EU Stimulus Fakery as Brexit Stumbles Forward

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We’ve been neglecting Brexit and EU stimulus measures because they seem all to familiar, in a bad way. Nevertheless, the EU, just like the US, is grappling with a massive deflationary shock. And even though much of Europe should be able to get to some semblance of normalcy sooner rather than later by virtue of many countries getting lockdown religion earlier than the US (and perhaps also generally taking it more seriously; overwhelmed hospitals in Italy might have focused a few minds), the new normal is going to shrink a lot of sectors, perhaps permanently: conferences, business travel, tourism and leisure travel, restaurants, spectator sports, restaurants and bars, higher education. And then you have secondary damage, such as less activity in business districts due to companies deciding to keep employees working remotely if possible, which in turn hurts nearby retailers and food venues.

As we’ll discuss, the EU, having managed to stumble through the financial crisis and then rolling national funding crises, has become conditioned to think that extend and pretend in combination with 11th hour, bare minimum bona fide action is a successful way to deal with Big Problems. They may be about to find that they are engaging in what we’ll call the Turkey Fallacy. As Nassim Nicolas Taleb pointed out, the turkey has the greatest confidence that the farmer is his friend, in the form of the most observations of the farmer feeding and housing him, the day before his head is chopped off. Or to put it another way, EU leadership has finally encountered a situation where stumbling through it will leave too many important constituencies unhappy, or worse, damaged.

And if all that isn’t bad enough, another hit is coming in the form of Brexit. Both parties are not just sticking to their guns but also escalating no-deal rhetoric and planning.

The very short version of Europe’s (and most of all, the Eurozone’s) big institutional failure, which is now stymieing making an adequate to the coronacrash, is its inability to engage in sufficient fiscal spending. A long list of familiar structures and beliefs conspire together to produce this outcome, including but not limited to a visceral fear of deficits, and as a result, a dogged commitment to austerity despite its repeated failures; misguided faith in “labor market reforms” as in crushing labor, as a way to make austerity work; the lack of meaning EU level spending to buffer the differences in growth reasons, with the result that the ongoing gap between the “debtor” countries and the well-off “surplus” countries is a centrifugal force; too often dopey and self-defeating rescue mechanisms, like the Bank Recovery and Resolution Directive which is better at creating bank runs than stopping them.

The latest effort at (mainly) optics over substance is the much-ballyhooed €750 billion package. Merkel and Macron had gone public with the idea that the two had agree to go big in tackling the downdraft. Germany behaving out of character plus the German-France axis usually carrying the day was taken up by the press as a major move, when our David encouraged readers to lower their expectations on May 19, right after the scheme was first mooted:

It hasn’t had much exposure in the Anglo-Saxon media (though here’s a report from the Guardian) but Merkel and Macron gave a joint video press conference yesterday, announcing a proposal for a €500Bn rescue fund, which would be added to the EU budget, rather than being repaid by the states benefiting. A typical reaction is this editorial in Le Monde, which talks of “a new start for France and Germany” and a front page story about “relaunching Europe.”

The politics of this are significant. Historically, the Franco-German “couple” was described as “the motor of European integration.” It largely depended on personal relationships between the leaders, and these took a severe turn for the worse under Sarkozy and Hollande, and Macron, as the truest of true believers, was keen to relaunch it. One important function of the original EC of course (as with NATO) was to allow the rapid re-entry of Germany into the international system, but under supranational control. This was accompanied (from the 1962 Elysée Treaty) by a bilateral relationship which was politically dominated by France, and for a long time the French managed to manipulate the Germans politically by playing on the sense of guilt of the German political class. This started to fall apart after 1992, when Mitterrand made the disastrous decision (in retrospect) to concentrate on the political side of the nascent EU, and to let the Germans largely have their way on the economic side. Over the last generation, the boot has changed foot quite spectacularly, and one of Macron’s major priorities has been to reduce German dominance. To the extent that this initiative originated with Macron (at least that’s what’s claimed) then if it’s adopted it will be seen by everyone as a slight but significant rebalancing of relationships.

Even if the politics are promising, the EU still needs heavy duty spending. And was that really in the cards? As Clive pointed out:

Yes, you really have to look under rocks to find it. Here’s the FT’s take https://www.ft.com/content/c23ebc5e-cbf3-4ad8-85aa-032b574d0562 (which I had to click through from the homepage, through “world” then down into the nether regions of “Europe” to eventually find).

