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  • Brexit Coronavirus Economy Europe

    European Recovery Political Concerns disrupt Economic Imperatives

    October 2020

    Europe was supposedly done with political histrionics. In the face of pandemic, a continent not known for common purpose had put aside long-festering national suspicions to forge a collective economic rescue, raising hopes that sustainable recovery was underway.

    But the European revival appears to be flagging already, in part because of worries that traditional political concerns may disrupt economic imperatives. The European Central Bank – which won confidence with vows to do whatever it took to stabilize the economy and support lending – has hesitated to reprise such talk, sowing doubts about the future availability of credit.

    National governments that have spent with abandon to subsidize wages and limit layoffs are wrapping up those efforts, presaging a surge of joblessness.

    And in the midst of the worst public health emergency in a century, twinned with the most severe economic downturn since the Great Depression, the British government has unleashed a fresh crisis: It has sharply escalated fears that it may follow through with years of bellicose threats to abandon Europe without a deal governing future commercial relations across the English Channel.

    A chaotic Brexit will in my opinion almost certainly worsen Britain’s already terrible economic downturn while also assailing major European trading partners like France, the Netherlands and Spain.

    Collectively, these developments have crystallized fresh worries that Europe could find itself mired in bleak economic circumstances for many months, especially as the virus regains strength, with an alarming increase of cases in Spain, France, and Britain.

    For me, it’s hard to imagine that there is going to be a strong and sustained recovery, given the current situation.

    A new Oxford Economics tracking model shows that commercial life in the 19 nations that share the euro currency bounded back sharply in July and much of August, before activity slowed again in recent weeks.

    But as Covid cases have rapidly increased recently, consumers and businesses have altered their own behavior, even where governments have loosened restrictions. People have scrapped holidays, limited their exposure to shopping areas and economized in the face of threats to businesses and jobs.

    The results in my opinion reinforce what has become a truism of the pandemic:

    The fundamental threat to economic livelihood is the virus itself. The lockdowns have simply intensified the effect. It’s hard for me to anticipate that consumers are going to be driving much of a recovery without the health situation under control.

    That was the backdrop as the European Central Bank convened last month amid deepening worries about flagging growth, which raised the prospect of deflation – falling prices, which discourage investment and choke off future growth. Exporters were troubled by increases in the value of the euro, which makes European goods more expensive on world markets.

    I was hoping and actually expecting to hear at least some reassuring words from the bank’s president, Christine Lagarde. In the first phase of the pandemic, she unleashed an overwhelming surge of money into the economy, banishing fears of a shortage of credit. In mid – March, the bank promised to spend up to 750 billion euros to purchase government and corporate bonds. By June, the central bank had nearly doubled that target. Along the way, Ms. Lagarde won plaudits for calming a marketplace grappling with an unfamiliar emergency.

    Ms. Lagarde reportedly played a behind-the-scenes role in bringing to fruition a landmark development in the history of the European Union – the agreement to forge a 750 billion euro rescue fund, with much of the money raised through the sale of bonds backed by member nations collectively.

    In previous emergencies, countries in Northern Europe – especially Germany, the Netherlands and Finland – opposed putting their taxpayer money on the line to cover the shortfalls of their brethren in Southern Europe while indulging crude stereotypes about the supposedly profligate ways to the Mediterranean.

    Such episodes had revealed Europe to be a union in name only – a reality that tended to enhance trouble, prompting investors to demand higher rates of return for loans to Spain, Portugal and Italy, lifting borrowing rates for those countries.

    But the passage of the corona-bond proposal – which was championed by France and Germany – cemented the sense that the pandemic had brought about a maturation of the bloc. Finally, the rich countries of the union have shown that they are willing to put their credibility on the line to support the others which also shows that they are in this pandemic together, more united than ever before.

    That in my opinion will stabilize expectations about the European economy going forward. But Ms. Lagarde’s sudden silence last month generated the impression that the European Central Bank – as ever, balanced between the fiscally conservative inclinations of the north, and the debt – saturated nations of the south – was putting priority on consensus rather than decisive action.

    The greatest cause for concern centers on what has not changed in Europe:

    Both the eurozone and the broader European Union are governed by strict rules limiting the allowable size of budget deficits.

    Those rules have been suspended, permitting member nations to borrow aggressively to finance their job protection programs. But the strictures will return eventually forcing spending cuts. Already, member nations are debating how long they can extend the relief. The European Central Bank has already launched a sweeping review of its main pandemic crisis-fighting tool, which some of its top policymakers believe could lead to contentious changes to its other asset-purchase programmes, as companies are resorting to layoffs.

