Europe Macro – December 13, 2021

Leo Nelissen | December 13th, 2021

We start this week with a closer look at the BoE and ECB as we’re in a key week due to their monetary policy decisions. Related to that, we have comments on not-so-transitory inflation trends and troubling developments when it comes to European gas prices. As usual, we also include supply chain comments. This time involving the metals supply chain, which will see accelerating demand. Another highlight today is Germany’s trade relationship with China, which is changing for the worse.

1.  CENTRAL BANKS

1.1 Delaying interest rate rises will only make things more difficult for the Bank of England – The Telegraph

[…] On Thursday both the ECB and the Bank of England will make their policy announcements. Inflation in the eurozone recently hit 4.9pc and the domestic German rate of inflation reached 6pc, a veritable disaster in the mind of most Germans.

Yet there is no sign of pay inflation rising across Europe and it is unlikely that the ECB will give any hint of an interest rate increase on the horizon, let alone raise rates this week.

The most that it will do is to make a technical adjustment to its procedures for injecting money into the system that will result, in net terms, in a decrease in the rate of such injections.

The Bank of England’s position is the most delicate. Before the last Monetary Policy Committee (MPC) meeting, it was widely believed that it would increase interest rates then, not least because earlier comments by senior Bank officials had indicated that a rise was imminent. In the event, the Bank held back.

Subsequently, the economic data have strongly reinforced the case for a rate rise. In holding off, the Bank placed emphasis on the need to get information about how the labour market withstood the demise of the furlough scheme at the end of September. Since then, we have had some labour market data for October that indicated that the jobs market remained tight.

Meanwhile, the inflation numbers have continued to flash red. For October, the Bank forecast inflation at 3.9pc. In the event, it turned out to be 4.2pc. Moreover, although the headline rate of pay inflation has been falling back, reflecting the unwinding of earlier covid-induced distortions, the underlying rate has been creeping up. And there have been some juicy individual pay settlements, including the recent 5.5pc deal for Tesco delivery drivers.

[…] If, as seems likely, the Bank holds interest rates this week, then it will get its next chance in February. At that point, unless the omicron variant has laid the economy low, I expect it to raise rates.

On current plans, the Bank is set to stop its bond purchase programme (quantitative easing, or QE) on Wednesday, putting it ahead of both the Fed and the ECB. In August, it announced that it would start to partially reverse this programme when interest rates reached 0.5pc.

This reversal would involve not reinvesting the proceeds of maturing bonds. The Bank would only actively start to sell some of its bonds after rates reached 1pc. At the time, these trigger points seemed a long way off. Now it seems that they may arrive sooner than the Bank imagined.

In any case, the Bank can easily change its policy on QE. And if inflation pressures continue to build, it should. Excess money is now part of the problem, not the solution.

Comment: First, expectations where that November would see the first BoE interest rate hike. Then expectations moved to December. Now we have given up hope that it happens before February. Reasons are a seasonal upswing in flu/COVID cases and new variants. The good news is that the BoE is serious about ending QE. Meanwhile the EU is working on ways to expend accommodative QE after PEPP ends and the much smaller Asset Purchase Programme continues.

Bear in mind that wage growth is down in Europe. That’s terrible for employees who are facing high inflation but a reason for the ECB to maintain a loose policy. After all, only risks of a rising wage inflation spiral would warrant emergency hikes according to the bank.

Even more important is that the ECB is on a dangerous path to include fiscal policy as well. Its low rates and QE basically finance up to 100% of new lending from certain EU countries. Now, Greece is making the case that the ECB should continue buying its bonds even after PEPP ends. After all, the ECB is not allowed to apply QE to below investment grade bonds:

“The Greek central bank is planning an appeal for the country’s bonds to remain eligible for new European Central Bank purchases after March when the vast bond-buying scheme launched in response to the pandemic is expected to end.

Several members of the ECB’s governing council said they were amenable to finding a way to keep buying Greek bonds for the rest of next year when they meet on Thursday. But Greek officials fear legal hurdles may mean that ECB purchases of the country’s debt will still be reduced much more significantly than those of other countries.

Officials in Athens are keen to avoid the stigma of the country being singled out once again without the safety net of the ECB’s bond-buying after its €1.85tn Pandemic Emergency Purchase Programme (PEPP) is due to stop net purchases in just over three months’ time.”

For now, the country has a cash buffer and will borrow half of its 2022 financial needs in 1Q22. That should delay potential risks for the time being.

