Thoughts from Pontevedra, Galicia, Spain: 25.4.20

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

- Christopher Howse: A Pilgrim in Spain*

Note: I'm indebted to Lenox Napier's comprehensive Business Over Tapas for some of today's items.

COVID-19 ROUND-UP

General

• Doctors are reported here to be 're-thinking the role of mechanical ventilation.'
• Discouraging news re the trial of the potential antivirus drug remdesivir.

Spain: Sees more recoveries than new infections for the the first time, while the death toll sees a significant drop. See here.

Sweden: Will its gamble pay off? See this video. Right now, its death/m number is 213.

Ireland: Rising rapidly in terms of per capita deaths. Having been below the USA (now at 156/m), Ireland's number has soared to 205, not far behind Sweden's. Compare with Germany at 69 and Belgium at 576. Though no country beats New York, at 1,085, and New Jersey, at 632.

The Netherlands: Fields of tulips go unpicked as the virus blitzes demand.

Life in Spain in the Time of Something Like Cholera

• María's Chronicle: Day 41.
• British residents will be vital to the recovery of the tourism industry. See why here.

Real Life in Spain

• The coalition government is finalising plans for the introduction in May of a guaranteed minimum income scheme, to the benefit of low-income families. It's said this'll be permanent and so survive the end of the virus crisis, whenever that'll be.
• The government is looking at significantly lowering the sales tax(IVA) on e-books and the digital press.
• Spain remains at 29th (out of 180) as regards freedom of the national press. If you think that's bad, the UK comes in at 35th.
•  In Spain, the phenomenal quantity of fake news and hoax information has been dubbed an ‘infodemic’ by El País.  The capacity of Vox to manage mass misinformation and fake news campaigns is not new; the European Commission sounded the alarm on the online behaviour of Vox and its network of fake accounts and bots last May. More on this here.
• Centre ground politics in Spain is notable for its absence.
• Spain has a complex, semi federal administration system with an additional layer of local government. In 'a country of low ethics', this is a breeding ground for corruption. Of which Spain has a very long  and notorious record.
• A politically motivated trial and sentencing? Often a suspicion in Spain.

The EU

• The EU is slow and lacks solidarity in the face of the coronavirus crisis. Click here.
• President Macron issues an ultimatum to Europe's German bloc:  Cough up Covid trillions or lose the single market': See there article below.

The USA 

• You really do have to admire the OFC's ability to lie outrageously with a straight face: I was being sarcastic to a group of hostile reporters of the fake news. Just as the video shows. Was there ever anyone better who didn't have the initials AH or JG?
• Is it a good thing or a bad thing that a percentage of the people stupid enough to be influenced by him will die?
• This is a report on the theme of his (total lack of) integrity and its fatal consequences
• A scandal? The American healthcare system is the most expensive in the world, and delivers some of the rich world’s worst health outcomes. It is also a gigantic engine of Sheriff of Nottingham redistribution, taking money from everyone—poor, middle, and well-to-do—and distributing it upwards to well-heeled doctors and providers in hospitals, pharmaceutical and device manufacturers. A family health policy cost $20,000 on average in 2018, and because so much health insurance is paid as part of employment, this high cost reduces wages and replaces good positions in large firms with the sort of outsourced jobs in service supply firms that offer scant security and few prospects. The cost of healthcare is essentially a poll tax on all Americans. From this article on the wider theme of inequality and its measurement.

The Way of the World 

• The position of the US in the Middle East might now be described as one of impotence tempered by assassination. From this article.

Spanish

• Phrase of the Day: 'Bare-faced liar': Possibly mentiroso descarado or mentiroso sinverguenza. Better ideas very welcome.

Finally . . .

• If you have white-tiled and/or parquet floors and have double the usual number of people in your house and they can't leave 24/7 but occasionally go into your garden, you'll find that the amount of sweeping and mopping you have to do increases markedly. But at least it helps to pass the time. And, in truth, it's not even a pin-prick. Just not what I prefer to spend time doing. On whatever day it is.
• Why does Sky News call the computers given to virus patients by their brand name and not just 'laptops'? If they aren't actually made by the company which owns the brand and the name (like Hoover years ago) is being used generically, it'll surely be worried about loss of trade-mark protection.

THE ARTICLE  

Macron issues ultimatum to Europe's German bloc: Cough up Covid trillions or lose the single market: Ambrose Evans Pritchard, the Telegraph

European leaders have dodged their "moment of truth". The Covid-19 emergency package averts an immediate crisis but fails to draw the political poison now threatening monetary union. 

It has not cut Italy’s borrowing costs to bearable levels and is too little either to ensure the economic viability of southern Europe’s debt bloc or prevent the North-South divergence from spiraling out of control. It leaves the European Central Bank holding the fort, compelled to cover the exploding debt issuance of eurozone treasuries and to work overtime to stave off a run on Club Med bond markets. This places the institution in an invidious legal position. 

The vague agreement on Thursday night was billed as a compromise. EU veterans say that it was in reality a "German" outcome, repeating the pattern of the eurozone debt crisis. The northern bloc rejected any serious move towards joint debt issuance or fiscal transfers.  Aid will come in the form of loans and must be repaid. Any extra debt will be subject to the surveillance and contractionary ideology of the EU Fiscal Compact once the pandemic is over. 

