Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / The European Trade Route Through the Suez Reroute
Transcript
- Lucas: So you've probably seen the headlines about container ships going around Africa instead of through the Red Sea. What started as a trickle in late 2023 is now a structural pattern — and it's quietly reshaping how European exporters move goods. Luna: I was going to ask about that. The Suez Canal handled something like twelve percent of global trade before all this. How much traffic has actually shifted? Lucas: A lot. By some estimates, over sixty percent of container ships that used to take the Suez route are now going around the Cape of Good Hope. That adds about ten days to a voyage from Asia to Rotterdam. And the cost — well, freight rates from Shanghai to Northern Europe have more than doubled since the start of the year. Luna: And yet European equity ETFs are up. VGK gained one point five percent in the past five days alone. EZU, the Eurozone ETF, up almost two percent. That doesn't sound like a region that's panicking about supply chains. Lucas: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Luna: Yeah, we keep it clean that way. Appreciate everyone who chips in. Lucas: Right. So back to the numbers. The market isn't panicking because the reroute is now priced in — but more importantly, European exporters have adapted faster than many expected. German manufacturers, for instance, have shifted to air freight for time-sensitive components and have built up inventory buffers. The logistics adjustment is happening. Luna: But at a cost. Air freight is three to five times more expensive than sea. And holding more inventory ties up capital. Is this a permanent shift or just a temporary workaround? Lucas: That's the million-dollar question. Let's look at what's actually driving the reroute. The immediate cause is the security situation in the Red Sea — Houthi attacks on commercial vessels. But the knock-on effects go deeper. The Cape route adds roughly three thousand nautical miles. That means more fuel, more crew time, more emissions. And it's not just about the Suez — the Panama Canal has its own drought-related restrictions. So you've got two major chokepoints constraining global trade simultaneously. Luna: Which is exactly the kind of scenario supply chain experts have been warning about since the pandemic. So European companies have had to build redundancy. But redundancy costs money. Lucas: Exactly. And the question is whether the market is correctly pricing in those higher structural costs. Look at the trade-weighted dollar index — it's at one hundred nineteen point three, up slightly from last month. That makes European exports cheaper for dollar-based buyers, which helps offset some of the freight cost increase. But it's a thin margin. Luna: So the weaker euro — one point one six dollars per euro, down from one point one seven — is actually a tailwind for exporters right now. But it's not a sustainable advantage. Lucas: Right. Currency moves can reverse. The real question is whether the reroute is inflating costs in a way that will eventually show up in consumer prices. We've seen sticky inflation in the Eurozone — services inflation especially — but goods inflation has been cooling. The reroute could put upward pressure on goods prices again, especially for things like electronics, machinery, and auto parts that move through Suez in large volumes. Luna: And the ECB is watching this closely. They've been cutting rates cautiously — last move was twenty-five basis points in April. But if trade costs push goods inflation back up, that complicates their path. Lucas: It does. And there's another layer: the energy price angle. The reroute also affects oil tankers and LNG carriers. Europe has been diversifying its energy sources since the Iran conflict, but the Red Sea disruption makes every barrel of Middle Eastern oil more expensive to deliver. Putin and Xi just revived talks on a stalled Russian gas pipeline — that's a direct consequence of the energy market jitters. Luna: Which ties back to the broader geopolitical picture. The US dollar strength, the trade route shifts, the energy realignment — it all feeds into a world where Europe has to navigate multiple disruptions at once. Lucas: And yet the European equity market is shrugging it off. Let's look at the country ETFs. Germany's EWG up one point three percent in five days. France's EWQ up zero point eight. Italy's EWI only up zero point three. So there's divergence within Europe — Germany and the broader Eurozone are benefiting from the weaker euro and industrial demand, while southern Europe maybe less so. Luna: That divergence is exactly what we talked about in episode three — the structural growth gap between core and periphery. The reroute probably widens that gap, because German exporters have more capacity to absorb higher logistics costs than, say, Italian or Spanish firms. Lucas: And the UK — EWU up one percent — is interesting because the UK has been doing its own trade deals. The recent uk gulf trade deal was called a 'monumental achievement' by Bahrain's industry minister. That gives UK exporters alternative routes and partners, potentially insulating them from some of the Suez disruption. Luna: So the reroute is not just a logistics problem — it's becoming a competitive differentiator. Companies and countries that can adapt faster will gain market share. Lucas: Exactly. And this is where the long-term structural story matters. If the Red Sea remains risky for another year or more, we could see a permanent shift in trade patterns. Some shipping lines are already ordering larger Cape-class vessels designed specifically for the longer route. That's a multi billion dollar capital allocation decision that says the reroute is not temporary. Luna: Which would mean higher baseline freight costs for European importers and exporters. That's a negative supply shock — but one that markets are still digesting. Lucas: And it's not just freight. Insurance premiums for ships transiting the Red Sea have skyrocketed. Some insurers are refusing to cover certain routes altogether. That adds another layer of cost and complexity. So when we look at Eurozone GDP growth — real GDP growth annualised at two percent, up from zero point five percent last year — that's a recovery, but it's a fragile one. If trade costs persist, that growth rate could easily be trimmed in the second half of the year. Luna: So the market's optimism right now is pricing in a 'muddle through' scenario: higher costs, but manageable. The risk is that something tips it into a more negative scenario — maybe a further escalation in the Middle East, or a sharper slowdown in China. Lucas: Right. And that's what makes this such a fascinating moment for European economy watchers. The reroute is a stress test for the continent's supply chains. So far, the system is passing — but barely. The next few months will tell us whether this is a one-off adjustment or the new normal. Luna: And the ECB will have to make policy with that uncertainty. Hard to see them accelerating rate cuts if trade costs push inflation up again. Lucas: Exactly. So the reroute is not just a shipping story — it's a macro story that touches currencies, growth, inflation, and geopolitics. And it's playing out in real time.