Unfortunately, it doesn’t mean that the ECB is in the clear. European central banks need to be aware of longer-term inflation risks and act accordingly. They need to look beyond the ongoing upswing in COVID cases and clearly communicate their strategy – even if inflation is higher than they expect. Especially the ECB has been terrible at communicating its strategy.

2.  INFLATION

2.1 Economists like myself got it wrong: inflation is here to stay – The Telegraph

When it comes to the 2021 word of the year in financial markets, “transitory” must be the top contender.

At the start of the year, policymakers at the US Federal Reserve, European Central Bank (ECB) and Bank of England (BoE) had presumed that any inflation overshoot linked to reversing base effects of falling oil prices in 2020 and the emerging supply shortages during the Covid-19 recovery would be “transitory”.

The BoE’s forecast revisions throughout the year tell a different story. In February, it had projected that inflation would gradually rise over the course of the year but remain just below the 2pc target, before edging above it temporarily in 2022.

But with each new forecast round, the BoE was forced to dramatically raise its projections. At the most recent monetary policy report in November, the BoE said that it expected inflation to peak at around 5pc in April of 2022 – more than double its February call.

A little over a month has passed since that report and the numbers already look out of date. On Monday, deputy governor Ben Broadbent stated that inflation is likely to “comfortably exceed” 5pc next spring. It looks like more upward revisions are on the way at the next monetary report in February.

Reacting to the significant inflation upside surprises, the BoE has turned in recent months to priming markets for a normalisation of monetary policy that should have already started in the summer.

Comment: The Federal Reserve buried the world “transitory”. The ECB did not. The BoE is on the fence. The graph used in this article is important because it shows what a central bank with a semi-hawkish view thinks of inflation. A surge to 5-ish% followed by a decline to 2% by mid-2024. The ECB sees 2% inflation in 2022. They will have to update that, but so far, that’s what they communicate.

It’s also worth mentioning that economist like Kallum Pickering change their mind based on two developments. Both discussed in this article and highlighted by us in the past few months:

“First, the harrowing experience of the great financial crisis, followed by a decade of sluggish growth and disinflation, remains etched into policymakers’ minds. Between 2010 and 2019, every time the business cycle in the advanced world looked as if it would get going, it fizzled out for one reason or another. Inflation and growth persistently fell short of policymakers’ expectations.”

“Second, central banks failed to appreciate the extent of the ongoing global supply chain disruptions as well as the continued strength of consumer demand for goods as economies re-emerged from winter 2020/2021 pandemic restrictions.”

2.2 As gloom descends, how long can house prices defy gravity? – The Times

[…] One interesting question is how this will affect the housing market, whose story has been an extraordinary episode in an extraordinary period. It has boomed even as other parts of the economy have been on their knees. When the 2020 slump loomed with the first lockdown, during which time the housing market was temporarily closed, a plunge in house prices and activity might have been expected.

In fact, any effect, which was minor, was temporary. Soon, people were using their spare screen time to hunt for houses on the property portals. Helped by record low interest rates and the chancellor’s stamp duty cut, prices and activity were soon surging.

It continues. The official house price index from the Office for National Statistics has house-price inflation at 11.8 per cent. The average price has risen by £28,000 to £270,000 in a year.

The Halifax house price index showed that prices in the latest three months, September-November, were up 3.4 per cent — the strongest quarterly rise since 2006, the eve of the financial crisis. This was significant, in that prices continued to rise even after the stamp duty reduction came to an end on September 30. It suggested that the market, or at least house prices, had enough momentum to see it through the removal of the tax incentive.

Comment: After discussing the rise in UK home prices last week, it’s time to dive deeper into a changing market. David Smith’s graph of housing supply shows how dire things are. Supply took a dive since the housing bottom of 2012 and has not recovered from its 2020 lows.

“One reason for that was provided by the Royal Institute of Chartered Surveyors (RICS) in its latest residential market survey. The great obsession in housing commentary is with new-build supply, and it matters. But even more important, as far as the day-to-day market is concerned, is the number of existing homes going on sale. According to RICS, new instructions to sell have fallen for eight months in a row, even as buyer demand continues to rise. This can have only one outcome. As RICS puts it: “This constrained supply backdrop is also underpinning price growth, which has shown no sign of easing over the latest survey period.””