I suppose it (the “ho-hum” reaction) is mainly because it is, as the FT’s headline states, a “call” for Doing Something rather than an actual Doing Something. And the Usual Suspects were making the usual mooing noises (again, from the FT):

However, the Franco-German plan also met resistance. Austrian chancellor Sebastian Kurz said he and his Dutch, Danish and Swedish counterparts were only prepared to accept a rescue fund that gave out loans.

So the usual monetary “how many angels can fit on the head of a pin” difference between “loans” and “grants”. Plus of course the numbers, even if we take €500bn at face value, are an entry point. Italy’s banks could probably swallow that as a starter, let alone it being the main meal.

But at least they’re trying.

The Financial Times engaged in some cheerleading on May 21 via an op-ed from the head of a New-York based data analytics and macro research company:

But just as the PEPP QE was starting, and markets were healing, the German constitutional court started to moan about the ECB’s QE. It needed to be restricted, the court argued, just like the previous incarnations of QE.

And the euro was back in crisis mode, and we saw the usual widening of bond-yield spreads, especially in Italy. The existing backstop infrastructure was insufficient; there was a lack of political will to create more policy space; and the legal challenge from the Karlsruhe court threatened to make things worse.

Then we had a surprise press conference on Monday from Ms Merkel and Mr Macron, outlining a plan to create an additional €500bn of spending power, via EU-level borrowing to distribute money in the form of grants….

The upshot is that May 18 2020 could turn out to be a historic day in the evolution of the euro. So far it is just a proposal….

But this is a crisis, and we do need a big response. If the grant portion were to get cut to, say, €200bn, it would not be enough to give the market confidence, and it could actually turn out to be very costly — in the form of a bigger European recession — including for the most frugal member states themselves….

The key point is, that if Ms Merkel and Mr Macron can get the entire EU-27 on board, it will move markets significantly. The euro will recover from its multiyear lows versus the US dollar, the Swiss franc and the Japanese yen. Peripheral spreads can narrow notably. And European stocks may finally attract some foreign interest, after a multiyear lull, and deliver some rare outperformance.

I don’t find it terribly confidence-building to see the only benefits listed as ones to financial assets.

Today, Wolfgang Munchau threw some cold water on the plan, pointing out that the numbers are too small to amount to much stimulus. Even though I am a newbie to EU budgeting, it should have occurred to me that the EU uses the same headline gimmickry as our Congresscritters, of taking all the spending contemplated in a bill (or over the next ten years, whichever is longer) and depicting the sum of all those years’ spending as the amount deployed, when it would be natural to assume the figure is first year total.

Bear in mind that Munchau was very sound before and during the financial crisis, but was off the mark on the Greek bailout negotiations. Nevertheless, his assessment here seems well-founded, and I trust any readers who disagree will pipe up. From Munchau:

Some celebrate the European Commission’s €750bn budget increase as a “Hamiltonian moment”, in reference to the first US Treasury secretary who brokered a historic compromise in 1790 for America’s federal government to take over the debt of the states. Others dismiss it as too little, too late. Neither of these views captures its true nature.

I have noted that commentators and Brussels-based journalists often fall for big headline numbers that conflate categories such as grants, loans and spending capacity. The commission is a willing accomplice in this obfuscation. The official document that accompanied last week’s announcement lists the total investment that could be generated as €3.1tn. Numbers like these are meant to impress the gullible. It’s the statistical sleight of hand you might expect from a disreputable election campaign.

The commission says that €500bn of the proposed €750bn comes in the form of grants, and €250bn in loans. The loans are economically irrelevant, since there is no shortage of low interest rate borrowing for the private sector. The grants are what matters.

But beware. Not everything that is called a grant constitutes a fiscal transaction. Some of these grants are used to generate lending. By my calculations, the fiscally-relevant part of the package is a little over €400bn. Of that, the main part is the recovery fund, worth €310bn over four years, plus an extra €11.5bn this year.

Dividing the €310bn recovery fund equally over four years, I arrive at an annual fiscal boost of 0.6 per cent of the EU’s 2019 gross domestic product. This is not nothing. But if you still want your Hamiltonian moment, you will have to look elsewhere.

Ouch. Not only is this not terribly meaningful in terms of EU relations or budget constraints, it’s also pathetically small in relationship to the coronavirus-created economic sinkhole.

