive board members were just added this month, so if there was ever an immediate need to hit the ground running, this would qualify. The board seems to be content to continue the loose policies of Lagarde’s predecessor, Mario Draghi. But if increasing global threats cause oil prices to rise dramatically, inflation could take root quickly and increased interest rates would be in order. But if economies slow, even more, the resulting recession would demand interest rates to decrease, thereby creating a dangerous no-win dilemma. Whatever the outcome, gold and other precious metals are in position to benefit greatly from the growing consternation.
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