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 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. 

A weaker Emmanuel Macron

President Macron is losing direction when it comes to France’s domestic politics. I real think that’s a major issue, both for the French and for all of us, in the EU.

His press conference of this week was supposed to respond to many months of street protests led by the Gilets Jaunes and to draw lessons from the national debate the President had promoted throughout the country on several key topics. Under the national debate, hundreds of public meetings and town halls had been organised. Emmanuel Macron himself chaired some of the gatherings.

The press event has shown that the President has left behind some important political commitments he had made during the electoral fight. One of the most important has to do with the reform of the French state administration. The country needs to adjust the administrative machinery to the new needs of the citizens and, at the same time, rationalise the costs. The last time France had a balanced public budget was 45 years ago, in 1974. Since then, the official administration is living well beyond the means the economy would allow. The country is deeply in debt. Public debt is today around 2,200 billion Euros. This is unacceptable and it will have a serious impact on future generations. Instead of cutting unnecessary expenditures, President Macron announced new measures that will increase public spending and, sooner or later, will have to be translated into new taxes.

He has also been unable to deal with the sustainability of the national pension system. The French, like all of us, are living longer. But, for demagogic reasons, the pension age remains at 62. He should have increased that ceiling. In a related matter, there is a need to review the working week, which is currently capped at 35 hours. This has not been addressed.

President Macron comes out of all this much weaker. He has not been able to appease the Gilets Jaunes. And he is now seen by many in France as just another Hollande, a younger version of the last President. But more arrogant, which is something that is also bringing him down. His communication style is not the best in terms of connecting with people and the media. 

I really hope he will be able to recover from the current predicament. He has three more years to go.