Friday, February 01, 2019

Thoughts from Galicia, Spain: 1.2.19

Spanish life is not always likeable but it is compellingly loveable.
Christopher Howse: A Pilgrim in Spain
  • Spain is one of those European 'socialist' countries in which there's a much more balanced - and less controversial - healthcare system than in, say, the UK. Private medical insurance is a well established aspect of this and even 'left-wing' folk - teachers and trade unionists, for example - have their own schemes. The end result is that a far higher percentage of the population here take out - rather less expensive - insurance than in the UK. And this El País article suggests this percentage is markedly increasing, because of cuts to the public health service.
  • As for Brits and their healthcare in Spain - The British government has first terrified them by warning their benefits could end on 31 March and then tried to calm them down.
  • Good news for some - Spain's economy grew by 2.5% last year, more than in most other EU countries. Forecasts for this year are a bit lower. Probably reflecting greater competitions in the key tourism sector. And maybe Brexit.
  • Spain is now tops when it comes to cocaine hauls, it says here.
  • On a parochial note . . . Perhaps I got too excited yesterday at the prospect of some sense being introduced into the system of road signs on the N550 between Pontevedra and Santiago de Compostela. For the administration involved is that of Pontevedra province, which ends (I think) between the towns of Pontecesuras and Padrón. The latter, like Santiago, lies in the province of La Coruña, where the administration doesn't seem to be concerned about the mess. 
The UK and Brexit
  • One opinion: May is in a stronger position than you think. The Conservative Party has entered the first stage of what it hopes will be its recovery. On Tuesday night, in a series of votes in parliament, it bought unity at the price of fantasy. Which means that an orderly Brexit is now the likeliest outcome.  . . .  it could be that hard choices are dawning on even the most intransigent and unbiddable of zealots. 
The EU and Brexit
  • There's a conundrum that's been posed and to which no one seems to have yet given an answer - If Ireland and the EU won't contemplate a hard border between Ireland (i.e . the EU and Northern Ireland (i.e . the UK), why are they driving things towards exactly that?
  • Addressing this question and reverting to the issue of economic damage of a Hard Brexit to the EU - and specifically Germany - these are the opening lines to the first Ambrose Evans Pritchard article below: German anger builds over dangerous handling of Brexit by EU ideologues. A group of top German economists has told the EU to tear up the Irish backstop and ditch its ideological demands in Brexit talks, calling instead for a flexible Europe of concentric circles that preserves friendly ties with the UK. Who knows, this might yet happen. Of course, Macron won't accept these radical ideas, but Merkel (and her successor) might. That's all it really needs.
  • If I were in charge, I'd suggest to the governments of Germany, the Netherlands and maybe one or two others that they join the UK in new union. Called,  I dunno. Maybe The Hanseatic League.
The EU
  • Ambrose Evan Pritchard became an EU sceptic a few years ago and this possibly shows in his second - rather pessimistic - article below on the state of the union and the difficulties it's likely to face quite soon. Especially if there really is a Hard Brexit. In this article AEP also gives his opinion on the Gordian knot of the Irish border, dismissing it as a real barrier to a sensible Withdrawal Agreement.
  • What I particularly admire about Fart is that he clearly doesn't care about how stupid he looks to most of the USA and, indeed, the world. For example his inane comments about the very cold weather in the Mid West, when he confused weather and climate. In fact, though, Fart is so stupid he doesn't know how stupid he is. And, for this reason, I'm probably wrong to say he's aware of the majority's adverse reaction to the nonsense he spouts. So, in his mind, there's nothing for him to care about. (I believe I've cited a technical term for this degree of stupidity but I can't recall what it is). Labouring this, the end result of this analysis is that my admiration for Fart's care-less-ness is surely misplaced.
  • Here's a US commentator on Fart's relationship with the reality in which the rest of us struggle: At every turn, Trump is shown to inhabit a world that bears virtually no resemblance to the one we actually live in. And that’s a very, very dangerous thing. 
  • More here on his 'foreign policy fantasies'.
  • And here's his 'mid-term report card'.
  • Is it too much to hope that this egomaniacal narcissist will walk away from a 2nd term when he realises he isn't going to get it? Well, if he's as stupid and as unaware as I've suggested above, Yes it probably is too much to hope.
Social Media
  • Facebook's founder, Mark Zuckerberg, insisted last night that his company had “fundamentally changed” after a series of scandals as the company reported fourth-quarter results that beat Wall Street’s forecasts. And I'm a Dutch uncle.
Finally . . .
  • The 40 sparrows who live in my roof appear to have disappeared. I think I worried about this last winter but they duly came back. But now I have a specific bird to feed. I went to the garden centre for some privet plants and, on an impulse, liberated a canary on the way out. Cost me €90 euros in all. I say 'liberated' but I mean to fly around one of my 2 bathrooms, not the Spanish winter wilderness. I must be getting old.

