The onset of the coronavirus could exacerbate a longer-term trend of geopolitical tensions even among those with close ties to each other, according to BNY Mellon Investment Management’s Shamik Dhar.
Dhar, the asset manager’s chief economist, said there are four secular trends likely to affect markets in the coming years, including: deglobalisation, decarbonisation, automation, and geopolitical fracturing.
However, it is the last one – geopolitical fracturing – that is particularly on view now as the Covid-19 pandemic challenges the existing geopolitical relationships. While the major geopolitical tensions in markets pre-pandemic centred around the US-China trade tensions and Saudi-Russia oil war, Dhar points out that EU relations may be another sore spot for some time after the pandemic ends.
The EU has struggled to present a united front on how to tackle the challenges presented by the pandemic, with existing tensions coming to the fore as disagreements emerged.
Relationships have also been strained significantly as some EU states have been accused of halting exports of personal protection equipment (PPE) alongside disputes on the nature of any financial support for the worst-hit countries.
“I do think this is a seminal moment for the EU and the eurozone in particular,” said Dhar (pictured).
“For the EU, we’ve seen a pretty rapid retreat into nation, state-based solutions and very little in the way of a common approach across countries. Borders have been shut and the so called ‘four freedoms’ [Free movement of goods, capital, freedom to establish and provide services, free movement of persons] have been pretty much brought to a shuddering halt.”
Dhar’s comments came ahead of the fourth EU virtual summit on Friday which aimed to resolve how far EU members were willing to combine resources to help rebuild each other’s economies; a meeting which came to no resolutions. 
At the crux of this debate is a split between Europe’s richer countries in the north and some of the most indebted, such as France, Italy and Spain who have been hit hardest with the coronavirus in terms of the human impact.
Indeed these three along with six other nations have asked for a €1-1.5trn recovery tool according to recent reports, effectively supply grants to countries without them incurring more debt. France’s president Emmanuel Macron has been particularly vocal that it should not be a ‘loan system’ instead asking for the EU to raise debt on public markets to help the hardest-hit countries recover with no obligation to repay.
It is hoped that the issue of ‘coronabonds’ could mutualise all EU countries’ borrowings and reduce the risk of a sovereign debt crisis of the type seen following the global financial crisis.
On the topic of mutualisation and so-called coronabonds the chief economist said he had quite a lot of sympathy with Italy and Spain in thinking that the pandemic is large enough shock to warrant radical, “out of the box thinking”.
“It strikes me that since this is a common shock – not just to Europe, but to the rest of the world – that some form of mutualisation would make sense in these circumstances and would certainly lessen the risk of there being some kind of return to a redenomination risk within the euro,” said Dhar.
“It would lessen the risk of Italy coming under severe financial pressure and will take some of the pressure off the ECB [European Central Bank], which is frankly conducting mutualisation through the backdoor through its QE [quantitative easing] programmes.
“My guess is that that would be a sensible way forward, but the political obstacles to that are enormous, particularly in Germany and other parts of northern Europe. So, that is an issue that is likely to fester and if it isn't resolved, will likely leave scars for quite some time.”
Dhar added: “Now, I'm sure there will be commitment from many at the centre and in the [European] Commission in particular to restart things as quickly as possible once we pass the worst of this.
“But, frankly episodes like this leave scars and people remember things. That tribe – if you like – of nation states over and above Europe [the EU] and the response to this crisis will be quite hard to forget, I think, and that may well have lingering impacts.”