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Thoughts from Galicia, Spain

Random thoughts from a Brit in the North West. Sometimes serious, sometimes not. Quite often curmudgeonly.

TfG: 6 June 2020
06 June 2020 @ 09:46

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

- Christopher Howse: 'A Pilgrim in Spain'*

 The Bloody Virus

  • Just in case you haven't heard of the latest guesswork . . . . A US team has found a certain response not only in the immune system of patients who've recovered but also in a group who had never had the virus. This might, they say, point to some “cross-reactive, pre-existing immunity to Sars-CoV-2” in up to 60% of people. And this might help explain the mystery of the 'Diamond Princess', a cruise ship where Covid spread unchecked for 2 weeks but only 20% of passengers ended up catching it. A UK neuroscientist suggested recently there's some kind of immunological “dark matter” out there stopping the virus from infecting as many of us as had first been feared. No one is quite sure what it is, but it does seem to exist.  BCG vaccination?

Life in Spain

  • A specialist in these things has said Spanish virus data is/are flawed. As for the PM's comment that a couple of days of nil deaths proves that the government's strategy has been 'a success for all', he dismisses this as 'also nonsense'. So, where does that leave us?
  • Santander bank has sent me an email saying it's improving its virus-times service by being open 8.30 to 2.30, Monday to Saturday. This is an hour more than usual - 9 to 2 - but is still only the morning, closing at the Spanish 'midday'. And you need now to make an appointment in advance. I suspect this is not great service by international standards. 
  • Here's María's Comeback Chronicle, Day 26. Art as soul food.
  • You'll all be wondering how I got on calling the number given to me at the police station in respect of a new residence card. Well, not tremendously well. I was actually given 2 numbers and it took me several calls over an hour - admittedly during Spain's 'coffee time' - to get a reply to the first one I tried. Only to be told I should have called the other one. On which I failed to get any reply at all yesterday. So . . . On to Monday . . .

The UK

  • A BBC graph 'punishes honesty', says Guido Fawkes here . Back to the issue of the validity of data from Spain, inter alia.

The EU

  • See the article below for a commentary on the latest round in the battle between the EU and Germany over who controls the EU’s economic machinery and legal character.  The bottom  line: The North-South gap will be even larger in the early 2020s. Monetary union will become ever more difficult to manage.

The USA

  • Direct from the mare's mouth . . . 

Of course, this could be fake news. But I suspect not.

The Way of the World

  • It is easy for democracies to slip into anarchies and lead to autocracies when trust in the system’s ability to provide what people need breaks down. We are beginning to see this.  

Social Media

  • Has anything in the entire history of the world been responsible for producing more specious anger than this?

English

  • The original phrase in the above para under 'The Bloody Virus' was  . . . unchecked for a fortnight. I changed this to 2 weeks, as I know fortnight isn't used in American English. Neither is sennight, but then, this is no longer used in British English either. We're not that quaint . . .

Finally . . .

  • One downside of the near-end of our lockdown is that driving schools are now open and learners are again clogging my route to O Burgo bridge. This takes me past the test centre and along the circuit the examiners always take. So I get plenty of evidence of how new drivers - at least around here - are still being taught how to negotiate roundabouts wrongly. And how to drive without ever making a signal. Which is sometimes amusing but more often irritating.

THE ARTICLE

The ECB defies German judges with €600bn of fresh stimulus, risking a constitutional crisis in August: Ambrose Evans-Pritchard, the Telegraph.

The European Central Bank has doubled down on emergency stimulus with an extra €600bn blitz of bond purchases, brushing aside dissenters on its own governing council and risking a fatal showdown with Germany’s top court.

The scheme is effectively open-ended and the bonds will be reinvested as far out as 2022, features that are likely to grate on the nerves of the German judges in Karlsruhe. They ruled in May that the ECB has already crossed the line with an earlier bond purchase scheme and is violating Treaty law.  

Holger Schmieding from Berenberg Bank said the ECB has shown that it “remains a truly independent institution fully committed to its mandate of price stability – and is not in any way constrained by the verdict of the German Constitutional Court.” 

The bold move has been widely praised by economists but it also amounts to escalation in a fundamental battle for control over the EU’s economic machinery and legal character. Sebastien Cochard, a former French treasury official, said today’s decision by the ECB is a “declaration of war” against the German court.

