Thoughts from Heald Green, England: 22.12.18

Spanish life is not always likeable but it is compellingly loveable.

- Christopher Howse: A Pilgrim in Spain. 

If you've arrived here because of an interest in Galicia or Pontevedra, see my web page here. Garish but informative.

England

• Here's a cartoon for reader Eamon in La Coruña:-

Spain

• Here's The (ever-helpful) Local with advice on seasonal food and drink.
• El País explains the attractions of the newish, far-right Vox party here.
• This is a bit worrying, not that I used domestic flights.
• Here's a reference I came across to fine eating in Galicia. I researched a bit but could find nothing more than this drivel from Private Eye's “Pseuds' Corner”: Contrasting events of the week: In 'The Birth of Tragedy', Friedrich Nietzsche creates a distinction between two elements of human instinct: the Apollonian (formal, rational, structured) and the Dionysian (passionate, chaotic, ecstatic). In restaurant terms, it’s the ball-bearing precision of foodie icon @luxeat’s Yashin Ocean House dinner vs the last days of Rome mania — and whatever the hell else was happening — at a gathering of British food heroes in Galicia. See it as a primitive personality test, perhaps: which to choose?

The Netherlands

• I wrote recently from there of the country's marvellous bike paths but also of the danger of speed-limited scooters that are allowed to use them. It turns out that these aren't the only vehicles causing consternation, injuries and even deaths around the Netherlands. There are e-bikes, hoverboards, Birò cars, stints, mopeds and snorfiets (which might be the same thing). Cue consternation and legislation in some cities. More on this here. But no mention of segways, which are banned on pavements in the UK, but not Spain. These were banned in the Netherlands back in 2007 but more recently the law seems to have been relaxed. Which seems rather contrary to what's reported above. Funny people. But quite nice, for the most part.

Germany

• Friends in Germany had already surprised me with this situation. Not what we've come to expect from the efficient Teutons.

The UK and Brexit

• I read stuff like this and am encouraged: How about no-deal, then? Chaos, blockades and tariff wars are highly unlikely. There will be some nail-biting short-term turbulence and sabre-rattling on both sides, maybe even some temporary shortages, but both sides have so much to lose from an enduring stand-off that self-interest will prevail.
• Then I read Richard North, as here, and return to pessimism and depression
• Above all, I wish I could believe that things will go as Ambrose Evans Pritchard hopes they will at the end of the article on Germany below.

The USA

• Says the BBC: This week in Washington has distilled all the chaos, upheaval, drama and conflict of the first two years of the Donald Trump presidency down to its purest form. It's been a bungee jump from high to low, then careening everywhere in between - and it's not altogether clear that it won't end with the loud and final thud of an impact on the ground. The evidence for these claims is in the article.

Spanish

• Words of the Day: El Gordo

Anti-Social media

• Are you a 'dumb fuck'?

Finally . . .

• This song is the Christmas Number One in the UK. Dear god.

© [David] Colin Davies

THE ARTICLE

No-deal Brexit risks a rude economic shock for Germany and fragile eurozone: Ambrose Evans-Pritchard

The German car industry is reeling. Share prices are starting to reflect existential risk. A no-deal Brexit would be an unwelcome shock

There is no such thing as Theresa May’s Brexit deal. The Withdrawal Agreement is merely a legal contract to pay £39bn, with the Irish back-stop for good measure.

In exchange, Britain secures a transition phase with no veto rights, bound to accept all fresh EU law even when it threatens the national interest.

On payment of the exit fee we also secure the ‘privilege’ of starting talks on a deal. The terms of that deal must be agreed by all 27 EU states (unlike the Withdrawal Agreement).

This will be a negotiating nightmare. We will face the same cliff-edge in two years, but with less leverage and unanimity to contend with.  

Whatever Mrs May now says, the UK will probably end up having to accept the full single market for goods and the customs union, freedom of movement, fishery quotas, and the full writ of the European Court, in order to get any trade deal.

The package will be a sort ‘Norway double minus’ with barnacles. The EU will lock in goods trade, but exclude services. We will have sacrificed the biggest part of our economy for nothing, entirely on terms that favour Brussels. Personally, I prefer to have the showdown right now.

The EU’s own circumstances have deteriorated dramatically over the last year. This matters. The first ‘recession’ casualties of Brexit have been Germany and Italy, not Britain, mirabile dictu.

While Italy has little trade exposure to the UK, it has secondary exposure through the interlinkage between the Milan-Turin industrial hub and Germany’s export machine, and that machine is in trouble.

The IFO index of manufacturing sentiment for exporters released this morning has gone off a cliff. IFO singled out a clear culprit: “German exporters are beset by fears of a hard Brexit,” it said.

The warnings are suddenly coming in thick and fast. Eric Schweitzer, head of the German Chambers of Commerce and Industry (DIHK), warned that “Brexit threatens massive consequences for the German economy”.

“We must be clear what this is all about. More than 750,000 jobs in Germany depend on exports to Great Britain. Just-in-time production and supply chains are at risk,” he said.

Dieter Kempf, president of the German Industry Federation (BDI), said the situation has become “explosive” as the clock runs out. “We have only got three months left and nobody should be playing games. Without an agreement there is no transition phase, which our companies badly need,” he said.

