The beauty of the spread …

… if your name is Germany.

We have all seen the effusive appearances of the unelected (!) EU Prez Uschi von der Leyen over weeks of video conferences with all Eurozone country leaders (not on ZOOM) on Twitter. Her body language is engaging, at times a little over the top, but you have to forgive her as she so much loves the Italians. “Cari italiani, in questo momento difficile, voglio dirvi che non siete soli”, ha scritto su Twitter. “In questo momento, in Europa siamo tutti italiani. …” Blablabla. Having said that, Mutti from Berlin chipped in and made it clear Eurobonds are a no no, Italy! Nevertheless, they finally aggreed on a package, one of which is called SURE.

So it looks “like it’s raining billions“. The best part of their blog post is this where it reads that Germany will benefit the most, quelle surprise, but why would it care when it can get 70 billion much cheaper than the rest of the group:

Table 1 below presents a breakdown by country of the amounts in play. As part of the 240 billion euros of Pandemic Crisis Support, Germany will be able to benefit from a borrowing capacity of nearly 70 billion euros, France nearly 50 billion euros, and Italy and Spain 35 and 25 billion euros respectively. These amounts correspond to 2% of the 2019 GDP of each country. At this point, there is no indication of whether the Member States will draw on this capacity. The advantage in doing so depends crucially on the difference between the interest rate at which they can finance their health and economic expenses without using the EMS and the interest rate on loans made by the EMS. The financing cost without going through the EMS is the interest rate on the country’s public debt. The cost of financing through Pandemic Crisis Support is the interest rate at which this credit line is itself financed, that is to say, at the lowest rate on the market, i.e. the German rate. So it is obvious that Germany has no interest in using this credit line. Of the 240 billion euros allocated to Pandemic Crisis Support, the 70 billion euros for Germany is thus useless. For countries other than Germany, the use of Pandemic Crisis Support depends on the difference between their interest rate and Germany’s rate, the infamous spread. If the spread is positive, using the EMS effectively reduces the cost of borrowing. But as shown in Table 1, the gain enabled by Pandemic Crisis Support is rather low. For Greece, whose spread vis-à-vis Germany is the highest in the euro zone, the gain would come to around 0.04% of GDP in 2019, i.e. a 215 basis point spread multiplied by the amount allocated to Greece for Pandemic Crisis Support (3.8 billion euros, which corresponds to 2% of its GDP of 2019), all relative to its 2019 GDP. For Italy, the gain is on the same order: 0.04% of its GDP. Expressed in euros, Italy stands to gain 700 million euros. For France, whose spread vis-à-vis Germany is much lower than that of Italy, the gain could be 200 million euros, or 0.01% of its GDP in 2019.

Here is the full post. Keep in mind, this is the EU known for vacuous promises. “Like rain before it falls, the billions of euros are not really euros before they fall“, they conclude.

Solidarity is a poor justification for Eurobonds

Dutch and German savers need to recognize that their savings would be much, much lower had indebted Italians, Greeks, and Spaniards not shared the euro with them. After all, it is southern deficits that keep the euro’s exchange rate low enough for Germany and the Netherlands to maintain their net exports. Eurobonds’ merit thus has nothing to do with solidarity. By shifting debt from deficit countries to a strong Union and, in the process, shrinking total eurozone debt (thanks to the lower long-term interest rates implied by the EU’s greater creditworthiness), Eurobonds would keep a country like Italy in the euro – thereby preventing Dutch and German savings from vanishing.

Adam Smith put it best back in 1776: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” Similarly, today, Eurobonds and a change of the eurozone’s ridiculous rules will never come by addressing ourselves to the “benevolence” of those with surpluses. The way to avoid northern vetoes is to appeal to what Smith would call their “self-love,” while making it clear that self-harming northern policies also will be vetoed.

Excerpt from Solidarity Is Not What Europe Needs by YANIS VAROUFAKIS. Here is Yra Harris of ‘Notes from the Undergound‘ who puts it plain.

It seems this would be a good headline for the New York tabloids if any mainstream U.S. media outlets actually paid attention to what took place in Europe. Again, EU leaders failed to agree on a large fiscal stimulus backed by a common funding mechanism, or as George Soros and others recommended, a perpetual EUROBOND of at least a TRILLION EUROS or more. The Germans and their running dogs fail to acknowledge that the collapse of the European financial system if the Italians choose the “nuclear option” and say CIAO to the EURO the cost will far exceed any amount being discussed.