The extra shot in the arm lifts the total package of ‘pandemic QE’ - or PEPP - to €1,350bn and helps offset the deepening contraction of the eurozone economy since the scheme was launched in late March. In that respect it is merely neutral, not net stimulus.

The ECB has cut its growth forecast to minus 8.7% this year, with a rebound of just 5.2% penciled in for next year, implying a protracted slump and deep structural damage that will leave parts of the currency bloc close to deflation. France has slashed its growth forecast from minus 8% to minus 11%.

The stimulus is badly needed as a funding bridge until the EU’s €750bn fiscal recovery plan kicks in next year. It arms the ECB with enough firepower to keep buying debt until February at the current rate, heading off a much-feared bond crisis in Italy this Autumn. Risk spreads on Italian 10-year debt dropped to a two-month low of 172 basis point but the gap remains unsustainably high, given the explosive rise in the country's debt ratio towards 160%of GDP. 

While the QE boost may be necessary for technical reasons - and is less than the Federal Reserve’s $4.5 trillion expansion - it is a political gamble after the German judges fired their thunderous cannon shot across the bows in May. The court ruled that the ECB has been carrying out a disguised fiscal rescue and its actions are ultra vires. Furthermore it said the European Court has been complicit and is itself in breach of EU Treaty law, an astonishing rebuke. While the case involved a different bond scheme, the legal arguments even more strongly to the new PEPP expansion.

Karlsruhe said the Bundesbank will have to withdraw from the programme - and, arguably, sell its existing bond holdings -  unless the ECB can justify its actions under the “proportionality principle”. The deadline is in early August. 

Christine Lagarde, the ECB’s president, deflected questions on this constitutional imbroglio, expressing confidence that a “good solution” would be found. But she also revealed that the decision to boost the PEPP scheme by €600bn did not have unanimous support in the governing council. It won only “broad support”, a euphemism for dissent and often a hot exchange of words. The details of this disagreement are likely to leak and will be crucial in determining how this plays out over the coming weeks. If it transpires that  Mrs Lagarde and ‘Latin bloc’ governors overruled stiff resistance from Bundesbank president Jens Weidmann and hawks from northern creditor states, it will further complicate an explosive situation.

The Frankfurter Allgemeine - close to Karlsruhe - said the extra QE was unjustified since the economic contraction is already bottoming out. “The hectic activism of the ECB is out of line. It is grotesque that investors want even more stimulus because inflation will be low in 2022. Pull the other leg, it's got bells on,” it said. 

Azad Zangana from Schroders said it is now obvious that the ECB’s bond purchases are “being used to finance governments, with a bias to member states being punished by markets for poor debt dynamics. The public finances of Greece and Italy have become totally unsustainable.”

While the ECB could in theory press ahead without the Bundesbank - and confidential plans are being drawn up to do exactly that in extremis - it would be viewed as desperation by the markets and would have no global credibility.

David Marsh from OMFIF said the way to defuse this crisis is for Mrs Largarde to report to the European Parliament - observing Treaty protocol  - and justify the ECB’s actions with a “proportionality” statement to that body. This could then be shown to Karlsruhe without the ECB having to answer German judges directly. Such a plan would be entirely in keeping with past EU conjuring tricks but would require the complicity of the German judges. They have already ruled that treaty law is being systematically violated. This cannot be wished away. 

It remains unclear whether the EU authorities have done enough to counter the immense economic shock of Covid-19. The recovery fund unveiled by the Commission in May - yet to be approved by frugal states - amounts to just €400bn of actual fiscal stimulus spread over four years once the flannel is stripped away. This is 0.6%of GDP annually.  It is temporary and therefore does not amount to fiscal union, or mark a ‘Hamilton moment’ for Europe. “Sceptical investors not yet buying the Europe story,” said Reza Moghadam from Morgan Stanley. “Many argue that the net macroeconomic impact is small both in relation to the size of the COVID-19 shock and because EU member states have to contribute to the initiative through the EU budget.”

What may matter more is Germany’s latest fiscal package, a €130bn stimulus of tax cuts and extra spending, including a subsidy of up to €6,000 for purchases of electric cars and a temporary cut in VAT from 19% to 16%. This lifts Germany’s total  pandemic response to 30%of GDP. While it helps to prevent ‘scarring’ or hysteresis from the downturn, it also means that Germany will recover in better shape than Club Med states hit harder by the crisis but which dare not spend so aggressively. 

The North-South gap will be even larger in the early 2020s. Monetary union will become ever more difficult to manage.



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