13 March 2020

Paul Goldschmidt: Covid19: Globalization in question?

A major difference with 2008 is that the subprime crisis remained largely confined to the financial and economic sectors, while the present crisis is far more difficult to apprehend. Indeed, it combines simultaneously a sanitary crisis – whose critical “social” stakes are of a total different order - with an economic-financial crisis which must be managed while integrating a completely new set of parameters.
 
Thus the measures implemented to fight the propagation and ensure the treatment of the epidemic are confronted with their immediate impact on the economy; their consequences, if the measures are not finely tuned, are liable to backfire, aggravating the sanitary environment. 
 
This coexistence of phenomena that are tributary to different orders of concern, but appear nevertheless  to be deeply interdependent, should suggest a great degree of circumspection in the behavior and declarations of all who express views on the subject and, in particular, to those who are endowed with any responsibility in conducting public affairs. This is not the time to criticize the authorities; quite to the contrary, it is appropriate to express trust and implement without discussion - as a matter of civism - the recommendations they may formulate and the measures they decide upon.
 
Only through altruism and solidarity will it be possible to minimize the consequences of the pandemic, whose character - apparently benign (medically speaking) except for older and fragile humans – could have infinitely more severe consequences if it triggered a major economic crisis, capable of destabilizing the fragile geopolitical equilibrium which was already under considerable strain before the latest sanitary event. [...]

3. The most dangerous aspect of the current situation is, however, the demoralizing spectacle of the EU’s incapacity to deal with either the existing or potential challenges of the crisis. The declarations, meetings, video-conferences, etc., are patently not up to the stakes involved; it brings into focus the primacy of the Nation-State and the reinforcement of intergovernmental decision making. It applies not only to the present health emergency but also to the negotiations over the plurennial budget 2021-27, to matters dealing with immigration, climate change and defense or to geopolitical dossiers concerning the Middle-East or relations with Russia and the United States. As for the economic response of the EU to the Covid19 crisis, the measures are limited to granting Member States additional leeway under the budgetary rules monitored by the Commission and a measly €25 billion emergency fund.

 
This is a wasted opportunity (perhaps the last?) to accelerate the process of Eurozone integration. In his solemn speech to the French, yesterday evening, President Macron showed his willingness to put into question many aspects of his liberal economic credo. He insisted that – after the health emergency is overcome – things could not be allowed to return to business as usual.  In particular he explained that French and/or European dependence on third parties for access to strategic goods was no longer admissible, implying that the mantra of unimpaired free trade could no longer be the guiding principle of economic management. The indisputable advantages of free movement of people, goods, services and capital should be subordinated to other imperatives and first of all, preserving “European sovereignty” at the expense – where necessary - of economic and financial efficiency. This is being broadly interpreted as a call for repatriation of delocalized production of strategic goods (medicines – vital spare parts, etc.) – in particular from China - and for a concerted effort to diversify sources of supplies to avoid excessive dependence on particular third parties.
 
However, while the foregoing may seem pure “common sense”, it completely overlooks the most crucial aspect of dependency to which the EU has been and remains subject: the vassalization of the € to the US Dollar. In this respect, and in line with Trump’s irrational interventions, it will be of particular interest to observe the smooth continuation of the ECB dollar funding by the FED through the central bank’s swap network on which the European banking system has become totally dependent, as the first signs of a dollar liquidity shortage are becoming apparent.
 
Rather than focusing on the necessary medium to long term independence of the EU’s access to vital supplies including raw materials, it should be the absolute priority of the EU to complete EMU, providing the Eurozone with a meaningful budget and adequate own resources. Had these tools been in place, it would have allowed – in line with what the USA did in 2008/9 – to insist that EMU Members abide by the existing budgetary rules while providing specific financial relief from the Eurozone budget, financed in part by tapping its largely underdeveloped borrowing capacity. Unfortunately, the latest signals from Member States point to an increased reliance on national policies which – if maybe appropriate for dealing with a health emergency – are totally inadequate to manage the Single Market and the Customs Union.
 
Fast tracking the completion of EMU would convey to the markets an important message, underpinning the long term sustainability of the Eurozone and the €. Instead, the European Council is allowing Italy, (to be followed by France and others), to increase its already bloated deficit and debt pile, a decision that only postpones the day of reckoning when – inexorably - the sustainability of the € itself will be brought into question. The ensuing crisis would be of an unprecedented depth, laying the ground, in due course, for a resurgence of inflation (the secular method of dealing with excessive indebtedness) and preparing for a reversal of the long term interest rate cycle. Limiting intervention to the classical tool box will only delay and amplify the inevitable looming crisis.
 
It is already too late to rely on the “Conference on the future of Europe” which was supposed to start next May. At the time when every European citizen is confronted with a new situation resulting from the Covid19 and its political, economic and social consequences, there is a real opportunity to ensure the triumph of solidarity between the people who currently enjoy the unique privilege of sharing European citizenship. By demonstrating the necessity as well as the advantages of surmounting nationalism and individualism, it may also prove the only way to escape far greater dangers.

Full article on Paul Goldschmidt website

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