And the Brexit freight train continues to bear down at full speed at the EU and UK. Since virtually nothing the EU has said seems to have gotten through to the UK negotiators, Barnier has become even more blunt. I can’t imagine he’s gone off the reservation in becoming so pointed, so I assume he either has license or has been told to signal EU exasperation (which is not news; sources like Politico have been mentioning it regularly for at least nine months). Barnier warned of a no-deal Brexit thanks to the UK walking back major commitments in the Political Declaration. More from Euronews:

After almost three weeks, Brexit talks are back on Tuesday….

In an interview to British newspaper The Times, the EU’s chief Brexit negotiator Michel Barnier said that “the UK has taken three steps back from the commitments it originally made”, adding that the EU wants the UK to respect them “to the letter”…

“We are much less exposed than them because only 7% of our exports go to the United Kingdom, when 47% of British exports go to the EU,” he said.

In another sign as to how sour things have become, fishing, which was seen as a contentious but soluble problem, looks more and more like an impasse, according to Politico.

The Telegraph, relying on the UK’s political funhouse mirror, presented that as Barnier trying to deny the UK its Brexit. And the Brexit fans are particularly steamed up that Sadiq Kahn wrote a letter to Boris Johnson pleading for a Brexit extension.

More commentary:

Needless to say, Brexit on top of a coronacrash is like pouring acid on a gunshot wound. I really wish there was a way to steer out of this trajectory but I can’t see how.

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32 comments

  1. jackiebass

    Brexit remind me of a saying often used by my colleges ate work. Be careful what you wish for. When you get it you may not like it.

    Reply
  2. PlutoniumKun

    I think the ‘optimist’ view of this is that the Merkel/Macron circus is a deliberate distraction to allow the ECB to slowly become a ‘real’ Central Bank by stealth. In this view, the Eurozone will normalise under the guise of a flurry of acronyms and special schemes which will gradually become a bail out, with ‘loans’ issued that will never be repaid. There are various schemes out in the ether (such as interest only bonds) which claim to be within the rules that would allow this. Its beyond my pay grade to know if they are realistic or not. I strongly suspect this is the way the ECB would like to go, but this depends on the austerity four deciding to turn a blind eye.

    A problem I think is that a gradual opening up over the summer will lead people to think the crisis is over – the true economic costs of the virus will not I think become apparent in the stronger economies until the autumn or later, as big companies fail and/or engage in massive layoffs. Or if one or more big banks finally go over the edge.

    Reply
    1. Ignacio

      Nissan has just closed its plant in Spain. The automotive industry is being hit very hard as if they weren’t doing any good before. Whether this benefits competitors in Europe or not is disputable. I am eager to see what is the new plan being devised for the automotive industry in Spain but this will include a new law regulating “Sustainable Mobility” from manufacturers to end users and, given this will only affect manufacturers operating in Spain, I guess there will be provisions on car imports to guarantee these fulfill the same requirements. Whether this results in something looking protectionist of if has been somehow consensuated with other EU countries is an unknown for me. Is there any European coordination any more? I don’t know.

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      1. Clive

        The EU (and the UK, for that matter) auto industries are reaping what they’ve been sowing for 10, probably nearly 20 years now. The Nissan move was inevitable given the givens.

        What are those givens? Germany’s pet ward-of-the-state “National Champion” (VW Group) has so ingratiated and embedded itself in not just German but many other European countries’ political establishments (through not always entirely above-board methods) that it is not only too big to fail, it’s too systemically important (not just in the Mittelstand but way beyond) to be allowed to stand on its own two feet. EU competition rules be dammed, more-or-less whatever VW wants, VW gets. Everything gets stitched up behind closed doors.

        There is simply no way the Japanese can compete with VW’s network effects advantages, both overt and covert. So Nissan (and probably Toyota, too) have — entirely sensibly — decided they’ll give up even trying. Conversely, these two will find just as bountiful government largess from the UK. So the Japanese brands will content themselves with increasingly sewing up the UK auto market. Anything they can sell in the rest of Europe (where they’ll always be a subscale player compared to VW’s dominance) is a useful bonus, but not a core market. So they no longer need the non-UK production bases.

        All of which goes to show that mercantilism, in the long run, is always a losing proposition. Europe gets stuck with not much choice than to buy one of the myriad of cookie-cutter not-especially-well-made-considering-the-price and not that brilliantly reliable VW group products (the EU having pretty successfully firewalled itself off from global competition in order to boost VW). The UK may well end up the same, but substituting Nissan and Toyota for VW. At least the Japanese know how to build a reliable car, unlike the relentlessly crappifying VW does.

