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by Brunello Rosa
23 November 2020
In July 2020, an agreement was made between EU leaders to approve the Next Generation EU (NGEU) rescue package to assist the recovery of economies that are being plagued by the pandemic and its socio-economic consequences. The agreement was saluted by some as Europe’s “Hamilton moment” (when US states’ debt were federalised). While we consider the agreement a historic step in the process of European integration, we never subscribed to the idea that NGEU represents the EU’s Hamilton moment. , at the very least because there is no “joint and several” guarantee by member states on the bonds issued by the Commission.
Moreover, the amount of “federal” fiscal expenditure remains modest compared to national budgets and the overall EU GDP. In our analysis of the agreement, we also highlighted the risks to the ratification process, which requires each parliament of the 27 EU countries to approve the package (a unanimous process akin to a Treaty change).
The implementation of the NGEU package, which includes the Recovery and Resilient Facility (RRF), is proving as hard as we expected it to be. Two countries, Hungary and Poland (both of which are currently subject to the proceedings of Article 7 for the violation of basic EU values, such as the independence of the judiciary) blocked the adoption of the agreement, and also vetoed the Multiannual Financial Framework for the years 2021-27, unless the provisions of the agreement regarding the respect of the rule of law are removed or softened. The ratification process is likely to be bumpy in the Netherlands as well, given the upcoming general elections in the spring of 2021. We expect these hiccups to be overcome eventually, but the actual introduction of the package is likely to be postponed at best.
Additionally, it is taking time for countries to present their respective national recovery plans, on the basis of which EU funds will eventually be disbursed. Only 5 out of 27 countries have presented such plans, without which the RRF remains a theoretical exercise.
Recently, the EU Commissioner for economic affairs, Paolo Gentiloni, encouraged countries to speed up the process of presenting those plans, by establishing emergency procedures. He was particularly explicit in the case of Italy, one of the largest beneficiaries of the NGEU in absolute terms (though less so as a percentage of its GDP).
As we have highlighted in our analysis, the NGEU package would have never been approved in its current form if the UK had remained part of the EU. In 2015, the UK opted out of the establishment and use of the EFSM, the facility created to sort out the Greek – and subsequent Eurozone debt – crisis, the model from which the NGEU and RRF have been designed.
Post-Brexit, the presence of the UK was not an obstacle to the approval of a package that further pushed the process of European integration. As we discussed in our recent publication, the UK and EU are approaching the endgame of the Brexit negotiations. We expect a skinny deal to emerge eventually, in order to avoid the most catastrophic consequences of a no-deal Brexit.
Meanwhile, the UK has struck a deal in principle with Canada, rolling over the terms of the deal that Canada and the EU made in 2017. This follows the trade agreement the UK made with Japan. Both agreements get the UK closer to joining, or at least benefiting from, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, i.e. what remained from TPP after the US pulled out of it. If Trump had won the US presidential election (and it is becoming increasingly unlikely that he will do so, as most of his lawsuits against Joe Biden’s victory are being rejected by judges), the UK might have struck an FTA with the US and used it to put pressure on the EU to compromise on Brexit. But now this solution is not at hand. Also, the UK could reach FTAs with Canada and Japan quickly only because they are based on the deals made by the EU with those countries in recent years, both made following years of negotiations.
Given these circumstances, it is becoming increasingly clear that an agreement on Brexit between the UK and the EU is the most convenient option for both sides.
by Peter Cecchini
25 November 2020
by Brunello Rosa and Karmen Meneses
27 November 2020
by Brunello Rosa and Fawaz Al Mughrabi
26 November 2020
by Brunello Rosa and Nouriel Roubini
16 November 2020
by Brunello Rosa
5 November 2020
by Brunello Rosa and Grégoire Roos
3 November 2020
Subscribe to receive our free weekly Viewsletter "Making Sense of This World"
by John Hulsman
24 November 2020
Introduction: The World Through Biden’s Eye
In one very important way, Joe Biden is surely an analytical improvement on the outgoing presidency of Donald Trump. Given his overall Wilsonian predilections, Biden instinctively believes in the power of coalitions, mightily criticizing his predecessor during the campaign for willfully frittering away America’s extensive alliance system.
