‘With All Our Hearts’

Angela Merkel is poised to take Germany back into a full-scale COVID lockdown starting Wednesday.

Europe’s largest economy, a relative success story during the first wave of the pandemic, has had little luck curbing the virus’s second wave under a soft lockdown instituted early last month. The chancellor warned of “exponential growth” at a press conference on Sunday. “We have to grieve many dead,” she lamented.

Germany logged records for both daily infections and fatalities on Friday, at 32,734 and 604, respectively. Although the country still stands out as having come through the crisis in better shape both from an economic and public health perspective than other large, European economies, cases per 100,000 over seven days, a key metric, was more than triple the target as of Sunday.

In a radio interview, European Council President Charles Michel said the EU will likely approve the first COVID vaccines “in the coming weeks, maybe even before the end of the year.” The figure below (from Goldman), gives you a sense of what’s expected in terms of time frames across the developed world.

The German government is funding assistance programs for businesses, but there’s some concern about the cost. One official last month cautioned that an extended lockdown would present a “serious burden for the federal budget.” The notoriously frugal Germans are taking on more debt in 2021 to fund crisis-related relief measures. Late in November, Finance Minister Olaf Scholz said that if lockdowns are extended through year-end, the government’s aid program would become “financially challenging.”

Obviously, funding relief based on last year’s revenues for businesses will be more expensive in December than November due to increased spending during the holiday season. In a letter to Merkel, a coalition of retailers put things in stark terms. “You are also irrevocably sealing the insolvency of thousands of retailers and putting millions into unemployment,” the letter, reported by Bild, reads.

Once again, it’s a difficult situation for world leaders: How much is a life worth?

That was the bad news on Sunday, and I would note that it’s not surprising. It was pretty clear last week that Germany was headed for stricter containment protocols. Non-essential stores will be closed from Wednesday and children are advised to stay home from school.

The good news is, Boris Johnson and Ursula von der Leyen kicked the can again on Brexit, if you can believe it. Last week was supposed to be the “deadline,” and when that didn’t work out, Boris and Ursula set up a dinner which was also touted as a “last-ditch” effort. After dinner, the two said their respective negotiators had until the end of the weekend to come up with a deal.

On Sunday, the two talked on the phone and decided to “go the extra mile,” where that means extending this charade for another few days, at least. They described a sense of “exhaustion” among all parties, but Johnson, speaking to the media, said “we’re going to try with all our hearts.” And yes, that is an actual quote.

“Both sides want to avoid being the ones walking away from negotiations; however, whether such an extension would be for show only, or in fact signal a real and realistic attempt to hammer out a deal is the question,” AxiCorp’s Stephen Innes said.

The BOE meets this week. A no-deal Brexit would almost surely force another rate cut, if not now, then soon enough. Zero is just 10bps away and speculation about negative rates picked up over the summer. The bank expanded QE by more than the market expected early last month. As in all developed economies, monetary policy is working hand in hand with the fiscal side (figure below).

If talks break down, the BOE’s Thursday meeting would be interesting indeed. “If a collapse in post-Brexit trade talks materializes, that could turn the BOE’s decision from a policy non-event to a blockbuster must-watch,” Bloomberg wrote, adding that “even if negotiations between Britain and the EU continue, expect the BOE to amplify its message about the tools it can deploy to cushion the blow of a chaotic outcome.”

“All of this will put the Bank of England’s back against the wall,” Innes went on to say, in a note. “Already this morning, economists are warning the market they are running out of policy wiggle room, noting that QE at this stage will prevent tightening but will not add more stimulus.”

Oh, and Italy reported 484 new deaths on Sunday. That takes the total to 64,520, meaning Italy now has the fifth most deaths globally, behind Brazil, India, Mexico, and, of course, the US, where the death toll is rising by roughly 2,300 per day and sat at almost 300,000 by the end of the weekend.

You can criticize that chart as you see fit. Here are some popular critiques: “It’s apples to oranges.” “It should be population adjusted.”

For my part, I just prefer to call it tragic.