What we see is a structural change in supply and demand accelerated by the pandemic. New work-from-home mandates (or worse) only validate why people moved into bigger homes in the first place. Living in small city apartments is not a “goal” anymore for most people. They want – and need – more space and often want to avoid messy cities that don’t get any better due to social tensions.

Eventually, the air will come out of this bubble. The problem is that it might not happen soon. Supply and demand are seriously out of balance. This also causes issues like a wider wealth gap. Some politicians are suggesting a capital gains tax on homes, but that is still far from reality and it’s unlikely that politicians are willing to risk their reputation on something like this.

“What to do about it? The Resolution Foundation suggests that a 28 per cent capital gains tax on main residences could bring in a useful £11 billion a year. A smaller £4 billion a year could be raised with a threshold of £75,000. This is not the first such suggestion; Dame Kate Barker, a former member of the Bank’s monetary policy committee and adviser to the last Labour government on housing supply, also recommended capital gains tax on main residences.”

2.3 Italy to allocate almost 2 billion euros more for energy price curbs – Euronews

Italy will allocate almost 2 billion euros ($2.26 billion) in additional funds to help households overcome rising energy prices next year, Regional Affairs Minister Mariastella Gelmini said on Thursday.

With international energy prices soaring, Prime Minister Mario Draghi’s government has already spent more than 4 billion euros this year to try to rein in utility bills by compensating companies that agree to cap their tariffs.

Draghi set aside a further 2 billion euros for next year in the 2022 budget approved by ministers in October, but with energy cost pressures continuing to drive consumer price inflation, the cabinet decided on Thursday to almost double that sum.

The government had made “an unprecedented effort” that “will allow families to face the coming months with greater serenity,” Gelmini said after the cabinet meeting, adding that the total outlay for 2022 will be 3.8 billion euros.

CommentLa Repubblica reports that Italy is looking to add another EUR 3.0 billion to its 2022 budget to support households with rising energy costs. EUR 6.8 billion represents roughly 15% of the 2021 annual household expenditure on housing energy.

These expenditures are provided by cheap funding. However, cheap funding could fade over the next 2-3 years while high energy costs are here to stay unless the EU makes significant changes.

Simply supporting poorer households while “richer” households have to suffer from the government’s stupidity is not a long-term solution but the start of wide-spread socialism. Cheap and reliable energy is no longer an option. Even if that means that some countries will have to invest in energy sources they hate like nuclear and natural gas.

3.  ENERGY/CLIMATE

3.1 Gas market remains tense – Russia must explain itself – Handelsblatt

It has never been easier to blame Russia for the low level of gas storage in Germany and other European countries. It was Russia’s President Putin himself who, at the end of October, held out the prospect of supplying more natural gas to the West again in November.

But there is no sign of that at the moment. Storage levels remain low. This is especially true for those storage facilities in Germany that belong to Gazprom or in which Gazprom has a stake. It is therefore natural to accuse the Russian side of being stingy with gas in order to force the Nord Stream 2 pipeline into operation.

But are things that simple? Of course, Putin is a brutal power politician who uses all instruments to push through his interests. The escalations in the Russian-Ukrainian permanent conflict underline this. De-escalation is an instrument that has no meaning in Putin’s toolbox.

Nevertheless, the gas supply does not follow power-political considerations alone. After a cold winter in 2020/2021, storage levels were low, and European traders were reluctant to stock up for this winter in view of high gas prices.

In addition, there were logistical problems with the Russians. Gazprom was busy filling up its own storage facilities until well into the autumn. Taken together, this provides part of the explanation for the situation.

However, the fact that, according to Ukraine, the Russian side is still not making full use of the transit capacities through the hostile country must give pause for thought. This cannot be due to a lack of demand for natural gas.

It is too short-sighted to make Russia alone the culprit for the situation on the gas market. But with every day that Russia delivers less than it could, the pressure to provide valid explanations grows.

Comment: The situation is dire. Last week, we discussed a new wave of energy bankruptcies in the UK. It seems to be just the start as energy prices are rising again. Dutch TTF futures are hitting new high prices above EUR 116 after briefly falling below EUR 70. Europe has its back against the wall. Russia is not increasing exports anytime soon and as long as fossil fuels are seen as the worst thing in the world (for climate reasons) supply will not come back to support demand.

Additionally, Bloomberg reported that Nord Stream 2 cannot be certified under current conditions. This means that Russia is even more unlikely to increase exports through other pipelines. In the end, it’s not about Nord Stream 2 as other pipelines allow for enough capacity to flow into Europe. This is about Russia wanting to use Nord Stream 2 to bypass East European countries like Ukraine.

