Empty Summer

As we get closer to August, which is the annual holiday month, we realise this year everything is different. In our part of Europe, people are not travelling that much. They prefer to stay in the vicinity of their home region. They understand that the health crisis is picking up and they do not want to be caught in a messy situation far away from their residence. I live in an area of my city that attracts a lot of tourists. This time, there are no visitors. I do not have to worry about parking spaces. But I worry a lot when I see the shops, restaurants and so on empty and the hotels closed. That is the reality this summer.  

Dark clouds in the horizon

The eurozone banks are borrowing heavily from the European Central Bank. Current borrowing amounts to €1,31 trillion. They take the money at negative interest rates, which means that they are paid to borrow. The negative rates are now around minus 1 per cent. By doing so, the ECB is telling us that the funding needs are enormous and that the crisis resulting from the pandemic is very deep.

The picture shows me three more things.

One, that we have too many private banks in the eurozone. Some countries, with small economies, have an incredible number of banking players. Tiny banks are particularly vulnerable to shocks. They represent an additional financial risk at a time of many hazards.

Two, most of the borrowing has been applied by the banks in the purchase of government bonds. That means the ECB is using the commercial houses – and paying them a fee – to finance exceptional and current government expenditures. Public debt is growing fast and in a non-productive way. Its growth goes hand in hand with the tremendous levels of debt of the enterprises and of the poorer segments of the population. Overall debt, in some countries of the zone, is reaching unsustainable levels.

Then, my third point. Conservatives and extreme right parties and movements in richer eurozone States are getting ready to challenge the policy options of the ECB, particularly their easy money funding programmes. These challenges will combine political activism with legal proceedings. As an example, the ultra-nationalist and extremist German party Alternative for Germany has announced today they will move a legal action against the ECB’s emergency programme. It would be a mistake to underestimate this decision. That goes along the recent ruling of the country’s Constitutional Court on a comparable matter. And it must be seen in conjunction with the position that The Netherlands, Finland, and a few others have taken, asking for conditionalities to be added to the Von der Leyen rescue plan.

As I see it, all this contains the seeds for further divisions in Europe. This time, the division might mean severe rupture. It is the future of the Union that is at stake.

The ladies are in charge

Harvard professor Carmen Reinhart has just been appointed as the new Chief Economist at the World Bank. The Chief Economist at the IMF, Gita Gopinath, has also come from Harvard University. Both ladies have collaborated with Professor Ken Rogoff, from the same university. They might all think alike which is not the best approach in times of crisis. Diversity and contradictory opinions are much more creative, at a time when we have to imagine a new economic order. But they are all for debt forgiveness when the challenge is too big to be managed, which is not a bad approach. And they have studied financial crashes and deep national crisis extensively.

People say that when two economists discuss there are at least three divergent opinions. In this case, let us see if both ladies can bring fresh ideas to their institutions. The IMF and the WB will be very much in demand in many countries in the post-Covid situation. They must propose an approach that goes beyond austerity and keeps investments flowing across the globe, particularly in the direction of poorer countries.

Let the airlines take a chance

A brief note about civil aviation and everything related, including plane makers and service providers. This is a sector that is deeply impacted by the coronavirus crisis. It will be one where major losses will occur. Every airline is losing massive amounts of money daily. And no one can predict when the skies will open again. The longer the wait the greater the risk of insolvency, of extensive disruption. And governments cannot save the entire sector. Any public money invested in aviation economics will be based on a reduced presence in the skies, on fewer planes and fewer jobs. It will be very tough. They will be competing against so many other demands on limited public resources. But let me be clear: it is critical to resume a handful of flights. It might be less expensive than keeping the planes on the ground. And it will help everyone to see where the priorities must be. The airlines will make their choices. In this case, the first role of governments should be to facilitate air travel, to lift the restrictions that make no real sense from a public health point of view.

The complexity

In my part of the world, the debate is now moving towards the recovery issue. To be able to get back to normal life as soon as possible. People are worried about jobs and the economic impact of this astonishing crisis. It’s now clear that the new debt situation of the states, the firms and the families will reach gigantic proportions. Many will not be able to reimburse it. They fear poverty. In any case, the Gross Domestic Product will contract seriously, to dramatic levels if the lockdown goes on beyond mid-May. There will be a lot of pressure on governments in the next days and weeks for them to provide masks free of charge and to allow the economy to re-open. At the same time, people want to know that the hospital system is still able to respond and that enough money is invested in the vaccine research. All this will have a tremendous political cost. I can anticipate a lot of political malaise in some countries, particularly in France and Spain. That will add to the complexity of an extremely complicated crisis. 

