Thoughts from Pontevedra, Galicia, Spain: 1.5.20

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

- Christopher Howse: 'A Pilgrim in Spain'*

Note 1: I'm indebted to Lenox Napier's comprehensive Business Over Tapas for some of today's items.
Note 2: In case anyone's wondering about the disappearance of the foto . . . I'm reverting to the layout of a week or so ago to try to find out why my readership fell by 75% after I'd made some changes. Bear with me.

Life in Spain in the Time of Something Like Cholera

• The government has given us more details about the de-escalation of the lockdown, abiding by the maxim of Keep it Complex and, naturally, raising as many questions as there are answers. But at least I know at what time of the day I can walk for an hour as of Saturday, but no more than 1km from my house, which is 1.5km above the shops and the bridge into the city, as the crow walks.
• I wonder, first, how this is going to be policed, and second, whether the police will issue fines on the day before this relaxation comes into effect. My guess is yes.
• Things were not helped when the PM and the relevant minister said different things about how and where we can meet family members and friends as of, I think, May 11.
• I wonder whether people here are keeping up with the latest WHO advice on masks, given that the great majority of customers in a supermarket last night were still not wearing one, in contrast to all the staff.
• The ex Prime Minister is still being investigated for breaking the rules. I remain confident no sanction will be levied.
• Here's Day 47 of María's Chronicle. As Marías says, after reflecting on what her parents' generation went through: Those of us who remain healthy should appreciate this quarantine, however much it chafes, and however much we want to take up life where we left off. It's now our turn to make sacrifices.  Of course the Y and Z generation kids have no links back to this suffering in Spain between 1936 and the 1960s, nor in the rest of the world during and after the Second World War. And so have little real perspective on things, for which they can't really be blamed, of course.

Real Life in Spain

• Lenox Napier: The far-right Vox got as good as they like to give, when on Wednesday the Prime Minister told them from the parliamentary pulpit, ‘You’re not even fascists, you’re just parasites’. It should be noted that, here in Spain, 'fascist' is what everyone calls everyone who disagrees with them, whatever the respective political standpoints. So the word has lost both all  its meaning and its impact as an insult. Rather like motherfucker in English.
• The PSOE is suing the founder of Vox for incitement to hatred. Which, these days, is far worse than being a genuine fascist. The socialist party has also taken out suits against leading Vox politicians. At the political level, if not elsewhere, Spain is a rather litigious society. Possibly because the great majority of our politicians are law graduates.
• 10,000 nurses and other health professionals who fought against Covid-19 in Madrid have found their contracts have not been renewed
• The Andalucian Organisation of Farmers and Ranchers complains of the brutal drop in prices paid to farmers for vegetables by supermarkets, where prices are said to have held up well. Or even increased in the case of melons - OK, not a vegetable - but they were €4 a kilo in Carrefour this week.
• The Post Office (Correos) has fallen behind on its package deliveries with more than a million in its warehouses. Service will resume next week, apparently. This would explain the non-delivery of my magazines.
• Another HT to Lenox for these images of Santiago cathedral, as was and as is. I should add that the facade, at least, of the cathedral has been cleaned since the latter fotos were taken and now looks as gloriously yellow as it did originally. Not black and moss-ridden.

The EU

• Ryanair's O'Leary has pointed out that France and Germany are breaking EU rules in respect of subsidising their state airlines. 'Twas ever thus in the EU. And fines levied many years later are rarely paid.
• The paralysed ECB plays a waiting game as the eurozone economy goes into 'free-fall', says Ambrose Evans Pritchard in the article below.

The UK

• An informative overview on the Covid-19  situation there, which might well be of equal relevance elsewhere.

The USA

• I'm regularly reminded of advice from a wise American friend: Always bear in  mind that the USA has both the very best and the very worst of the world. And that was way before the era of President Fart. Which has rather proved his point.

Finally . . . 

• About 0.1% of Germans (80,000) are of noble descent (alas, none of my friends), against only around 0.01% in the UK(6,500). Ditto. But I know a lot of rich lawyers . . .

THE ARTICLE:

The paralysed ECB plays a waiting game as the eurozone economy goes into 'free-fall': Ambrose Evans Pritchard, The Daily Telegraph

The European Central Bank has left markets in the dark.  

It warned in Gothic terms that economic output is in free-fall and that eurozone GDP could contract by a calamitous 12pc this year, yet declined to boost its emergency asset purchases or clarify how long it will keep those bonds. It choose not to follow the US Federal Reserve by purchasing junk debt.

The glaring mismatch rattled European bourses and pushed up risk spreads on Italian debt to 240 basis points. It was too little to assuage investors worried that the current pandemic package will run out by October, leaving southern Europe naked as countries struggle to cover the explosive rise in sovereign debt issuance.

Christine Lagarde, the ECB’s president, vowed to keep buying bonds for as long as necessary to fight a recession of “unprecedented speed and magnitude”. She insisted that the institution has €1tn (£870bn) of firepower at hand and will deploy it to prevent financial conditions tightening in whatever country.  “We will not tolerate any risk of fragmentation."

Rhetorical assurances may not suffice. Investors know that the ECB is deeply divided and may be hitting its political and legal limits under EU treaty law with the latest €750bn package of "pandemic QE".