With this in mind, and with regard to the situation in Germany, the country is lucky that the average December temperature is currently about 4 degrees above the normal average. If it stays above average, Germany might be able to avoid a disaster. The problem, however, is that if the winter gets colder, Germany does not have alternative energy sources to offset its low natural gas storage levels.

Shortages would primarily impact gas for heating. Nonetheless, electricity might also be affected as gas accounts for 12% of generated electricity. Even if companies get enough energy, households might get rationed. After all, European gas storage levels are falling off a cliff after failing to normalise prior to the start of the winter.

While Germany might have an emergency plan, it’s not very likely. During crisis, the country is often overwhelmed thanks to its system where a lot of decisions are left to individual states. This caused the vaccination campaign to lose momentum early and was a major issue in this year’s floods.

In the end, it all comes down to how much Germany is willing to change. Not only are Putin’s threats of lower gas exports not working because Nord Stream 2 is delayed further, but we might also even see more pressure on the pipeline if Russia invades Ukraine. Germany could be forced to make big decisions like it did in 2011 after Fukushima when Merkel decided to phase out nuclear. That’s not on anyone’s agenda, but if the proverbial hits the fan, it might be Germany’s only option to guarantee energy supply.

3.2 EU looks at new ways of funding the green transition – FT

While the landmark NextGenerationEU recovery fund was formally designed to be a one-off, advocates have always quietly hoped it will provide a Rubicon-crossing precedent for more common borrowing in the future, writes Sam Fleming in Brussels.

Now those voices are growing louder.

At an FT conference last week, Paolo Gentiloni, the economics commissioner, argued that if the recovery fund succeeds it can serve as a template for new investment vehicles supporting EU priorities.

One such idea was a green investment fund, he said — a concept that was also floated by the IMF in its recent Article IV statement on the euro area economy. “It’s one of the possible ways to address a problem which we all recognise — how do we keep a decent and possibly strong ratio of public investment to GDP?” said Gentiloni.

The commission has estimated that green investments will require an extra €520bn a year for the next decade — although admittedly the bulk of that will need to come from the private sector.

NextGenerationEU remains a one-off programme, Gentiloni said. However if it is a success, “you will have the basis to use these methodologies for other purposes and other goals”. If it’s not a success, he added drily, “we will have a problem”.

Macron hinted at similar ideas last week as he met Scholz in Paris, suggesting the EU should be willing to come up with innovative financing ideas — just as the union did when it hatched up the recovery fund in 2020.

[…] There are other ways of achieving the goal of supporting investment, Gentiloni added, pointing to the current consultation over reforms of the EU’s Stability and Growth Pact. One change would be to reform these budget rules to incentivise “strategic investments” — something southern European countries have long advocated.

Comment: This article would also be a great addition to the “stability pact” part of today’s newsletter as there is no way EU countries are able to boost investments in green technologies without breaking deficit rules. Now, countries are looking to exclude these investments from stability pact calculations. It might work as even the fiscal hawks in Germany (i.e., Lindner) are finding it increasingly difficult (impossible) to fund their plans while maintaining a balanced budget. Expect the calls for looser rules to become louder as rising energy prices mean that governments need to invest in other energy sources.

4.  SUPPLY CHAINS

4.1 To fight climate change and hit net zero targets, we will need miners – The Telegraph

[…] Yet it is not the oil majors I chiefly want to write about today. Rather, it is those other stock market pariahs, the big mining finance houses. Like performing monkeys, they too are increasingly forced to jump through the Environment, Social and Governance (ESG) hoops in order to gain continued access to capital.

If meeting these requirements sounds like a contradiction in terms for such companies, that’s because it largely is. Mining has a terrible history; it routinely inflicts significant environmental damage, and is frequently pursued with scant regard for safety and workers’ rights. It is also highly energy intensive, and therefore makes a considerable contribution to global warming. It’s hard to impossible for these corporate goliaths to tick ESG boxes.

Big strides have been made in recent decades in cleaning up the industry’s act, but the disasters keep coming. Vale, the Brazilian mining giant, has presided over two tailings dam failures over the past six years, with another now reportedly imminent. The destruction of two ancient and sacred rock shelters in the Pilbara region of Western Australia by Rio Tinto as part of an iron ore mine expansion was equally jaw dropping in its seemingly casual disregard for modern standards of corporate responsibility. Try as it might, this is not an industry that will ever achieve the holier than thou status of Tesla or Ørsted, the world’s largest electric car and offshore wind companies respectively.