What lies ahead is simply unique

The economic dimension of the crisis is huge. That’s now obvious to everyone, as the figures about unemployment and temporary layoffs become known. And that explains the gigantic size of the recovery programmes that have been announced. The amounts are just mind-boggling, difficult to imagine, because of the large number of zeros that follow the initial figure. Hundreds of billions, many of them close to trillion figures, or even above, as it is the case in the US. We are talking about funds that are simply not available. They will have to be printed.

It is a dramatic situation to many families and a move to extraordinary levels of indebtment by the States, the corporations and firms, and the families. Large amounts of debt, both public and private, were already a key feature in many countries. Our economies have been in the red for several years. But the previous debt levels will look as small fish when compared with the numbers in the next phase, the recovery phase. Most of that debt will be untenable and will have to be write off, sooner or later. That will cause major changes in wealth ownership. The point will be to manage such transition in a way that would avoid the ruin of key sectors of the economy, including the pension mechanisms, the banking and insurance systems, the bond and the property markets.

It is indeed a completely new ball game. We will have to play it and keep defining the rules as we move on. It will require an extraordinary level of international cooperation. That means wise leadership, plenty of foresight and political courage. Unfortunately, wise leadership seems to be a dimension that is seriously absent in the current international relations scenario. In my opinion, that’s one of the key risks that can seriously disrupt the next stage of our life in this small planet. These will be exceptional times.

EU must work together

It would be a serious mistake to continue the ongoing noise about the future of the European Union. The priority now is to combat the virus, safe lives and accelerate the vaccine research. The member states should be discussing and agreeing on what must be done together and in a coordination matter in these areas. There are already some positive moves of collaboration. They must be expanded immediately.  

The discussion about the economic recovery is also an urgent matter. But it would be much easier if the priorities I mention above could be effectively addressed. The shorter the period of the crisis the easier it will be to deal with the economic dimensions.

We have a crisis in our hands

In some European countries, today we have reached a turning point. They have adopted very stringent measures to contain the coronavirus pandemic. 

The decisions have nothing to do with President Trump’s harsh words about us, words that were pronounced yesterday, when he was announcing the entry ban on European visitors. 

Today’s measures, adopted in France, Belgium, Denmark, Spain, Portugal and elsewhere, are just an indication of the level of risk we are confronted with. The pandemic is a major menace, that was the message coming from the different governments. It is huge because nobody knows the dimension it might get, nobody is in a position to guess a timeframe but everyone sees it will have a major impact on human lives, on public resources, on living standards, on lots of economic, financial and social aspects.

In view of that, the preventive measures can only be of an extraordinary nature. Some might seem disproportionate, but who knows what is reasonable or excessive, in a crisis of this dimension?

Contain, contain, contain

Today’s word is containment. Every government should ask themselves what they can do to more efficiently contain the epidemic. That must be the priority. But containment is not just about the disease. It is a lot, a great deal, about the disease. Indeed. But is also about the panic and the epidemic’s impact on key sectors of the world’s economy.

A challenging March

As we get into March, we can be sure we will have major challenges in front of us. The coronavirus will probably be the most critical. It has all the key ingredients to confuse many of us. People will keep pressing the panic button and the political leaders will be jumping in all directions, just to show to the citizens that they are moving as required. Then, there will be the economic impact. On the economic side, the crisis can be multifaceted. There will be less demand, the supply chains will be disrupted, and many enterprises will face serious cash problems. In addition, the stocks will not be able to recover the immense value that has been lost during the past week and probably the week ahead.

Obviously, the health systems will be under serious stress. They will become distorted as much of the resources will be focused on the Covid-19 pandemic.

Adding to the above, we will see an escalation of the conflict between Turkey and Syria, supported by Russia, a new migratory crisis and a Brexit on the rocks.

This is a time that calls for a new type of leadership.

Spain: difficult times and the people´s response

Life is today more challenging for many Spaniards. These have been difficult years and a long period of painful adjustment processes. But it is also amazing to see how people have accepted the changes and how they are trying to cope with lower levels of income and higher levels of unemployment. That does not mean they have accepted the new situation. But they have kept a very healthy level of pragmatism. 

Greece has to move fast and show results

The Greek government has lost the last month trying to convince the European leaders to accept the merits of its approach to crisis management. In the current situation, a month is a long period of time for the Greeks. It is even longer when you achieve very little. It is hell, when you have empty pockets.

They should have listened to the advice coming from the key EU capitals: no programme implementation, no money. Such advice was repeated in Brussels last night, when a side mini-summit brought together the Greek prime minister, Angela Merkel, François Hollande and a couple of other senior people, Greece was once more invited to cooperate with the rest of the UE. Money was promised. It should be released when the Greeks start moving along the reform path.

Listening today to the Greek Prime Minister I got the impression he has not yet realised that time is running out. Money is getting very thin in the government´s drawers. And the political support they had in Europe is evaporating fast. It would be better for his government and his people to show they can implement the agreed reforms. The sooner they do it the better for them and for Europe´s cohesiveness. 