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        1. Martlin

          Market share of the combined VW group is less than 25% in the EU + EFTA. There Second placed PSA has 16%. Third placed Renault still had more than 10% in 2019. Next Hyundai is still bigger than either BMW group or Daimler. I don’t think the claim, there is no choice is true (nor do I agree, that the quality of the VW group cars is that bad; 40% of VW sales are in China about the same as in Europe; why would the Chinese buy all these cars, if they were so bad). Toyota is quite a bit smaller still than Hyundai, so maybe it doesn’t make sense for them to build in Europe. Luckily, the new EU Japan trade agreement means, that cars can be imported from Japan without tariffs. Not that much mercantilism going on on that specific front.

          Reply
          1. Clive

            No VW group product features in the top twenty most reliable cars https://www.thisismoney.co.uk/money/cars/article-8229819/The-reliable-new-cars-according-motorists-them.html but many of the slots in the bottom 25 most unreliable are propped up by VWs https://www.whatcar.com/news/25-most-unreliable-cars/n17550

            The EU assessment is that market dominance concerns start to emerge at a 25% share http://regulationbodyofknowledge.org/faq/market-structure/assessing-market-power-what-is-the-best-factor-to-use-to-determine-market-share-and-assess-dominance/ and to have a marker share nearly 50% above the volume of the next competitor and getting on for three times that of the one below when the prices charged are not materially lower and product quality is no better and arguably worse than the competition requires an explanation.

            And you made the point about “fortress EU” as far as auto sales are concerned better than I. The Japanese brands scarcely get a look in. Japan’s willingness to “suddenly” do a trade deal with the EU is evidence of their abandonment of any attempt to be a significant player in the EU market (along with the shuttering of EU-based plant). They’re never going to have the advantages that the VW group has managed to acquire for itself. The logic being that if they’re confined to a 5 to 10 percent market share limit, they may as well bring in pretty tiny numbers of imported products rather than try to manufacture locally. They’ve (the Japanese brands) have concluded EU auto sales is a rigged game, a game they can never win. So no point in throwing good money after bad in trying.

            I’m not saying the U.K. is going to be any more of an honest broker here. Just the opposite. But two wrongs don’t make a right.

            Reply
            1. Marlin

              The European Commission, for instance, sets the following criteria to assess dominance: a firm with a market share of no more than 25% is not likely to enjoy a dominant position; a firm with market shares of over 40% raises concerns, and over 50% is said to have a dominant position if its market share has remained stable for a long time.

              VW doesn’t have a market share of over 25% in the single market. In 2019 it had 24.X%. Going forward it likely is to lose market share, as electric cars are going to get an increased market share and VW is less experienced in this area than several competitors.

              I certainly haven’t given anything resembling an explanation why people prefer buying VW at the same price and potentially lower quality than Japanese brands. If it is the same price, maybe people simply prefer domestic manufacturers. The political advantages would mostly allow lower prices due to production subsidies. But the decision to buy a car at the given price, that is not something politically allowed or not allowed. Nobody is preventing a German to buy a Toyota or a Frenchman to buy a Nissan. If anything currently politicians of certain parties are actively advertising Tesla. I don’t have a car, but the last car my father bought was a Ford (in Germany).

              I wish the EU would take the 25% share serious when it comes to
              – internet / phone providers (Vodaphone recently was allowed to acquire Unity media)
              – online retail (amazon certainly has more than 25% market share and clearly is abusing its power; why not do it like India and make Amazon decide between selling its own product and 3rd party products)
              – office software (Word documents are accepted all the time, try some non-propietory format like odp; if this is network like, why not politically set prices as for the electrical grid)
              – online advertisement (why was Facebook allowed to acquire Instagram? Why could google buy Youtube? Why not force social media to open an API to independent suppliers? Why not force Youtube to have a certain pay out ratio to content providers like is done in health insurance in some countries?)

              I really have the impression the car industry is unfairly singeled out and it is one of the few industries, where collective bargaining agreements still allow for the existence of some true middle class jobs. In contrast e.g. amazon is a horrible employer for both distribution center workers and delivery drivers. Microsoft has huge margins. In contrast VW actually has less than 5% margin. The Japanese companies are as well decent, but perhaps this isn’t as well known.