But here’s the irony; we’ll need the FTSE four of Glencore, BHP, Anglo American and Rio Tinto more than ever if the energy transition required to meet net zero targets is ever to be achieved. And so will Tesla, Ørsted and other supposed clean energy companies. The campaigners who scream “do something” at every available opportunity seem entirely unreconciled, even oblivious, to the fact that the desired progress requires a massive increase in the world’s production of key metals.

Pariahs they may be, but the FTSE’s mining four are going to be in the thick of this surge in demand. If we think of the metals most needed to power the energy transition – copper, nickel, cobalt and lithium – then each of these companies is a top five producer in one or more of them. Nor is it just these metals. Wind turbines use huge amounts of steel, which in turn requires iron ore and coking coal. Alternative, green steel is still a long way off.

According to recent research by the International Monetary Fund, the total value of metals production will need to rise more than four-fold for the period 2021 to 2040, rivaling the total value of current crude oil production, in order to achieve the net zero by 2050 goal. This will in turn cause metal prices to surge to unprecedented levels.

[…] What is more, the biggest sources of supply often lie beneath politically unstable regions. The Democratic Republic of the Congo, for example, accounts for about 70pc of cobalt output and half of known global cobalt reserves.

Advanced economies like to think of themselves as post-industrial, service-based constructs that no longer need to make or consume a great deal of stuff, at least relative to the industrial age.

Turns out that in fighting climate change, we are going to need the physical more than ever. The tired old FTSE 100, long thought of as an investment backwater of ageing corporate dinosaurs, may be about to come back into its own, dragging the wider City with it as a go-to source of green energy finance.

Comment: Jeremy Warner is one of the few writers who get global supply chain issues – especially with regard to environmental issues. It’s a piece that needs not a lot of commentary as he’s spot on.

It’s an issue that will get worse if countries do not invest in mining and exploration. The same goes for oil. After all:

“According to recent research by the International Monetary Fund, the total value of metals production will need to rise more than four-fold for the period 2021 to 2040, rivalling the total value of current crude oil production, in order to achieve the net zero by 2050 goal. This will in turn cause metal prices to surge to unprecedented levels.”

You can access the IMF report here as it shows that under a net zero scenario, demand for metals will skyrocket.

On a side note, we should also not ignore that a rising middle-class in African countries will have a significant impact on energy demand. According to a tweet I came across this weekend, a number of African countries have a lower per person energy use than an American fridge. That’s something to think about when it comes to our need to produce affordable and reliable energy.

To get back to Jeremy Warner’s takeaway, the FTSE and it’s not-so-ESG-friendly components will do much better than some might think. Energy, basic materials, and related are not going anywhere. If anything, they are more important than ever before.

4.2 Fracking companies threaten to sue the Government over ban – The Telegraph

Fracking companies are threatening to sue the Government over its ban on the practice amid complaints they have been left out of the country’s energy revolution.

The onshore shale gas industry has exchanged “pre-action correspondence” with Whitehall after it was barred from drilling following concern over earthquakes in 2019, before any gas was produced.

It raises the prospect that taxpayers could be forced to shell out compensation to an industry which came under sustained attack from campaigners over environmental concerns.

The potential legal action also raises questions for Cornwall’s clean energy revival.

Fracking companies were riled after testing to extract heat, power and lithium from deep geothermal waters in the county last year triggered mini-earthquakes similar to those caused by fracking, but different regulations meant the work did not have to regularly pause as a result. 

The billionaire industrialist Sir Jim Ratcliffe was among those who spent millions of pounds on fracking projects that had to be ditched following the ban. His company Ineos wrote off £63m in 2019.

It comes as the Government faces questions over whether its policies are deterring investment in energy that would help Britain secure independence from Russia and producers in the Middle East.

Charles McAllister, policy manager at UK Onshore Oil and Gas, the trade body, said: “We support the continued development of geothermal energy in the UK, however we would ask the Government to look again at lifting the moratorium on hydraulic fracturing for shale gas in light of its approach to the regulation of seismicity from deep geothermal projects.

“Whether our members will legally pursue compensation for the £500m they have invested in the Midlands and the North of England is a question for each company.

“We would of course prefer the Government to look at the science, apply regulation fairly and allow our members to proceed in producing a much-needed source of domestic natural gas.”