    The review will assess the impact of the flagship bond-buying scheme that the ECB launched in response to the coronavirus crisis in March and expanded to 1.35 trillion euro in June. The important question in my opinion for the review will be to consider how long the Pandemic Emergency Purchase Programme (

    PEPP) should continue and whether some of its looser restrictions should be transferred to the ECB’s longer running asset-purchase schemes.

    Previously, the ECB’s sovereign bond purchases were bound by self-imposed rules, designed to avoid it being accused of using monetary policy to directly finance governments, which is illegal under EU law.

    This changed with the PEPP, which ditched the restriction of only buying up to a third of a country’s debt and introduced a more flexible interpretation of the rule requiring it to buy sovereign bonds in proportion to the size of each country’s economy. It also started buying Greek government bonds, breaking with the ECB’s tradition of not buying debt rated below investment grade.

    Any move to increase the flexibility of the ECB’s overall bond-buying programme is likely to prove controversial, particularly among its critics in Germany who are gearing up to launch another legal challenge at the country’s constitutional court. Some ECB council members are already concerned that the PEPP risks becoming a more lasting part of the central bank’s policy framework, especially after it was extended from the end of this year until June 2021.

    As of last month, the ECB had bought 527 billion euro of assets under the PEPP on top of the more than 2.8 trillion euro of assets it owns under its other asset purchase programmes. Some economists expect it to increase its bond-buying plans by a further 500 billion euro as early as December.

    Meanwhile, joblessness rose within the eurozone to 7.9% in July, the fourth straight month of increases, according to the organization for Economic Cooperation and Development (OECD) in Paris.

    Unemployment in my opinion will most probably be exploding everywhere between now and the beginning of 2021. France typifies my concern. As the country tumbled into a deep recession early this year, President Emmanuel Macron delivered a spending package worth 600 billion euro to stimulate a recovery. About 500 billion euro was dispensed to troubled companies via tax cuts, subsidies and state-backed loans. More than one million private-sector workers in industries as varied as restaurants and aerospace have been promised an additional year of wage subsidies.

    All told, the government is covering 90% of the French economy’s coronavirus-related losses. An economic plunge that had been forecast to reach 10.3% this year has been revised to 8.7%, the Banque de France declared last month.

    But some economists, who say more support is needed, worry that a new 100 billion euro “turnaround plan” announced last month by Mr. Macron’s government would fall for short of generating a revival.

    The program largely focuses on longer-term investments over the next decade in green industries like electric car batteries and hydrogen power. It comes as Green Party candidates are sweeping into power in major French cities, prompting Mr. Macron’s government to shift toward more environmentally conscious policies.

    About a third of the money would subsidize corporate tax cuts to stimulate long-term investment. The government is betting that if it can instill confidence that a brighter future is unfolding, French savers will invest in forward-looking industries and generate jobs.

    Economists affirm the logic but I fret that these benefits could take too long to emerge. Even so the realization could turn out to be more complicated than expected, the ambition is there.

    As if all of this is not enough, Prime Minister Boris Johnson of Britain – his popularity plummeting after his government’s tragic mishandling of the first phase of the pandemic – has taken this as the moment to embrace rogue tactics in negotiating a trade deal with the European Union.

    He has advanced a bill that renounces commitments Britain has already made to prevent the re-imposition of a border separating Northern Ireland – part of the United Kingdom – from the independent Republic of Ireland.

    Former prime ministers and members of his own Conservative Party have assailed the more as a violation of international law, its mere formulation undermining the nation’s standing as a credible member of the world community.

    Mr. Johnson’s action has poisoned dealings with Europe, significantly increasing the chance that Britain will crash out of the bloc without a deal when an official transition period expires at the end of this year. Such an outcome in my opinion will bring an absolute chaos to the ports on both sides of the English Channel.

    Given that Britain sends nearly half of its exports to the European bloc, an unruly Brexit will almost certainly exacerbate the perils gripping the nation’s economy, which already contracted by more than 20% between April and June.

    Europe obviously stands to be hurt, too.

    All of this comes at a bad time. In my opinion neither for Britain nor for the EU do you necessarily need disruption to your trade relationship while trying to keep your economy afloat during a pandemic.

    But this is what happens when you give unfettered power to people who can campaign brilliantly but not lead professionally.