The growing importance of the Transatlantic Relationship

  • António Martins da Costa
  • 4 October 2022

We are watching a change in the world geopolitics and economic paradigms.

Turbulent times continue. First, a pandemic crisis, with all its economic, social and political impacts, showing the weaknesses of the globalization process. Despite the unquestionable advantages it has had in the development of societies, especially in the less developed ones, the globalization led to relocations of production centers, to dependence on less reliable suppliers and to the creation of more fragile supply chains, which, apparently more efficient, had never been tested in crisis situations.

On the other hand, it was in this context that remarkable technological leaps were achieved, as in digitization or in health and biotechnology R&D. It was also in those times that the need to accelerate the energy transition was confirmed, as a way of adjusting the world economic development model to the sustainability of the planet.

But the impacts were dramatic in several areas of activity, as in travel, tourism and some industry sectors, which could only be mitigated by the special recovery and resilience plans approved by different national governments and multinational institutions (like the European Union).

After this period of near-stagnation, and due to the development, in record time, of covid-19 vaccines, it was possible to overcome the pandemic situation with a resumption of the economic activity at an accelerated pace, above any prediction. This led to subsequent breakdowns in stocks, disruptions in transport and distribution chains, shortages of labor force and to the creation of inflationary pressures, due to the sudden increase in demand with no equivalent counterpart on the supply side.

Financial and monetary policies had then to be reassessed by governments and central banks to control inflation, although with different approaches between the FED in the United States and the ECB in the EU, implying significant rises in interest rates and high volatilities in currencies exchange rates.

As if this were not enough, on February 24th, Ukraine was invaded by the Russian Federation, in total disregard for the rules of International Law, with tragic consequences in loss of human lives and in the destruction of infrastructures, buildings and critical equipment.

The shockwaves of this action have been felt all over the world, especially in Europe, and are clearly visible in the problems with energy and food supplies, in a further increase in inflation and in the slowdown, or even stagnation, of the world economies.

The dependence of European countries on Russian natural gas and oil has led to difficult but correct decisions, as the acceleration of the energy transition, the diversification of supply sources and the establishment of mechanisms to limit the growth of the energy market prices.

The world dependence on cereals and fertilizers produced in Ukraine and Russia (still suffering from severe flow restrictions) had as consequences the exponential increase of prices and the scarcity of products, with a particular impact on the poorest countries with low negotiating capacity.

Inflation has led to the loss of citizens’ purchasing power, with consequent social protests and political implications.

We are therefore watching a change in the world geopolitics and economic paradigms.

It’s precisely in moments like these that the response of the western world, based on the principles of the respect for human rights, solidarity, the rule of law and the market economy, has to be given in a cohesive way. Not only to show the defense of those values, but also because the joint use of resources increases the effectiveness and the efficiency of the response. At the same time, it gives a sign of unity, cohesion, and support, especially important for the most exposed countries.

In this context, the coordinated decisions that have already been taken by the European Union and NATO – where the transatlantic relationship with the USA is crucial – have proved to be of the highest importance in containing the effects of these crises, at their different levels (geo-political, social, economic-financial and military), and in the reversal of some of the effects that initially seemed to be uncontrollable.

Portugal, as a member of the EU and NATO, has a privileged position in this context.

Not only because it does not have the energy dependence on natural gas or oil from Russia that other European countries have – although it is impacted by the price effect, but in a more mitigated way, due to the more favorable design of the Portuguese energy market – but also by benefiting from the EU bargaining power in accessing and diversifying the food supply sources.

However, it is not immune to the effect of inflation, despite having a good track record on public accounts since the Memorandum of Understanding (Troika) signed in 2011. Although sometimes at the cost of shortcomings in the services provided by the State, this track record has allowed the country to maintain, and even improve, the positive outlook in the international markets, clearly seen in the rise of the sovereign debt ratings.

The US has played a decisive role in this environment, both by directly supporting Ukraine and by filling the gaps that Europe has in some critical areas. Just underlying three of them: (i) due to the historical insufficient funding of several countries in the ​​defense area, the US has been key to guarantee the readiness and operability of NATO forces; (ii) in the energy sector, the US has served as a supplying source of natural gas (LNG) and oil to Europe, as it is currently self-sufficient in energy and have export capacity; (iii) in digital technologies, collaboration between the US and the EU has been absolutely crucial in issues like cybersecurity and the exchange of information and know-how.

Only acting on a coordinated way, US and Europe will manage to overcome these crises, minimizing their negative impacts on populations and on the economy, and achieving a fair stabilization in the political, social, and economic order, that everyone wishes. Particularly those who suffer most directly the effects of the conflict that continues to erode Europe and produce undesirable collateral effects in other regions of the world.

  • António Martins da Costa
  • President of the American Chamber of Commerce in Portugal (AmCham)