Comment: An article that perfectly underlines the message of Jeremy Warner’s article we just highlighted. Fracking is far from great as it does have the ability to do environmental damage (including minor earthquakes). However, in light of the need for metals and energy, there needs to be some exceptions. The same is the case in The Netherlands where the government suspended production in Groningen where Exxon Mobil and Shell produced natural gas. With rapidly rising natural gas prices in Europe, people will soon be willing to take more (environmental) risks in order to keep inflation from rising any further.

5.  TRADE

5.1 Things are getting complicated between Germany and China – Frankfurter Allgemeine

[…] In the meantime, Baerbock is more diplomatic, but other leading Green politicians are openly calling for a diplomatic boycott of the Olympic Games in Beijing – supported by the FDP, which is also critical of China. The tone for the legislative period is set: things will not continue to be as friendly as they were under the chancellorship of Angela Merkel (CDU).

[…] Nevertheless, the Greens and the FDP are getting support from the business associations. “China is tightening its course in such a way that Germany and Europe have to react to it,” says Albrecht von der Hagen, CEO of the Association of Family Businesses. The fact that Beijing imposed economic sanctions on the EU country Lithuania because a diplomatic representation of Taiwan – which Beijing considers part of China – recently opened there, is seen by many entrepreneurs as crossing the border. Von der Hagen sees this as “seriously jeopardising long-term cooperation with China”.

The Federation of German Industries (BDI) would also like to see a “clearer and more self-confident course” vis-à-vis the country, as Wolfgang Niedermark, the executive director responsible for this area, puts it. Even at the risk of economic retaliation. “Anyone doing business in China is exposed to disproportionately high political risks,” says Niedermark. This makes it all the more important for the German government to work “for a permanent level playing field”.

[…] The fact that the Chinese embassy in Berlin spoke of “individual politicians” who should show more “respect” towards China after Baerbock’s remarks was a comparatively mild reaction. It shows that the People’s Republic does not want to lose Europe as a partner as well, after the relationship with the USA has completely disintegrated and countries like Great Britain have now also clearly positioned themselves against China.

[…] Relations with Germany are likely to deteriorate, says Fan Hongda, professor of international relations at Shanghai International Studies University. It is true that China is Germany’s largest trading partner for the fifth year in a row. But the new Chancellor Olaf Scholz (SPD), who is seen in China as friendly towards the country, does not have the prestige and influence of his predecessor and has to listen to his coalition partners, which makes Germany’s China policy “more complicated”. If the German government takes “too much consideration” of the United States in its relationship with China, this will “definitely negatively affect” Beijing’s relations with Berlin, he said.

[…] The words of Economics Minister Robert Habeck (Greens) and FDP leader Christian Lindner at the same event were clearer. Habeck said that in the relationship with China “we will have to take a close look at where cooperation or even takeovers of companies are in the European and German interest”. Lindner emphasised the importance of the Chinese domestic market for the German economy, but also said that the coalition government had undertaken to “show commitment on the world stage” in the area of human rights.

Comment: Things are not getting better for the German Chinese relationship – and that might be a good thing as Germany has long been the force that made it hard for the EU to stand up against the Chinese. This time is different as both the Greens and the liberal FDP make it harder for Scholz to make a good impression in China (as he intends to do). Even German companies are increasingly sceptical as they feel that China is becoming vulnerable. Its own economy is weakening due to construction and real estate weakness and its trade wars with the US are making good relations with the EU very important. After all, China is dependent on German imports like cars, machinery, and electronics. The problem is that Germany is also dependent on cheap imports. It imports goods worth EUR 116 billion from China. The second-largest trade partner is the Netherlands with goods worth EUR 89 billion.

When it comes to exports, Germany exported more than EUR 100 billion in goods to the United States. China came in second with a value of EUR 96 billion. This is what will keep Germany at bay. Mentioning human rights is something Merkel has done frequently. Actually, acting on it is a whole different story – especially given the dependence of automakers on China. When it hurts their top line, they will quickly force German politicians to change their stance on the matter.

Interestingly enough, and according to another Frankfurter Allgemeine article, Germany has expanded in emerging markets faster than its European peers. It was great for its economy, but it came with geopolitical issues like the dependence on countries that do not have the kind of democracy the west has – to put it mildly.