              Reply
      2. d

        sort of wonder why Nissan or any non UK manufacturer remains in the UK they wont be able to export to the EU competitively any more after Brexit, and the UK market isnt all that big. so why stay? Japan’s new deal with the EU may also put an end to their plants in the EU.

        Reply
  3. PlutoniumKun

    On Brexit, the Irish government have formally started planning for a hard Brexit. Its very unusual for them to be so forthright, so there must be an assumption that there are no reasonable grounds for a deal, barring a last minute panic by one or other party. It remains to be seen what sort of damage the Cummings scandal has done to the government – there are all sorts of rumours that the gruesome twosome in charge of the UK may be planning to spend more time with their families in the autumn, allowing a clean skin to take over the government. Certainly, Johnson doesn’t appear to be having fun being in charge, which must be a shock to him.

    Its also dawning on the Northern Ireland establishment that they may have found themselves in the worst of all worlds – instead of being a nice half way house between the UK and the EU, they could well find themselves excluded from either, as British businesses decide that NI is too high risk for investment.

    Covid is having its effect too. While the UK loosens up, and opts for a high risk of the virus returning with a vengeance, Ireland is staying tighter, despite having far lower rates. The government in Ireland seems determined to try to eliminate it before risking opening up. But this leaves the border issue if NI doesn’t get its act together. NI claims to have low levels, but the hotpots along the border areas strongly suggests that this is a testing and counting issue, not a reality. All this points to the UK being cut out of the general opening up of travel in Europe over the summer.

    Reply
    1. vlade

      I assume when you say “hard brexit” you mean “no-deal brexit”. How the language slipped over the years..

      Reply
  4. Tom67

    Re Merkel / Macron. I am German and am following German published opinion as well as various econ blogs. I agree with Munchau that the published numbers are rather small vs the desired effect. But much much more importantly a dam has been broken. One cannot overstate the significance of the fact that Germany has for the first time agreed to issue Eurobonds in all but name. That is the EU taking up loans to hand over to the Southern periphery of the EU. Considering the mentality and the economic convictions of German conservatives that is really a big, big deal. I suspect that only to have been the start of more in the same vain to come. Whether that will be enough, whether the money will be spent in a worthwhile manner and whether it will prevent the breakdown of the Eurozone in the long run is a completely different matter. But certainly and for the foreseeable future the EU will be able to somehow continue to muddle through.

    Reply
    1. Yves Smith Post author

      If the deficits across the Eurozone stay within Maastrict limits, the Eurobonds wind up being a distinction without a difference. The EU will still suffer much deeper economic damage than it would if it would spend enough to support demand.

      This plan still looks like it might fit a saying from Venezuela: “They have changed their minds, but they have not changed their hearts.” Eurobonds are a device to enable bigger deficit spending. If they are only used to facilitate redistribution, that’s nice to have but it doesn’t solve the most pressing problem the Eurozone now faces.

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      1. Charles 2

        Actually, I checked in Eurostat rules and it seems that EU commission borrowing are not constrained by the stability pact. The rationale is that borrowing is very short term (Just to cover calendar differences) or very safe thanks to Low leverage ratio for the EIB. In a sense, the situation is a bit similar to the off-market swaps used by Italy and Greece : original rules considered swaps as a interest rate management strategy with little impact on the quantity of borrowing because it was “natural” to transact initially at market (ie zero NPV), but the loophole was used with everybody’s knowledge to politically allow Italy and Greece to join. It is only after that northern countries denounced the accounting shenanigans, Capitaine Renault’s style…
        In the present case, the magic is that the commission can borrow without having to immediately show the corresponding income from member states, which means it can roll over the borrowing until the member states decide (at unanimity, so kicking the can will be tempting !) to part some money to pay the money back. Considering that now mature currency issuing countries covers only 80 to 95% of their expenditure with tax, it could morph into a way to lodge exclusively the “deficit creating” expenditures at the EU level while formally keeping with close to balanced budgets at member states level. It is really leveraging a MMT loophole by stealth, but not crazier than say, minting a platinum coin ! If there is a will from everyone (ECJ, ECB, EU Commission) to close their eyes, there will be a way…

        Reply
        1. Yves Smith Post author

          The member states are well aware of the obligations they see as imposed on them, so I am not sure the loophole solves the political problem. See this from Politico’s morning newsletter last week:

          The core MFF proposal will pick up roughly where Council President Charles Michel and the 27 heads of state and government left things after an initially failed negotiating summit in February — a bit north of €1.1 trillion. And the recovery plan is largely expected to track a proposal put forward last week by German Chancellor Angela Merkel and French President Emmanuel Macron calling for the Commission to borrow €500 billion and use the money to give grants to the EU countries hardest-hit by the coronavirus.