Biden’s emphasis on alliances even fits the tenor of the times, whether he is aware of this or not. As we have said before in these pages, we are now living in a new era of loose bipolarity, where there are clearly two superpowers, the US and China, vying for global dominance. However, just beneath them in terms of importance, great powers—such as the Anglosphere countries, the EU, India, Japan, and Russia—all have extensive room to maneuver, to craft independent foreign policies of their own. This contrasts greatly with the old Cold War, which exhibited a tight bipolar system, wherein all the powers beneath the US and USSR had to far more rigidly fall into line with the wishes and the dictates of the dominant superpowers.
The basic geopolitical power realities of the new loose bipolar system still favors an America that has at its disposal the general support of the Anglosphere, the EU, India, and Japan, with only Russia drifting into China’s general orbit. The choice for the first four is one of either neutralism in the face of the Sino-American Cold War, or tilting towards Washington. For Russia, it is the reverse, neutralism or alliance in one form or another with Beijing. As such, America has the clear structural edge here, with the chance to bring more powerful allies onside to tilt the superpower contest in its favor. At first glance, it would appear that in the Wilsonian Biden, and his clarion call of renewing alliance-building, the man and the strategic moment are met.
But there is another, less positive, way to look at the coming foreign policy of the Biden White House. The new President has preached a doctrine of restoration throughout his bitter electoral contest with Donald Trump. In essence on the campaign trail, Biden assured Americans that he would return the country to the kinder, gentler world of Barack Obama domestically, even as he followed Obama’s Wilsonian script abroad. On its surface, this is surely an appealing program, particularly for a country emotionally exhausted by years of Donald Trump’s disruption across the board.
But it ignores two central facts that together make it far more likely that Biden’s restoration foreign policy will fail at best, and prove truly dangerous to US interests at worst. First, looking at it objectively, the sainted Obama’s record was always highly overrated; beyond giving a series of high-minded speeches endlessly applauded by the international (center-left) commentariat, very little positive occurred on his watch.
It is now commonly thought that China ran amok in the South China and East China Seas (as well as in terms of hacking the American government itself), while the Obama White House meekly looked the other way. The much-ballyhooed Joint Comprehensive Plan of Action (JCPOA)-- the West’s stop-gap nuclear accord with Iran—demonstrably failed to halt its regional expansionism. “Engagement” with North Korea meant in practice doing little about it.
All these problems metastasized, while the self-regarding former president instead gave lofty speeches about doing away with nuclear weapons, an idea that went absolutely nowhere. In other words, the Obama foreign policy amounted to much ado about nothing. Going back to it, as Biden has promised to do, might not be such a good idea.
The second problem with Biden’s foreign policy restoration is that, in the words of the great American novelist Thomas Wolfe, you can never go home again. Obama’s presidency took place during the transition from a unipolar order to our now clearly bipolar world. Obviously, what worked in one era is not guaranteed to work in an entirely different age. To attempt to turn back the clock, as though history and time—as well as the global power distribution of the world—stay constant is to indulge in a fool’s paradise. Worse, in doing so, even with the best of intentions as Biden seems to have, can only lead to a highly destabilizing foreign policy.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week 23 - 29 November 2020
PMIs to Point At Stagnation, While US Inflation Is Expected To Remains Broadly Unchanged
In DMs, November PMI data are expected to hint at ‘stagnation’, as: i) US PMIs are likely to remain flat, with manufacturing at 53.0 (p: 53.4) and services to slightly decline to 55.5 (p: 56.9); ii) EZ manufacturing is likely to slow down to 53.1 (p: 54.8), along with services to 42.5 (p:46.9).
Inflation: In the US, both the PCE and the core PCE Index are expected to stay unchanged - at 1.4% and 1.5% y-o-y, respectively.
In next week’s monetary policy meeting, the Riksbank will likely keep the interest rate unchanged at 0% but may increase and extend its asset purchase program.
Slower Global Recovery; Geopolitical Risk To Hinder Growth; Central Banls To Remain Dovish
At global level, while challenges remain around the speed of production and distribution of the vaccine: i) a 2021 GDP recovery is more probable; but ii) over the next few years monetary policy is likely to remain loose and supportive.
