Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / How Eurozone Trade Ties Are Shifting After the Hormuz Deal
Transcript
- Lucas: So the Strait of Hormuz reopened a week ago under that U.S.-Iran deal, and already a ship was attacked. The UN actually paused its evacuation plan. If you're a European logistics manager right now, you're not breathing easy. Luna: And you can see it in the numbers. The euro slipped to one-fifteen against the dollar, and the trade-weighted dollar index hit 120.4 — that's a six-year high. Lucas: Right, that strong dollar is a double hit for Eurozone exporters. First, their goods become more expensive in dollar-denominated markets. Second, if they rely on imported energy from the Gulf — which a lot of German industry does — their input costs spike when shipping routes get shaky. Luna: Germany in particular. The country gets about a third of its crude oil from the Middle East. Even if the channel is technically open, insurance premiums for tankers are through the roof. Lucas: Exactly. And look at the ETF data for last week. The Germany-specific ETF, EWG, dropped 2.2 percent. Italy's EWI fell 3 percent. But the UK's EWU was flat, actually up 0.2 percent. That divergence tells you something. Luna: The UK is less dependent on Gulf energy. They have the North Sea. Plus the pound hasn't strengthened as much, so UK exporters are more competitive. Lucas: Right. And the broader Eurozone ETF EZU fell 2.3 percent. The market is pricing in a real risk: if Hormuz gets contested again, the whole continental supply chain seizes up. Not just oil — also LNG, and container traffic for manufactured goods. Luna: Are we seeing any rerouting? I've heard about ships going around Africa again, like during the Red Sea disruptions. Lucas: Some are. But that adds two weeks to transit time and burns fuel. For time-sensitive goods — auto parts, electronics — that's a nightmare. And southern European ports like Piraeus and Valencia could benefit from transshipment, but they're already congested. Luna: So the strong dollar and shipping risk are compounding. And the ECB is watching core inflation at 3.4 percent in the U.S. — that keeps the Fed hawkish, which keeps the dollar strong. Lucas: Exactly. The ECB has to decide whether to cut rates to stimulate a slowing economy, but if the euro weakens further, imported energy gets even more expensive. That's a policy trap. Luna: And meanwhile, Eurozone GDP growth annualized at 2.1 percent in the first quarter — that's a solid rebound from 0.5 percent late last year. But that was before the Hormuz deal and the uncertainty. Lucas: Right. The second quarter data, which we'll start seeing in a few weeks, will tell us whether the rebound is sustainable. If trade volumes dip again, that 2.1 percent could be the peak. Luna: Let's talk about one specific industry. German chemicals — BASF, for instance. They rely on naphtha from the Gulf. If the supply chain gets cut, their margins evaporate. Lucas: And BASF already announced capacity cuts in Europe last year. They're shifting production to China and the U.S., where energy is cheaper and more reliable. Every Hormuz scare accelerates that move. Luna: So the long-term effect is deindustrialization of Europe? That's a strong claim. Lucas: I think it's a structural risk. The U.S. has shale, China has coal and government support, Europe has... imported energy via chokepoints. That's a competitive disadvantage that no amount of ECB easing can fix. Luna: And yet services trade is booming. The Eurozone services surplus is at record highs. Tourism in Spain, IT services in Ireland, financial services in Luxembourg. Lucas: That's the divergence we've been tracking for months. Goods trade is vulnerable to geopolitics; services trade is less so. But services alone can't support the whole economy. Manufacturing still employs millions. Luna: So what does the market expect? The ETF pricing suggests investors are rotating out of Eurozone equities, especially into the UK and U.S. Lucas: And that's rational in the short term. But if the Hormuz situation stabilizes — and that's a big if — those ETFs could snap back quickly. The valuation gap between Eurozone and U.S. stocks is still wide. Luna: What would a real resolution look like? Not just a deal, but actual security guarantees for shipping? Lucas: You'd need an international naval coalition that Iran respects, plus a credible inspection regime. That's years away, if it ever happens. For now, we're in a cycle of fragile reopenings and sudden attacks. Luna: And that uncertainty is itself a cost. Companies delay investment, hold more inventory, pay higher insurance. It's a tax on trade. Lucas: Exactly. And it's one reason why, even with the GDP rebound, business investment in the Eurozone has been tepid. The Ifo Institute's survey last month showed export expectations falling again. Luna: Alright, but let's zoom out. If you're an investor, how do you play this? Avoid German industrials, overweight UK? Or is there a contrarian angle? Lucas: The contrarian play would be to buy the dip in quality European exporters that have pricing power and diversified supply chains. Think companies like LVMH, which has luxury demand independent of oil prices. Or ASML, which sells irreplaceable chip equipment. Luna: So stock-picking matters more than country allocation. Lucas: Exactly. The broad Eurozone ETFs are a bet on the macro resolving positively. Individual stocks let you hedge against the macro risk. Luna: That's a good way to frame it. And speaking of making sense of the macro, I think this is a good moment to mention something. Lucas: Sure. Luna: We don't run ads on this show. No sponsors, no interruptions. That's intentional — we want the conversation to flow without commercial breaks. Lucas: And if that approach has been valuable to you — if walking through the economy with us has made something click — there's a way to support it. It's buy me a coffee dot com slash fexingo. Luna: No pressure, no perks. Just a way to keep this ad-free. And now back to the trade picture. Lucas: Right. So where does that leave us for the next few months? The ECB meets in July. I think they'll hold rates steady, but the statement will acknowledge the upside risk to inflation from energy routes. Luna: And the downside risk to growth from trade uncertainty. That's a classic stagflationary mix. Lucas: Stagflation-lite, maybe. But the central bank can't solve a supply-side problem with demand-side tools. The real solution is political: secure the Strait of Hormuz, diversify energy sources, and invest in European energy independence. Luna: Which is a multi-year project. In the meantime, we're left watching shipping routes and currency markets for the next tremor. Lucas: Exactly. And that's the story for the second half of 2026.