For the last two years Germany’s industrial lobbies have adopted a dismissive tone on Brexit, deeming it a sad spectacle of economic self-harm, with minor implications for them. They would not rescue Brexiteers by pushing for a friendly market deal. The integrity of the EU project matters more.

It has not been hard to keep up this mantra. The British government has yielded at each stage. What Deutschland Inc was  not expecting is that Parliament might block the Withdrawal Agreement altogether, leading to a hard Brexit by default.

This has begun to concentrate minds. People are digging out a report by the IW Institute in Cologne warning that a hard Brexit could slash German exports to the UK by 57pc.

Needless to say, Germany is being hit by multiple shocks, but Brexit is clearly one of them. The much-needed fall in sterling has clipped German imports and led to import substitution at the margin.  The current account deficit has improved markedly when adjusted for full-employment (the relevant metric).

Germany is paying the price for relying on a structural trade surplus to underpin its economic model. Over a fifth of that global surplus is with Britain (€54bn)

The EU’s net exports of goods is siphoning off 4.5pc of British GDP each year, a large drain in aggregate demand. In a WTO hard Brexit - with no quick reversal to free trade - the EU would “crash out” of the British market, to borrow a phrase.

The structural effect would be to shift some of that demand back into the UK economy. This would have a cushioning effect, ceteris paribus. The EU economy may be five times as big (not seven times as often claimed) but such a switch would be a pure loss them.

As ex-Brexit Secretary Dominic Raab writes in this newspaper, some of the funds currently transferred to the EU could be used under WTO rules to shield specific sectors such as car production - smaller than people think in GDP terms.

I would go further. In an emergency the Government could nationalise parts of the car industry and redirect the plants to supply the UK internal market, buttressed by investment in UK subcontractors. President Obama nationalised General Motors temporarily - and successfully - in 2009. Sovereign states can do what they want.

The question for the German political class is where the pain threshold lies when so much else is going wrong beside Brexit, and whether it can risk a full-blown slump in a eurozone that no longer has any monetary defences against deflation and that is uncomfortably close to a fresh sovereign debt crisis.

Many of the latest problems track monetary tightening by the US Federal Reserve. Liquidity is draining away in Europe’s offshore lending markets for dollars, squeezing European lenders. Deutsche Bank’s share price has halved this year to an all-time low of €7.64.

The surging dollar and a doubling of LIBOR rates this year have set off an emerging market crunch. China’s slowdown is deepening. Tentative monetary and fiscal stimulus have failed to gain traction. Capital Economics said the true level of growth in China has dropped to 5.5pc - based on proxy measures - and will continue falling to 4pc by mid-2019 before touching bottom.

This is a Chinese recession.  Germany is taking the full brunt, as it typically does in global economic downturns. The country is highly leveraged to the world’s trade and industrial cycles.

By curse of timing it comes at a moment when the German car industry is reeling from the diesel conspiracy and the systemic threat of electric cars, with Donald Trump’s threat of 25pc tariffs still hanging dangerously.

Volkswagen had to accept humiliating terms on a €5bn debt issue in November, treated like a fallen angel. Alliance Bernstein says Germany’s car companies are trading at levels hinting at bankruptcy risk. Plainly they are in no fit state to cope with a full-blown Brexit shock.

That would bring the guillotine down on 750,000 car exports. Britain is Germany’s biggest single car market - bigger than the US or China - and an integral part of its production system. This is the sort of problem that Berlin must think about as the British government activates its no-deal plans and puts the army on stand-by.

My fear is that Berlin will try to head off this threat by offering Theresa May just enough legal pomade on the Irish back-stop to slide the Withdrawal Agreement through Parliament, without really changing the substance.

Sir Ivan Rogers, former chief Brexit negotiator, has issued a devastating attack on the wishful thinking and incompetence of the Government and much of the Brexit movement for the last two years. His lecture to Liverpool University has been republished by The Spectator and is a mandatory read.

He argues that the EU will grind us down mercilessly over the transition phase, running the clock until our backs are pressed against the wall and we forced to yield to all demands on abject terms.

Inadvertently, he makes the case for resistance. He implies that the EU will exploit the UK vassal status as a taker of EU law and regulations to inflict grave harm, and he paints an insider portrait of a truly villainous EU machine in Brussels determined to ensure that Brexit is agonizing, unworkable, and punished.

On cue, the Commission announced with some relish that its no-deal contingencies will “be very damaging for UK financial services”. Why does an EU official insert such language, and why does Jean-Claude Juncker let it go through?

Sir Ivan almost admits in his tirade that the EU cares not a whit about its good faith commitment as a WTO member to avoid impediments to trade, or its legal obligations under the Vienna Convention and Article 4 of its own Lisbon Treaty.

If that is the case, Theresa May’s Withdrawal Deal leaves us is great national jeopardy.  Nobody knows exactly what would happen in a no-deal rupture because so much depends on how EU would respond, and how it judges its own vulnerabilities. The contingency plans released today tell us little. They are an exercise in pressure.

But we do know exactly what is going to happen to us if we persist on the Prime Minister’s current course. A no-deal outcome is a big risk, but the terms of the Withdrawal Agreement pose an even bigger risk.

We are not so weak, and the EU is not so strong, that submission is necessary. The sooner we regain our nerve and break completely free from this tightening trap, the safer we will be.