Hence, to use the article’s own worlds, Germany needs to prove it is willing to make changes:

“A study by the European Council on Foreign Relations (ECFR) recently showed that Europeans trust Germany when it comes to economic policy and upholding democratic values, but not when it comes to power poker in international relations. Especially when it comes to geo-economic issues, Germany needs to gain credibility. Becoming aware of Germany’s geo-economic interests is not only an end in itself, but also serves above all to strengthen the EU’s position of power.”

6.  COVID

6.1 Why are we ignoring a cheap and potentially powerful weapon against Omicron? – CAPX

In the hubbub about boosters, lockdowns, antivirals and monoclonal antibodies, one potential defence against Omicron has been overlooked. Already widely used and approved for depression as a cheap generic, fluvoxamine (‘fluvox’) could be quickly deployed at scale. The large trial using it to treat Covid was stopped, not because the drug was ineffective, but because it was so clearly better than the placebo that it would have been immoral not to give it to those on the placebo. If the trial results are borne out, it could sharply reduce deaths and hospital admissions and help preserve personal freedom. But, for some reason, the Government apparently has no plans for it.

If recent trials are to be believed, fluvoxamine could reduce hospitalisation by 32%, saving £4,000 per patient, and perhaps cut deaths by over one third, not to mention saving vital hospital beds for other patients at this crucial time. It’s cheap, at just £4 for a complete 10-day course, it keeps at room temperature and could even be posted. Respected pharma expert Derek Lowe and Florida’s Surgeon-General have called for it to be used. Another expert told the Wall Street Journal that it ‘may end up being standard of care’. This should be a total no brainer.

[…] Nor is this some novel, untested treatment. Fluvoxamine was one of the first of the new treatments for depression known as selective serotonin reuptake inhibitors or ‘SSRIs’. It has been available in Switzerland since 1983 and the US since 1994, generating plenty of data on its safety profile in various patient groups. It is a generally well tolerated and relatively safe drug, whose most common side effect is nausea. The doses given in the largest trial for Covid treatment are in line with doses prescribed for depression, so adverse events and effects are likely to be comparably small. It is so safe that in a study of 1,497 patients, adverse events were more common in patients who got the placebo than those who got fluvoxamine.

[…] A small and highly competent team could set things up using an external contractor in short order. When Test and Trace gets a positive PCR result, it could notify the contractor’s onsite pharmacist of each case, which could provide a simple online form for the patient to qualify for treatment. Because many of the vulnerable may not be Internet-savvy, it should then call those who do not respond, using trained laypeople to walk them through the questionnaire.

[…] Why hasn’t fluvoxamine already been tried at scale for Covid in England? Partly because it doesn’t fit into the highly successful hospital-based RECOVERY trials that discovered dexamethasone and other treatments. Those treatments are generally only given to severe cases, once they are already in hospital. They often require infusion through an intravenous cannula. Fluvox, on the other hand, is a simple pill that can be taken at home. It must also be taken soon after developing symptoms, before they become serious enough to require admission to hospital.

[…] No big pharma manufacturer will bother to press for fluvox or fund further expensive trials: they have no patent and so it has insufficient profit for them. It will require an ambitious government moving at high speed to save lives and preserve as much liberty as possible. The British government has previously shown what it can achieve. It is time to step up again.

Comment: Remember ivermectin? The “horse de-wormer” Joe Rogan took to quickly recover from COVID. The corporate media in the US – and abroad – pretend that weirdos are experimenting with animal drugs just to avoid getting vaccinated. That’s nonsense as many congress members have been treated with the drug according to RealClear Politics. The problem is that ivermectin is just like flufox, not a drug that makes pharma companies a lot of money. That’s pretty much all there’s to it.

7.  STABILITY PACT

7.1 Macron urges Scholz to ‘invent’ new financial solutions for EU – POLITICO

Europe must create new financial instruments like the coronavirus recovery fund to boost its economic and strategic sovereignty, French President Emmanuel Macron urged on Friday.

Macron issued the plea while speaking to reporters after his first meeting with freshly sworn-in German Chancellor Olaf Scholz, who had come to Paris for his first foreign trip just two days after his inauguration.

Both leaders vowed to use “flexibilities” under the EU’s debt rules to ensure sustained economic growth and finance the green transition. But Macron notably went one step further when he touched on the €800 billion coronavirus recovery fund, under which EU countries for the first time agreed to share limited common debt risk.

“We need the same capacity to innovate and invent appropriate solutions to accompany the coming period,” said Macron.