Chancellor Angela Merkel said grants of money are "not in the category of what I can agree". She warned peers with icy precision that if Europe is going to spend vast sums then all states would have to submit to “coherent taxation policies”.  This is a polite way of telling Italy that the quid pro quo is wealth confiscation to restore debt solvency, akin to what happened in the early 1990s or with Argentina’s corralón. It sends shivers down Italian spines.   

The new Recovery Fund – to be fleshed out next month by Commission technocrats – will be linked to the EU’s internal budget and mostly come in the form of lending. It will be subject to Treaty Article 122 to keep tight control. Two-thirds of the trillion-plus headline will be achieved by "crowding in" private money.  Eurointelligence says the intent is to "impress the gullible".

French president Emmanuel Macron did not pretend that there was a summit breakthrough. In a remarkable outburst afterwards he issued what could be interpreted an ultimatum. He had a warning for those rich northern states that "profit" so handsomely from exporting to the South: they might wake up one day to find that the EU single market is "no longer there" unless they are careful. "If you let part of Europe fall, the whole of Europe will fall," he said. "The countries that are blocking are the same ones as ever, the frugals: Germany, the Netherlands... whose  deep psychology and political constraints justify very hard positions," he said.

This accusatorial tone will surely grate in Berlin, the Hague, or Vienna. They know that Mr Macron is trying to bounce the North into fiscal union, exploiting the emotions of the pandemic to change Europe’s constitutional structure. Such a jump violates treaty law. It breaches the German Basic Law and alienates the Bundestag’s tax-and-spend prerogatives. It cannot legally be done with a flick of the political fingers.

Nor is France an honest broker. Marchel Alexandrovich from Jefferies estimates that a U-shaped recession will push France’s public debt to 135% of GDP this year. It would hit 142% under a W-shaped slump caused by rolling lockdowns and delayed recovery. France and Germany had similar debt ratios before the Lehman crisis in 2008. They have since diverged dramatically.  The pandemic shock – symmetric in origin, asymmetric in its effects – is turning France into a full member of the vulnerable Latin bloc.

But Mr Macron is also right. Loans pile more debt on countries already drowning in debt. "That won’t resolve the underlying issue," he said. Covid-19 requires a vast Marshall Plan financed by "joint debt" and "budgetary transfers" to the hardest hit regions. "Our Europe has no future if we don’t do this," he said.

Markets have reacted calmly so far. Italian risk spreads remain stretched – and unsustainable – at 240 basis points but they have not widened. 

The EU did agree on other measures with a nominal value of €540bn but this figure is financial legerdemain. One component is really just €25bn of actual money from the European Investment Bank, to be levered up by private funds to €200bn. "Previous experiences with similar structures such as the 2016 Juncker Plan have been mixed, to put it mildly," said Holger Schmieding from Berenberg Bank. 

There is €100bn in loans for Kurzarbeit jobs support. The last €240bn is to come as lending from the EU bail-out fund (ESM) on "light conditionality". This is politically toxic in Italy – deemed a Trojan Horse for a Brussels take-over - and it is unclear whether any country will touch it. 

Citigroup said each country is being left to meet the shock on its own and therefore that the package will fail to convince markets. "That leaves the ECB, yet again, as the first and last safety net for Europe," it said.

The ECB’s Christine Lagarde told EU leaders that doing "too little, too late" risks repeating past errors and is courting fate. She warned that the eurozone could contract by 15% this year.

Mrs Lagarde also pointed out the fundamental injustice and economic dangers of what is happening. The strong states are spending up to 14% of GDP directly to keep their economies whole and ensure a rapid rebound: the weak dare not match this. Some are spending as little as 1%, implying lasting damage and a blighted recovery. 

Jefferies estimates that a W-shaped scenario would push debt ratios to 183% of GDP in Italy and 158% in Portugal. "Markets are also starting to see just how damaging this recession will be to public sector finances," it said.

Worse yet, the weak may be left further behind in the early 2020s. Giada Giani from Citigroup says Italy will not fully recoup this year’s lost GDP in 2021, and will then flat-line in stagnation until the middle of the decade.

This will destroy monetary union if allowed to occur. The ECB will avert an immediate crisis by mopping up Italian debt under its "pandemic QE" plan. But it cannot keep doing this forever. 

Italian debt made up one third of the ECB’s total bond purchases in March, double the country’s "capital key", yet this has failed to hold down Italian yields. Private sellers are off-loading their bonds on the ECB and rotating the proceeds out of the country in what amounts to capital flight.   

These flows will surface in the ECB’s Target2 payments data. The Bundesbank is in effect having to provide a forced "credit" to Club Med central banks that will soon blow through €1tn. At some point this will become politically and legally untenable.

The German constitutional court will rule on May 5 on how far the Bundesbank can go in supporting the ECB’s emergency policies. The exact wording will be crucial. Markets may suddenly discover that the ECB cannot play the role of permanent saviour after all. Then what?


 *A terrible book, by the way. Don't be tempted to buy it, unless you're a very religious Protestant.