Andrew Kenningham from Capital Economics said there are “nagging doubts” over how far it is willing to go in extremis to prop up the system. Citigroup said Mrs Lagarde had done her “level best not to answer any question” and left confusion over what exactly the strategy is supposed to be.

The obfuscation was deliberate. Her hands are tied. A German-led bloc of hawks on the Governing Council is reluctant to give Europe’s bickering politicians an easy way out or to let the institution become the fiscal backstop for insolvent countries. They are resisting a debt union by the back door.

The ECB focussed its immediate efforts on less controversial stimulus for banks, cutting its loan rate on the next batch of long-term lending (TLTROs) to an historic low of minus 1pc. This helps head off an incipient credit crunch but cannot alone stop the coming wave of defaults or revive crumbling output.

The bank also beefed up its liquidity tools to prevent further stress in the interbank lending markets. The so-called fear gauge –  the Euribor/OIS three-month spread – has risen five-fold since February.

In reality, the ECB is paralysed until the German constitutional court issues its long-waited ruling next Tuesday on the legality of earlier bond purchases. The judges in Karlsruhe typically grumble but go along with EU measures in the end.

However, this ruling is particularly treacherous because the ECB has breached its "capital key" so openly by mopping up vast amounts of Italian debt in what amounts to a state rescue.

Goldman Sachs estimates that purchases have been “heavily skewed towards Italy” since the launch of pandemic QE last month, reaching 35-45pc of the total. It is striking that such massive intervention has so far failed to stabilize Italian bond spreads.

The court ruling has already been drafted. The press release stretches to over five pages. This suggests that there will be no green light for unlimited QE and that the judges may constrain the ability of the Bundesbank to participate fully in rescue actions if the ECB strays too far.

“The message is going to be that you play with the capital key at your peril,” said one source close to the case. “What is crucial is that purchases of Italian and Spanish bonds are proportionate. People are starting to realise that this case is extremely serious.”

A restrictive ruling would be a bombshell at this delicate juncture, but precisely for that reason the litigants themselves expect a weak fudge. Professor Gunnar Beck, an MEP for Germany’s eurosceptic AfD party and a lawyer handling the case, said the judges will shrink from anything controversial for fear of bringing down the whole EMU edifice.

“What is going on is obviously a breach of Treaty article 123 prohibiting monetary financing of states, and the sheer volume of purchases can no longer be classified as monetary policy. The ECB is pursuing an independent and illegal economic policy. But the court will cave anyway,” he said.

For now the eurozone is in suspended animation. Last week’s video-summit of EU leaders was a damp squib. Germany and the Netherlands succeeded in blocking any serious move towards joint debt issuance, insisting that the €540bn stabilization package come in the form of loans that further burden the most vulnerable Club Med states, already nearing the limits of solvency.

The planned “Recovery Fund” for rebuilding Europe has been downgraded days later to a “Recovery Initiative”. The large headline figures are theoretical, relying on seed money to crowd in private funding.

Taken together it is thin gruel compared to the vast injections of direct fiscal support in the US or Japan - or indeed in Germany itself where emergency measures top 30pc of GDP and the state bank KFW is using its AAA credit rating to pass on free loans to Deutschland Inc.

Germany now accounts for half of all state aid in Europe. This keeps the German economy in tact through the lockdown and ensures a powerful rebound as life returns to normal. The danger for monetary union is that southern Europe cannot afford to take such action and will suffer deeper structural damage as a result, blighting recovery and leaving half of Europe behind.

Morgan Stanley’s Jacob Nell estimates that GDP will this year contract by 8.4pc in Germany, 10.7pc in France, 12-13pc for Greece, Spain, and Portugal, 15pc for Italy, even under its base scenario, worse than any year in recorded peace-time history.

But what if there is a second wave of Covid-19 with further lockdowns and a protracted crisis dragging on through the year? In Morgan Stanley’s ‘bear case’ the economy would shrink by 22.7pc in Italy, 22.6pc in Spain, and 21pc in Portugal, with no bounce back in 2021.

It would be an L-shaped depression with explosive political implications. Italy’s public debt ratio would probably punch through to 180pc of GDP. This would stretch the ECB’s creativity to breaking point.

A complex game of three-way brinkmanship is now underway. The ECB is trying to force EU leaders to step up to the plate with meaningful actions by holding back some of its latent firepower, but the hardliners on Governing Council are also trying to force the Italian government into activating the EU bail-out fund (ESM).

This instrument is a legacy of the eurozone debt crisis, freighted with poisonous memories, and widely-viewed in Italy as a Trojan Horse for a "troika-style" intervention by EU commissars. The conditions are ostensibly "light" but the EU’s Stability Pact and Fiscal Compact are still law and would kick again as soon as the pandemic is over.

Italy would then be compelled to retrench - from an even worse position - going through the austerity saga again. It is an open secret that Berlin’s objective is to force Italy to tap into its rich stock of private savings through a wealth tax, effectively a one-off confiscation to whittle down the debt.

Even if the coalition’s Five Star Movement swallows the ESM - after calling it toxic for years - the consequences would play into the hands of Matteo Salvini’s nationalist Lega party and probably usher in a full-blown anti-euro government at the next election.

Mr Kenningham says the ECB ultimately has no choice. It will have to underwrite fiscal deficits and become a lender-of-last resort to governments.  Delay merely prolongs the agony.


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