          Not too big, not too small: Anything less than the €500 billion would be dismissed as unambitious, while a larger amount would potentially draw fierce opposition from the so-called frugal four — Austria, Denmark, the Netherlands and Sweden — which came out against the idea of all EU countries incurring debt to give grants to a select few.

          Reply
          1. Charles 2

            It depends of the meaning of “political problem”. If by that you mean convincing core-structurally-more-productive-than-average countries that they have to perform permanent transfers to periphery-structurally-less-productive-than-average countries, then yes, it doesn’t solve the political problem and you are entirely right.
            If “political problem” means enabling a political will to establish a de facto transfer union without having to legislate a new treaty, then the loophole solves the political problem if the ECJ goes along (by not closing the loophole), the ECB goes along (By ensuring that bonds “temporarily not yet” backed by tax income trade at the right level) and the Council goes along (by enabling a “very long term” Art. 312 Multiannual Financial Framework – the letter of the Treaty says at least five years, meaning 10, 20, 100 or 1000 years is possible !). The first two institutions are already convinced, the only remaining hold-out is the Council, which has to be unanimous, but that has to face Covid induced Great Depression and the Ongoing absence of contribution from the UK. Give it a generalised second wave during autumn (because the Europe Summer migration will happen and virus will mix EU wide – Cf. Your post on will power) and another lockdown and the Magic Money Tree will suddenly look more like a political solution than like a political problem, even for the Dutch !

            Reply
            1. Yves Smith Post author

              I made the point clearly. The Maastrict rules issue is the deficit level, or as MMT types would put it, the net spending level. The EU will have to collectively net spend way above the “deficit” levels allowed by Maastrict, and for some time, to prevent the EU from sinking into deflation and depression.

              IMHO the transfer issue is now secondary, maybe even tertiary. That was yesterday’s problem. The big problem now is huge levels of spending are needed. I don’t see enough leaders having given up neoliberal principles for that to happen.

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              1. Charles 2

                I am sorry that it didn’t get your point immediately, I.e. the need for deficit spending, point taken.
                The nice thing about the EU borrowing loophole is that it accommodates both the concern for deficit spending and the concern for transfers. So the “legalistic political” problem may be solved, and that leaves the “political economy” problem that, as you rightly point out can be a tough nut to crack.
                My Additional point, which I may have not been enough emphasised, is that a “very Long term” MFF Crafted the right way kinds of does the trick : “frugal” countries only need to give their approval once, and after that the EU commission is empowered to deficit spend With only Qualified majority decision and majority control by the EU parliament.
                Very narrow path I admit, but quietly strangling holdout opponent is something Merkel is very good at doing. German and EU political graveyards are full of politicians who underestimated Angela Merkel.

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    2. PlutoniumKun

      I think that if there is a strategy as such within the EU, this is it – to gradually chip away at northern European (its not just German) resistance. As you say, a very big deal for Germany to accept these changes. I assume that the strategy is to use this as a wedge to open up deeper changes. The problem of course is that the true believers (which seems to be mainly the Netherlands and Austria these days) are aware of this and will do everything they can to stop it.

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    3. Ignacio

      Hi Tom67, i very much welcome your comment, but I still have some caveats on the context of such quasi-eurobonds and believe that the dam is still firm in its position. One is the same as in Yves comment that such eurobonds don’t change a dime on the Maastricht agreement that might only see some relax to come later with a vengueance when things should have had the appareance of being fixed. The second, and in my opinion more important caveat, has to do with the political view, which i believe has ample support in Germany (please, correct me If I am mistaken) that commercial surpluses are a positive and should be kept in place permanently. While it is true that these will tend to reduce unemployment in Germany it is also necessarily true that the same tends to increase unemployment elsewhere creating a vicious loop of lending to support the surplus. For me this is the biggest dam to be broken if we want the EU to be sustainable in time. The drift is still widening, eurobonds or not eurobonds..