1. German anger builds over dangerous handling of Brexit by EU ideologues: Ambrose Evans Pritchard

A group of top German economists has told the EU to tear up the Irish backstop and ditch its ideological demands in Brexit talks, calling instead for a flexible Europe of concentric circles that preserves friendly ties with the UK.

Brussels must “abandon its indivisibility dogma” on the EU’s four freedoms and come up with a creative formula or risk a disastrous showdown with London that could all too easily spin out of control.

A joint report by the influential Ifo Institute and universities across Germany and Europe warned that Brussels may be deluding itself in thinking that the EU has the upper hand in all respects or that the British will inevitably capitulate before March 29.

“In a standard game of chicken, the actor who loses the most will dodge first. Can the EU really be sure that losses are sufficiently asymmetrically distributed that it ‘wins’ this game?” the report asked.

“This is a very dangerous game, both for the UK and for EU. It is wiser to take the threat of a hard Brexit at face value and react accordingly. Recognising that a hard Brexit is in no one’s interest and that it would cause irreparable political as well as economic damage, we call both on the UK government and the EU Commission to rethink their ‘red lines’ and return to the negotiation table,” it said.

The report implicitly rebuked the European Commission for mishandling its negotiations with Britain and for trying to use the legal advantage of the Article 50 process to dictate a harsh settlement, with little regard for long-term strategic and diplomatic interests. “Since 2000, the United Kingdom paid a net contribution to the EU budget of €76bn. One may argue that this fact alone merits a fair treatment of the second-largest European economy,” it said.

The report is led by Clemens Fuest and Gabriel Felbermayr from the Ifo in Munich but includes the chairmen of the advisory boards of both the German finance and economics ministries.

It proposes a new supranational trade body in which the EU and Britain both are members with full voting rights. It would cover goods but exclude services, intellectual property, foreign investment, or social areas such as health.

This has features in common with Jeremy Corbyn’s proposals for a permanent customs union with an element of UK co-decision. The difference is that Britain would not be an adjunct to the EU’s arrangement.

Both sides would be joining a new entity, dubbed the "European Customs Association’". The authors suggested that the European Court might be the final arbiter but accepted that disputes could equally be resolved by a bilateral tribunal - akin to the EFTA court - if this was unpalatable to Parliament.

Such a customs association would amount to a revolution in EU affairs. Brussels would be giving up a degree of control over an area that is already part of the EU acquis. This would go against the teleological thrust of an ever more integrated superstate structure that has prevailed for half a century.

The EU’s trade officials are the shock troops of the European Project. The plan is unlikely to be accepted, but is indicative of the shifting mood in senior policy circles in Germany. There is a growing sense that the EU has been captured by an ideological priesthood.

It is failing to adapt to the realities of a complex Europe that is pulling in different directions and must be managed with supple statecraft. “We have two visions over what Europe is going to look like in the future and they are in conflict. This is what Brexit is all about,” said Prof Felbermayr, the lead author.

“I am very angry about what has happened. Everybody in Europe is pointing the finger at London and blaming Theresa May, but nobody has been questioning whether Brussels has been doing the right thing,” he said.

“From the German point of view we need Britain as hedge against countries with protectionist instincts like France and Italy. The British are closer to our liberal free-market tradition. We also need Britain in this customs association because it makes Europe’s GDP 20% larger and gives us more bargaining power with China, India, and the US.”

Growing dissent in Germany also reflects worries that a no-deal Brexit could lead to a serious economic shock and crystallise the eurozone’s long-festering problems, starting with a pan-eurozone banking crisis and a fresh Italian debt drama.

Italy fell into recession in the second half of 2018. It is the third slump in a decade and each time the debt ratio climbs closer to the point of no return for a country with no sovereign currency or monetary instruments.

An earlier study by IW Institute in Cologne warned that a worst-case hard Brexit could slash German exports to the UK by 57pc, with serious disruption to supply chains and a huge loss of sunk investments.

Germany’s economy is already struggling with the slowdown in China and emerging markets. A blow on this scale at this juncture would push it over the edge into a sharp contraction.

The Ifo-led report said the EU must stop trying to shoehorn Britain into a customs territory where it is reduced to a rule-taker with no say. This is unworkable over time. It will lead to friction and must break down in acrimony. “If it is going to have any credibility, it must offer mutual benefits,” said Prof Felbermayr.

The EU’s current plan replicates the failed "Turkey model". Ankara has to accept tariff reductions whenever the EU does trade deals with other countries or blocs, but does not secure automatic reciprocation from these countries. “It is a colonial relationship and Britain would be in the same position,” he said.

