I’m still a bit surprised that you’re surprised about Trump’s decision not to renew temporary exemptions from metals tariffs on U.S. allies given that multiple media outlets all but confirmed the news on Wednesday evening, but I guess given Trump’s penchant for 11th hour reversals some folks were still holding out hope he might change his mind.
Whatever the case, the “tenuous calm” in Europe I mentioned first thing Thursday morning was shattered by the tariff news, but also by the prospect of Rajoy’s seemingly imminent ouster in Spain.
The situation there has been simmering since late last week (and I mean, anyone who follows Spanish politics would tell you it’s been simmering for a helluva lot longer than that), but a report that the Basque nationalist party will support a no-confidence vote looks like it was the last straw for Spanish stocks. The IBEX trimmed an early gain to trade aggressively lower:
But more broadly, the tariff news deep-sixed European equities’ attempt to find their footing and you can see exactly when that news started to bite:
Complicating this situation further are reports that Five Star and League are set to form a government after all, with Italian economist Giovanni Tria as finance minister. The scorned Paolo Savona is apparently set to be minister of European affairs (because what you definitely want in a “minister of European affairs” is a guy who harbors disdain for the euro).
Those headlines started to hit just as Europe closed:
Italyâ€™s Five Star, League Agree on Govt Team: Official
— Heisenberg Report (@heisenbergrpt) May 31, 2018
That was good for about 18bps worth of richening in BTPs:
By 1:00 pm New York time, it was “official” (whatever the fuck that means in this context):
ITALY'S DI MAIO, SALVINI SAY ALL CONDITIONS MET FOR GOVT: LA7
— Heisenberg Report (@heisenbergrpt) May 31, 2018
Between all of that and the upbeat CPI data…
…it’s not even worth trying to annotate a EURUSD chart (it’s… ummmm… choppy).
But what is worth noting is that the new pick for Italian FinMin doesn’t sound like he’s exactly excited about the existing arrangement.
Here, in his own words, are the problems (and we’ll just present this translation without further comment):
The three failures of Europe
Sixty years after the Treaty of Rome, the achievements of the path of European integration, the European Union and the common currency, appear much more fragile and precarious than we could have imagined only a few years ago. The growth of anti-European movements across Europe is a reality, albeit with different weight and characteristics, in the main eurozone countries.
To understand the extent of the phenomenon we need to start from the three biggest failures of the monetary union, to which naturally there are important successes, which however do not nullify the former.
failure in the process of convergence and elimination of internal macroeconomic imbalances;
the failure to coordinate macroeconomic policies, ie between monetary and fiscal policy;
the failure to correct external imbalances.
An increasingly divided Europe between the “ants” of the north and the “cicadas” of the south in perennial conflict does not seem to have a future.
The German surplus is the sign of the failure of the euro
The growing surplus of the German economy shows that monetary expansion, without a policy that aids economic convergence between the various countries, merely fuels an imbalance that puts us in conflict with the rest of the world. The German-driven Europe has not deliberately grasped, wrongly, that excess of virtue (surplus of “ants”) produces more damage than excess deficit (of the “cicada” countries). And the measures to cope with the resulting crisis have only worsened the situation, rather than resolving it. To think that the convergence of economies should go through internal deflation to the so-called weak countries (the “cicadas”), and imposed through fiscal consolidation even in periods of recession, has produced generalized deflation and no fiscal consolidation.
The problem of public debt, not just in Italy
From 2007 to 2016, the gross eurozone government debt increased by over 25 percentage points of GDP (from 65.0 to 92.2 percent). The French public debt over the same period increased by 35 percentage points of GDP, the Spanish debt of about 65 points, the Portuguese debt of about 62 points, the Italian one of 32 points. Non-compliance with the debt rule has steadily increased: 75% of eurozone countries currently do not meet the public debt limit of 60% of GDP. In 2011, the Italian government in office was dropped under the imperative of the budget break-even in 2013, and today, after six years, Italy is pleased to maintain the deficit below 3 percent in 2017.
In recent years, in order to limit the destabilizing growth of debt throughout the Eurozone, nominal GDP growth has been crushed by the absence of inflation for too many years and by low growth in real terms. And the little blaze of the last few months does not change the scenarios.
A big plan for productive public investments outside EU parameters
In this context, what should be done is clear, even if doing so implies changing the rules that oversee monetary union. To date it is not easy to change them, but the road is not that of non-compliance with the rules, even if until now the Union has arranged to accept substantially the violation or their flexibility. What is missing are the investments needed to support domestic demand in the euro area, but above all to recover competitiveness on international markets and to ensure long-term, above all social, sustainability of growth.
The Juncker plan, which was to represent the second pillar, alongside the expansive monetary policy, of European economic policy, does not appear to be sufficient to date. Monetary policy, although aggressive, has not been able to adequately support private investments, having been blocked by its transmission to the real economy, a real weak point in the quantitative easing of Mario Draghi, who has repeatedly stressed that the ECB could not do it alone.
Hence the opinion that the crucial component of the growth that is missing from the appeal is public investment, which has strongly decreased in all countries. It is enough to think about the massive investments in formation that are necessary for what, with a little imaginative but synthetic terminology, it is used to define “Industry 4.0” and to develop the material and immaterial infrastructures necessary for it.