Argentinian blues...

Argentina is again in the midst of economic and financial chaos. People are desperate and the country seems to be directionless.

I raised the issue this morning as part of my regular discussions with some people at the centre of European decision making. I was told, in very direct and brief words, that Argentina matters very little in international affairs. If they have a problem – and they do have some very serious ones, I thought to myself –then it is up to them to sort them out.

I believe that´s what people call internationalist realism…

Italy´s promising presidency of the EU

The Italian presidency, this semester, of the EU might bring in a new debate about economic growth, fiscal responsibility and the role of national governments vis-a-vis the Brussels institutions.

Prime Minister Matteo Renzi is a young politician. He brings a bit of courage and fresh air to EU politics. We might disagree with some of his positions but we should recognise that his interventions are forcing the German politicians and other leaders from the North to engage in a dialogue that had been missing for a long while.

EU has a lot to gain from a proper exchange of contradictory but well formulated views. Political diversity is good for Europe. 

Oil, economic recovery and key geopolitical areas of interest

The price of Brent Crude Oil has been relatively stable during the last 12 months. It has oscillated around US $105 and $108. During the last five days or so, it has even decreased slightly. I take this as an indicator that there is more serenity out there, among those who know what´s going on, than the events in Ukraine let us believe. This is certainly good news. We need calm waters out there. The economic recovery is still very precarious, particularly in the EU, and we can´t afford major disruptions. Oil remains an important factor in terms of the recovery and its price can have a critical impact on economic and social stability in Europe.

That´s why we have to pay more attention to the situation in Libya, Iraq, Nigeria, and also make sure that Iran plays ball as agreed and can be back in the oil market as an important supplier.

These are some of the countries that would call for more focus within the EU machinery. 

EU recovery winds

In the EU, this month of July ends with a more optimistic note. At least, that’s what some analysts would like us to believe. They are now saying they see some signs that the worst of the economic crisis is past. That we might return to positive growth rates during the second half of the year.

If we look at the recovery in Ireland, we might come to the same conclusion. I am certainly very encouraged by the level of international investment the country is able to attract, which is a clear indicator that confidence is back and the overall macro-economic framework is getting the right shape. 

But one swallow doesn't make a summer. 

We can even forget Greece and its chronic development challenges. We cannot however be blind to the economic situations in Italy and Spain. These countries are not out of the woods. And they combine economic depression with political fragility. This is the worst combination we can have as one of the keys that opens the door of recovery is a strong government with a clear popular mandate and indisputable political legitimacy.

When the image spirals out of control...

Two friends of mine are travelling to Greece tomorrow for a week away from our grey skies. They bought a package holiday, the well-known “all inclusive deal”. Yesterday, when collecting the vouchers, they realised that the 5-star hotel they had picked is closed for lack of guests, then the alternative option is also closed; only the third choice is indeed available. They then realised that Greece has somehow disappeared from the holiday map of Northern Europe. For now, at least, I should say, and particularly for the high end segment of the tourism market.

This is no good news for Greece.

The Russians and Merkel

On Cyprus, again... The main concern of all parties – EU and Nicosia – seems to be about face saving. Any solution will now be massaged to look good for both parties. But there is still the Russian unknown. And Berlin gets mad every time the Kremlin is mentioned as a potential partner, as a possible contributor to the solution.

The saga needs to be followed with great attention. It is a turning point in European affairs. 

European idiots

The EU shot itself on the foot once more. The decision it imposed on Cyprus as a condition to approve a package of financial aid is indeed a very serious mistake. It sends a very unequivocal message to everyone: if you put money in a saving account or even invest in a European country that is facing serious economic difficulties you are a fool.

Nobody wants to be taken for an idiot.

Therefore, in the near future we will see a lot of money and potential investments running away from countries such as Portugal, Spain, even Italy, not to mention Cyprus, of course.

The only good thing about being a European idiot is that you might become a government leader in one of the EU countries. You will join the club. 

On Greece: what should we conclude?

On Greece, from today's Eurointelligence daily report:

Confidential troika report reveals significant delays in tax collection

Greece missed key revenue targets by a wide margin last year, triggering concern over whether the government is fully committed to cracking down on tax evasion and graft, the FT quotes a confidential troika report leaked to the Greek press. The collection of overdue tax raised only €1.1bn in 2012, compared with a target of €2bn, while unpaid tax increased by 10% to €55bn, equivalent to almost 30% of national output. Two years after the launch of broad-ranging tax reforms, Athens each year still collects less than 10% of total assessed taxes on personal income and corporate profits. Thousands of Greek company owners and self-employed professionals routinely contest their assessments through the courts waiting for the finance ministry to grant tax amnesty settling for a tax bill cut by at least 30%.  The official Greek translation of the report, dated January 31, was accessible on Thursday on the websites of several Athens newspapers.