Meanwhile, the COVID-19 pandemic is accelerating in: 1) the US, daily cases topped 180,000, the highest increase on record; and 2) Europe, where: i) while GDP is still between 5-10% below pre-virus levels; and ii) new lockdowns - so far less stringent than the Spring ones - have come into force in the Germany, UK, France, Italy and Austria - with more countries likely to follow suit. Inevitably, renewed lockdowns will entail further economic downturns.
Pfizer Inc and the drug maker BioNTech announced that “early data suggest [the] COVID -19 vaccine is more than 90% effective”. US Fed Chair Jay Powell, ECB President Christine Lagarde and BoE Governor Andrew Bailey stated that a breakthrough on a COVID-19 vaccine would “lift the uncertainty weighing on the global economy”.
In the US, President-elect Joe Biden named Mr. Ron Klain as his White House Chief of Staff - the first major appointment. President Donald Trump continues to: i) dispute the election results; and ii) file lawsuits, despite losing four in court.
In the UK, as the government faces important decisions over: 1) COVID-19 management; and 2) the post-Brexit trade-deal with the EU - two top officials resigned: i) PM Boris Johnson’s closest aid and Director of communications Lee Cain; and ii) Dominic Cummings, Johnson’s chief adviser and Brexit’s architect.
Real Economy: Despite Vaccine News, Outlook Constrained By Increase In COVID-19 Cases
In the US, in the week ending on November 14 ‘initial jobless claims’ came in at 742k (c: 707k; p: 711k), the first rise in over a month. In October: i) retail sales declined to 0.3% m-o-m (c: 0.5%; p: 1.6%); while ii) IP expanded by 1.1% m-o-m (c: 1.0 %; p: -0.4%).
In the EZ, November’s consumer confidence fell to -17.6 (c: 17.7; p: -15.5) the lowest level since May, amid rising COVID-19 cases and renewed lockdowns. October’s headline and core inflation remained unchanged (CPI, a: -0.3% y-o-y; c: -0.3%; p:-0.3%; core-CPI, a: 0.2% y-o-y; c: 0.2%; p: 0.2%); CPI matched the previous month's decline, the sharpest since April 2016.
In Japan, activity and demand rebounded and preliminary Q3 GDP data showed a rise of 5.0% q-o-q (c: 4.4%; p: -8.2%) - the first quarterly growth in a year. October inflation declined to -0.4% (c: -0.3%; p: 0.0%) as the pandemic continues to hamper consumption.
In Turkey, the CBT raised its key policy rate by 475 bps to 15.0% (c: 15.0%; p: 10.25%) and stated it will maintain a tight monetary policy “until a permanent fall in inflation is achieved”.
Financial Markets: Global Equities, Fixed Income And Oil Prices Rose; The USD Weakened
Market drivers: the news of a coronavirus vaccine were offset by worries about the worsening of the pandemic.
As a result, global stocks rose w-o-w (MSCI ACWI, +0.6%, to 610) but the S&P 500 fell (-0.8%, to 3,558) due to: i)deteriorating COVID-19 trends; and ii) renewed activity restrictions. In Europe, shares rose for a third consecutive week (Eurostoxx 50, +1.0%, to 3,468), amid: i) optimism about potential coronavirus vaccines; and ii)upcoming ECB liquidity provision.
Fixed income: w-o-w global bonds rose (BAML Global, +0.5% to 299.2), as growing concerns about the economic outlook pushed UST yields to their lowest level in two weeks (UST, -6 bps, to 0.83%).
FX: w-o-w, the USD index weakened against other currencies (DXY, -0.4%, to 92.392; EUR/USD, +0.2%, to 1.185). The TRY rose by +0.4% to 7.632, after the CBT: i) hiked its key interest rate; and ii) signaled a return to monetary orthodoxy.
Commodities: hopes for an end to the pandemic in 2021 lifted oil prices (Brent, +5.1% to 45.0 USD/b) but hampered gold (-0.9% to 1,870 USD/Oz.).
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