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  5. Bsoder

    I find Michel Barnier at best to be exceedingly tedious. Ya, he’s just doing his job, but making statements like “only 7% of our exports go to the United Kingdom, when 47% of British exports, blah blah”, mean what? I could look it up and do the math, but I bet 7% of whatever EU number he’s talking about is a larger number. And I’m not sure that the U.K. 47% number is accurate, or what it’s size based on, so what it is. Is it like 7 is larger than 5? Can we have some real data? And Barnier knows he’s playing this game.

    Like it or not the U.K. is gone and ain’t coming back. And when I see how lousy the EU is in dealing with Covid-19 on any level, seems a benefit not to part of any of that. Can’t wait to see how climate heating is going to be handled. The problem with reality is it doesn’t care about your feelings. As to CV19, here at the lab, I have to say the current data is very odd, almost impossible, weird. Can’t say, cause I’m not publishing as it would only create more confusion. So it’s first principles- first do no harm – to people. What worries me is only 3-4% of almost any given population has been exposed to CV19. What happens next? The models are useless.

    Reply
    1. paul

      Of course he might seem tedious, he has to repeat a fairly clear position to the UK team which changes every week.
      The latter is happy to deny anything which went before.
      They seem to think an IDOX based lansdlide gives them a mandate over the EU.

      I did say early last year that, by more foul means than fair, the hard brexiters have won.

      They,unfortunately, are pleased by general misery.

      It makes them look so much better.

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    2. d

      its not like the UK has dealt with the virus better is it? seems like they have even gone and beat the Italians numbers, which would seem difficult to do, but they did it any way.

      so nothing the UK did about the virus seems to be some thing to brag about

      Reply
  6. David

    Very little seems to have happened on the M2 front since the two leaders announced their initiative. Macron has kept a very low profile, and it’s Philippe, the Prime Minister, who has been making the announcements. He’s a competent technocrat, and it’s generally thought that his low-key style is better suited to the crisis than Macron’s excitable rhetoric about being at war. Indeed, some commentators have suggested that part of the imbalance between Paris and Berlin results from Macron’s inability actually find an appropriate register in which to speak, which (it is argued) is not a problem for Merkel. As it is, the French media is largely concerned with the domestic consequences of the epidemic (notably the opening of bars and restaurants tomorrow) and with reporting, with grim amusement, on the epidemic of receiptless shopping underway in the US.
    I thought, and still think, that Macron’s initiative was essentially political; at once to recover some of the political status lost in the bilateral relationship, and to promote the idea that Europe was doing something creative. In reality, French confidence vis-à-vis the Dear Enemy has taken another knock as a result of the virus. Much as the French complained about the cost and complexity of their health system, they did feel it was perhaps the best in the world. No more, after the virus. Rightly or wrongly, the Germans are seen as having done a lot better.

    Reply
    1. Ignacio

      I think now everybody is now focused on the act of licking their wounds and all this is somehow passing without anybody paying attention.

      Reply
  7. Susan the other

    The similarities between the EC and the US Congress – the 10 year budget fudge – indicates we have a monolithic problem in the Western world. It’d be interesting to have a comparison with China or India on their budgeting protocols. Maybe no better since they all have to deal with us whether they like it or not. And this quote on the recent EU QE is a keeper, “I don’t find it terribly confidence building to see the only benefits listed as ones to financial assets.” Indeed.

    Reply
    1. OpenThePodBayDoorsHAL

      The number of times a currency union has worked can be counted on, well, the remaining fingers on the hands of a demolition expert.

      And I’m not sure how one would describe Target2. Italy already owing Germany a cool trill and a half in an accounting fiction. (Yes I know there are many accounting fictions maintaining our various bank monies).

      And the proposed bond would have full faith and credit based on which government’s taxing of citizens, exactly?

      Reply
  8. Ren

    No sympathies for the UK if Brexit ends up harming itself more than doing good. They enthusiastically voted for it. And judging by the likes of Eddie Dempsey from the rail union being quite happy that the Corbyn left lost than being sad that the Tories won, let’s see what they come up. WTO rules anyone?

    Reply
  9. RBHoughton

    The only chap who makes sense about the EU to me is Yanis Varoufakis so, for my money, I would place my bet on Dien 25. The other commentators, politicians and businessmen, say different things, sometimes mutually contradictory.

    Reply
    1. Yves Smith Post author

      Um, Yanis favors open borders and strong labor protections. Those don’t go together.

      And as much as Yanis has made extremely astute economic analyses, he’s no where near as sure-footed on the politics.

      Reply

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