The report said the EU needs a profound shake-up. Its habit of imposing a ‘one-size-fits-all’ integrationist regime on reluctant countries must be challenged. “In the long run, the current model may be inherently unstable,” it said.

Europe’s tut-tutting over cherry-picking or "cakeism" evades the core issue. If countries are not allowed to participate in the European economy on a partial footing, they will seek allies elsewhere and gravitate to hostile camps. “It is a question of economic self-interest. Putting obstacles is irrational and strategically unwise,” said the report.

The authors said the EU doctrine of the four indivisible freedoms -  goods, services, capital and labour – is dogma with no grounding in economic science. Under the standard Heckscher-Ohlin and Mundell trade models, free movement is necessary only for currency unions.

The report has some shrewd observations as to what might actually happen in a no-deal rupture. Britain would not impose a hard border in Ireland. The EU would then be in an awkward predicament. If it compelled Dublin to erect border infrastructure against its will, it would face an Irish nationalist backlash.

It would also face demands for financial compensation at a time when it might not be able to count on all of the UK’s £39bn exit fee. Prof Felbermayr said Britain might immediately tear down its global customs barriers and opt for unilateral free trade - at least for a while - leaving European exporters struggling to compete in the UK markets against the cheapest products in the world.

If so, the chaos at customs posts would chiefly be on the EU side, at their ports. They would not be ready to handle rules or origin and clearance procedures on such a scale, causing havoc to EU supply chains.

Prof Felbermayr said European companies would be up in arms, blame their own governments and pressure the EU to drop the tariffs: “I don’t think anyone in Brussels has really thought this through.”

2. No-deal Brexit would push Europe back into deep recession, with explosive consequences: Ambrose Evans-Pritchard

Economic growth across the eurozone core has dropped to stall speed. This is the price that Europe pays for clinging to a mercantilist trade model.

If you depend on perpetual surpluses and the rest of the world’s consumer demand to stay afloat, you become acutely vulnerable in a Sino-led global trade slump.

Italy has been in recession for the last six months. Credible forecasts are warning of outright contraction for the whole 2019 as well, posing a lethal threat for Italy’s fragile debt dynamics.

Germany and France are both in an industrial slump. The IHS Markit composite index of French manufacturing and services fell deep into contraction territory in January.

These economies are at a dangerous juncture in the economic cycle where - if they are not careful - the ship no longer rights itself. It tips too far and capsizes. That is how downturns suddenly turn violent.

The real risk of a third eurozone recession in a decade greatly raises the stakes of a no-deal Brexit. Seen through the ‘global macro’ lens of hedge funds, the EU position is weaker than it may appear to those living in the Westminster or Berlaymont bubbles.

This is not to predict how the EU will react to Theresa May’s demand for renegotiation of the Withdrawal Agreement. Europe’s authorities are prone to error. They drifted into the double-dip recession of 2011-2012 with astonishing ineptitude, and persisted in austerity overkill even after the destructive effects were obvious. They may equally mismanage Brexit.

But what should be clear to everybody in Brussels, Paris, Berlin, or Rome is that the eurozone cannot withstand a second episode along the lines of 2011-2012.  Southern Europe is already a populist powderkeg. Latin societies will not tolerate another round of swingeing austerity cuts. Nor is there any appetite for fresh bail-outs in Germany where the anti-euro AfD party chairs the Bundestag’s budget committee.

If Europe’s authorities drop the economic ball again, they can kiss goodbye to the EU Project. Pious talk about the sanctity of the single market will count for nothing.

The Commission’s Jean-Claude Juncker has told Europe to “prepare for the worst”, and the worst is what he may well get if he persists in imposing a Withdrawal Agreement that breaks up the integrity of the United Kingdom, and that British democracy cannot accept.

France’s Emmanuel Macron says the Withdrawal Agreement cannot be changed. So does EU president Donald Tusk. But what should we really make of mechanical messages scripted in advance?

Europe's leaders suddenly face a new situation: the Tory party is miraculously united and has stated explicitly that the Irish backstop is the stumbling block to a Brexit deal. Brussels can longer keep pretending that the Commons is split in too many ways and on too many issues to make it worthwhile negotiating anything.

Mr Juncker repeated on Wednesday that “we still don’t know what the House of Commons is exactly for.” Actually the message from Westminster was crystal clear.

Amendments that bind the Government’s hands all failed. Hopes of pushing Britain towards a softer ‘Norway Plus’ or a second referendum are fading. This may change over the next two weeks but right now Brussels is staring at a binary choice that it did not expect: a no-deal Brexit with all its awful consequences for Europe, or the Withdrawal Agreement without the mischief of the backstop.