His proposition is “not a question of pre-empting instruments or returning to the debates we have faced a lot about in recent years,” he added. It’s about responding to the “new environment” the EU is facing, which includes “unprecedented economic and social conditions” following the pandemic.

He also pointed to the need for investments into European sovereignty “that the geopolitical tensions impose on us.”

“We need to find pragmatic ways and good agreements,” Macron stressed.

Such calls for new financial tools, which would most likely involve a broader pooling of debt risk among EU countries, are a red rag in Germany as well as “frugals” like the Netherlands, Austria, Denmark and Sweden.

Scholz, for his part, was more restrained and avoided speaking of new financial tools, but he stressed that both sides could find a common approach.

“I am confident that we will be able to solve the tasks that lie ahead of us jointly,” he said. “After all, it’s about ensuring that we continue to enable and sustain the growth that we have set in motion with the recovery fund, and that we ensure sound finances at the same time.”

Comment: Meanwhile, Bruno Le Maire is meeting Christian Lindner, Germany’s new finance minister to discuss the banking union and reforms to the stability pact. While Lindner is tweaking the rules at home, he is likely to insist that investments are still included in deficit calculations – something Le Maire tried to change. Le Maire also proposed an idea that each member state takes responsibility for its own path of reducing public expenditures and restoring public finances.

These things are set to cause tension between countries and do not fit with Germany’s new government’s ideas when it comes to a more powerful and integrated European Union.

8.  SPAIN

8.1 Brussels gives Spain more leeway to approve labor reform – CVBJ

The European Commission is willing to be flexible with deadlines that manages so that the countries have their reforms ready in exchange for millionaire injections of European funds; and singularly, in the case of Spain, this means giving a little more margin to the labour reform. European executive sources ensure that the commitment that the Council of Ministers approves the new labor market regulations before December 31 “it is more of an indicative date than a legal obligation“A relief for the Executive and the social agents now that there are 21 days to the end of 2021 and the negotiations to try to reach an agreement are not going through their best moment. However, the Government maintains -for the moment- their Endeavor for the Official State Gazette (BOE) to collect the new legislation before the start of 2022.

Comment: There’s news. And it’s good news for Spain. The country is getting more time to approve the labour reform. For the past several months, this issue has been hard going for both the government and its partners.

The way the government is dealing with the labour issue is similar to its handling of the global financial crisis. Back in 2012, the Rajoy government passed labour reforms without securing an agreement with unions and the employers’ association. It made sense as unions and the employer’s association had severe disagreements.

The current government wants to back to the social dialogue. This includes daily talks.

This follows a general pattern. After a failed attempt to secure a mandate for governing alone in 2019, Sánchez’s Socialist party entered the first coalition government since the civil war era. Sánchez has also opted for dialogue over confrontation with the Catalan separatists.

Similarly, the European Commission requested the employers’ association’s input into the labour reforms.

Needless to say, this style of politics comes with risks. Multiple actors makes it easier for participants to cast blame elsewhere, and it makes the process very lengthy and difficult.

8.2 Fitch Affirms Spain at ‘A-‘; Outlook Stable – Fitch Ratings

A recovery in the Spanish economy is under way, following the economic contraction and deterioration in the sovereign’s fiscal position caused by the Covid-19 pandemic. Spain’s ratings remain supported by a high value-added economy, strong governance indicators, and human development rankings above the ‘A’ peer median. The Stable Outlook reflects Fitch’s view that recovery prospects, along with continued favourable funding conditions, will facilitate a steady or downward public debt trajectory.

Economic activity has recovered strongly this year, albeit at a slower pace than previously expected. We expect real GDP growth of 4.6% in 2021, in line with the outturn over the first three quarters of the year. The recovery in employment is close to or above its pre-pandemic level based on various metrics, and the unemployment rate fell to 14.5% in October, from a peak of 16.6% in August 2020. This was despite real GDP as of 3Q21 remaining substantially below the pre-pandemic level of end-2019 (a gap of 6.6%).

We expect the economic recovery to gather pace next year, as European funds are deployed to a larger extent, and international tourism continues to recover. We forecast real GDP growth of 6.3% next year, before slowing to 3.6% in 2023, still well above potential. Risks to the near-term outlook are mainly related to developments in the pandemic and the potential for renewed restrictions with consequences for domestic economic activity and international travel. Supply constraints across various industries, high energy prices and a slower than expected rollout of European funds also pose risks.

Comment: Given the reasoning behind this decision, it is unlikely that Fitch will have to adjust its rating on the medium term again.