On the spread of Italian-German bonds:

… it is time for ECB President Christine Lagarde to call into question about the euro’s future. And watch the German, Dutch, Austrian  and French banks go into financial STASIS as the rapid rise in yields in Italian bonds creates massive losses for the banks and even the ECB.

Meanwhile, the Twitter timeline @EU_Commission and @vonderleyen reads like a never ending saga of intentions and planned projects that mostly will end up like the European Commission’s Investment Plan for Europe (EC IPE) known as the “Juncker Plan”.

Lastly, do not miss to read the comments on Yra Harris of ‘Notes from the Undergound: Merkel Doesn’t Approve of Macron’s Package‘ post.

Could Covid-19 vanquish neoliberalism?

Excerpts from Thomas Fazi’s Could Covid-19 vanquish neoliberalism?

Over the course of just a few months, the Covid-19 global pandemic has shattered practically every shibboleth in the neoliberal bible.

The first and most obvious victim is the idea that money is a scarce resource. …

The coronavirus crisis has now revealed the austerity logic to be an utter sham: as advocates of modern monetary theory (MMT) have been saying for years, states that issue their own currency and issue debt in their own currency (i.e. every advanced country in the world with the notable exception of the eurozone) can never ‘run out of money’, nor can they become insolvent because, unlike households or firms, they can literally create money out of thin air. That’s what being a currency issuer means. In recent weeks, governments around the world have announced massive spending plans and double-digit deficits; yet, curiously enough, we haven’t heard any of the usual screams of “How are you going to pay for that?”. …

The second neoliberal shibboleth shattered by the pandemic is the superiority of private and liberal strategies over centralised economic planning and the welfare state, and the obsolescence of nation-states. For years (well, decades), we’ve been told that governments are wasteful and inefficient; that markets are able to operate more efficiently both in the short term and in the long term; and that governments are largely powerless vis-à-vis the forces of the global economy. …

So governments have surrendered many of their national prerogatives to supranational organisations — the most obvious example being the European Union (EU) and monetary union — while state-owned firms and public services, including public hospitals and healthcare facilities, have been progressively underfinanced and privatised (often by appealing to the aforementioned austerity logic). … According to OECD Health Statistics, Italy and Spain have today fewer hospital beds per inhabitant than China; France and Germany fewer than South Korea or Japan. Governments around the world are rushing to boost their hospital capacity but for tens of thousands of people it is too late already. …

This brings us to the third neoliberal shibboleth blown away by the coronavirus: the benefits of belonging to the European Union and eurozone. There’s a reason EU and euro countries — most notably Italy and Spain — have been hit so hard: the EU remains the only economy in the world where neoliberalism has been embedded into its very legal structure and effectively constitutionalised, through strict rules against government support to local industries, the constant encouragement of deregulation, the enshrinement of the ‘four freedoms’, and, above all, by depriving states of the central plank of economic policy, the currency.

The EU’s guiding principle was approvingly espoused by Italy’s former economics minister (2006-2008), the late Tommaso Padoa-Schioppa: to “weaken social protection” in all areas of citizens’ life, “including pensions, health, labour market, education”. It thus shouldn’t come as a surprise to find out that the European Commission made 63 individual demands of member states to cut spending on healthcare provision and/or privatise or outsource healthcare services between 2011 and 2018, in order to meet the arbitrary debt and deficit targets enshrined in the EU’s fiscal rules, as revealed in a recent report by the Emma Clancy, a political advisor in the European Parliament. …

Finally, the current crisis is exposing the madness of today’s hyper-integrated supply chains and the delocalisation of production that has taken place in recent decades, with countries finding out that they lack factories to produce basic medical equipment (such as masks) or much-needed medicines, which have suddenly become scarce with the collapse of global supply chains. Hyper-globalisation, just like the marketisation of public services, has proven to be not only a serious ecological, economic and social problem, but a threat to national security as well.

Full essay here.

The EU must be forged in this crisis or it will die

Excellent article in the FT.

At the moment, the EU is a little more than a geographic expression with a common central bank. A pan-European national sense is so absent that we could not even agree on the heroes to put on our banknotes. In the future, euro bills might have a portrait of Mario Draghi, the former central bank governor. But currently these banknotes feature non-existent buildings: we could not even agree which nations’ landmarks should be represented.

Read in full here.