The psychological tables have turned. It is the EU that starts to look intransigeant in refusing to heed the legitimate concerns of Parliament and Ulster Unionists over the backstop. Withdrawal on WTO terms becomes politically tenable in Britain if enough people conclude that Brussels is the cause of rupture rather than Theresa May.

The EU’s Brexit task force made a strategic blunder by weaponising the Irish border in order to shoehorn Britain into a permanent customs union (and single market by implication), aiming to lock in the satellite status of EU membership without voting rights or right of unilateral exit. This was to butt into an neuralgic intra-community issue for ulterior purposes.

As the Commission’s negotiator Sabine Weyand told EU ambassadors, the agreement “requires the customs union as the basis of the future relationship”. The British “must align their rules, but the EU will retain all the controls.”

I suspect that Downing Street was complicit in this since it gave Theresa May a way to wriggle out of her Manifesto pledge to leave the customs union. The EU’s error was to think that such a technocrat stitch-up in the interests of the CBI and German supply chains would secure the assent of British democracy. Parliament has now taken charge - not in the way that Brussels expected - and Europe is hoisted by its own petard.

Mrs Weyand’s backstop does not uphold the Good Friday Agreement. It violates both the spirit and the letter of that accord.

Lord Bew of Donegore, one its principal architects, writes for Policy Exchangethat the backstop leaves the Unionists with a deep sense of betrayal and risks stirring up fresh conflict in “unpredictable and dangerous ways”.

“The Backstop, by placing key areas of North-South co-operation under the operation of a new regime, without the consent of the Northern Ireland Assembly, would turn the Good Friday Agreement on its head,” he said. Note that the accord says nothing about the need for an open border. That is a concocted imperative by Dublin and Brussels.

The British push-back has begun. For over two years the UK has passively allowed Brussels to get away with its twisted narrative of what upholds peace in the UK territory of Northern Ireland. The EU will henceforth have to explain how it can possibly be in the interests of peace to trash the sensitivities of one party to the Good Friday Accord.

It is true that Brexiteers paid little attention to Ireland during the Referendum, though personally I was painfully aware of the risks and nearly voted Remain precisely for that reason. The Good Friday Agreement is anchored in the political assumption that both countries would remain in the EU.

But it is a huge leap to go from there to argue that Britain may not withdraw from the customs union or reassert trade and regulatory sovereignty.

The Good Friday Agreement makes no mention of the need for an open trade border between Ireland and Northern Ireland. But there is no going back this kind of check even in a no-deal Brexit Credit: PA archive

The border issue can be managed by exempting 80pc of small business trade entirely from customs control, limiting rules of origin checks to large companies using trusted trader schemes and modern technology away from the frontier. The mantra that this is ‘magical thinking’ is a negotiation blocking tactic. Singapore introduced exactly such technology last year (installed by a British firm).

Whether or not premier Leo Varadkar has gone too far in competing with Sinn Fein and in flirting with Irish mystical nationalism is a subject I leave to others, but Lord Bew is right that Ireland also has obligations under the 1998 agreement that it must legally uphold. Pacta Sunt Servanda.

Europe’s leaders will now have to decide whether they are going to push their demands to the point of absurdity. Will they stake all on a backstop that is of much weaker legal, political, and moral force than they have so far pretended, and is on balance harmful? In purporting to defend Ireland will they instead precipitate a no-deal Brexit that brings about the exact opposite?

Will they risk an economic shock and potentially a violent contraction of GDP through multiple channels of contagion and through cascading effects on trade, supply-chains, capitals flows, and confidence, when much of the European banking system is already in serious trouble?

The eurozone has no policy ammunition left if its Brexit gamble goes wrong. Interest rates are already minus 0.4pc. The European Central Bank has just made matters worse by winding down quantitative easing into the teeth of the latest slowdown. The political bar for fresh bond purchases is exorbitant.

Plain vanilla QE would not be potent enough in any case in a no-deal Brexit scenario. The ECB would have to carry out direct funding of budget spending with ‘helicopter money’. This is politically and legally impossible in the eurozone.

Fiscal stimulus a l’outrance is equally outlawed. Constitutional debt brakes and the Stability Pact get in the way. There is still no automatic lender-of-last resort for EMU countries in distress, no fiscal union, and no pan-EMU deposit scheme to break the 2012 bank/sovereign ‘doom loop’.  Monetary union remains a fair weather construction built on unworkable foundations.

If the EU wishes to push Brexit to the test with a maniacal insistence on a bogus formula for a confected Irish crisis that is greatly of its own making, then we should batten down the hatches and let history run its course.

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