As unhappy places go, although clearly not in the same league as Myanmar or Hong Kong, the EU must be high up the list. Not much seems to be going its way and much of what is going wrong is entirely self-inflicted. Covid is the lightning rod for the underlying fundamental distaste for the political recipe, with a hint of aftermath-of-Brexit for additional acidity.
While the United States and the United Kingdom have been inoculating their populations at a gallop, the centralised European Union vaccination programme has sunk to the occasion, descending into its own mire of bureaucracy, backbiting and bitterness; Anglo-Saxon Covid caseloads are tumbling yet on the Continent many countries including France, Germany and Italy are on the brink of a third wave of the disease despite a fleet of mitigating vaccines being available. Amid much mutual finger-pointing between Ursula von der Leyen’s Commission (accused of incompetence and seeking to deflect blame anywhere to distract from its own all-too obvious shortcomings) and national governments (fingered for stockpiling and playing politics and adopting almost total vaccine risk aversion with AstraZeneca), recriminations abound including against the UK. And we’re not even a member! True to form, Hungary has gone rogue and, bypassing Brussels, is making a very public play of its success in sourcing its own vaccines from China and Russia, as well as from the established western pharma companies.
On the economic front it is not much better. As Covid cases and hospitalisations mount and national governments try desperately to avoid the imposition of further lockdowns and restrictions with all the knock-on economic and political consequences, EU leaders can see the risk of economic recovery remaining on a horizon which never seems to get any closer. They can see the US and, horrors, the UK both stealing a competitive march on them. The €750bn EU Covid-recovery package, negotiated amid rancorous rows last July and which after everyone had calmed down was hailed as the “new dawn” of cooperation for EU members, has barely yet disbursed a handful of euro cents of aid nine months later; given the incipient internecine warfare breaking out again among EU partners over the vaccine debacle, history suggests “false dawn” of co-operation as a more accurate assessment.
Then, last week, Christina Lagarde at the European Central Bank (ECB) was flushed out of cover by the markets, forced to break ranks with the Federal Reserve and the Bank of England, pledging more quantitative easing (QE) to try and quell rising bond yields and hence rising eurozone financing costs. Eurozone QE has proved an enduringly blunt tool in every sense over the six years it has been employed. Despite being embedded policy for more than half a decade, it still has its sceptics notably among the economically conservative northern countries and especially Germany; Lagarde was promptly on the receiving end of another writ presented to the German courts that yet again the ECB was exceeding the bounds of its mandate and acting illegally.
To all of which we can add the lingering sepsis of the Brexit free-trade agreement: the ink has barely been dry for three months and the EU is already taking the UK to court for breaches of the toxic Northern Ireland Protocol. Little wonder that Boris’s new post-Brexit, ‘Global Britain’ strategic foreign policy review unveiled this week shifts the centre of gravity for future opportunities towards Indo-Asia and away from Europe.
Very real political consequences…
There are real-time political consequences and no more so than in Germany, with its federal election due in September. When, as recently, German newspapers such as Bild carry a front-page banner depicting a Union Jack and the headline caption, “Britain, we envy you!”, you know something has gone significantly awry. Germany’s growing resentment at the alleged incompetence of its leadership over the vaccination programme, and its impotence in being able to effect change in Brussels on the same subject, is palpable. The Germans’ anger at the ECB is no mere confection based on ideological differences about the rights and wrongs, the morality and legality of QE and negative interest rates; it is energised by the frustration that the ECB pays no heed to the fact that the majority of Germans ‘save’ their surplus income in deposit accounts, rather than investing in assets; far from saving money, negative deposit rates effectively steal it, misappropriating their hard-earned cash (the policy is known colloquially as Strafzinzen, literally ‘punishment rates’). Tip in to the domestic mix that Angela Merkel will retire in September, that Armin Laschet the newly elected leader of the CDU party and her potential successor as Chancellor is increasingly seen as a dud (and he is the replacement for the failed leadership experiment that was Anna Kramp-Karrenbauer who in turn was elected to replace Merkel when her party turned on her in 2018, ejecting Merkel from the leadership), plus that the CDU is facing corruption allegations over PPE orders, and it presents a toxic brew for the centre-right Christian Democrats and a big opportunity to the principal opposition parties, the centre-left SPD (Social Democrats) but more pertinently the left-wing Greens.
An early illustration of the effect was seen in last weekend’s regional elections in Baden Wurttemberg and the Rhineland Palatinate. In both cases the CDU was dealt a drubbing, much worse than party leaders had feared; the beneficiary was mainly the Greens while the SPD will have been relieved at a solid result. It remains the case that in the national opinion polls the CDU still just retains a double-digit lead over its nearest rival, the Green Party; but what seemed an unassailable 20+ point margin only nine months ago is now looking wobbly. Much can happen over the remaining period to national election day on 26th September (there is one more regional election due in the meantime, Saxony Anhalt on 6th June as a mid-way sense check) but there is every possibility of a prolonged post-election period of intense negotiations in which the principal parties lash together a variety of possible coalitions with less-than-obvious bedfellows in an attempt to form a government.
…which will eventually be evident in bond yields and on the foreign exchanges
From an investment standpoint it is relevant because political instability and/or a crisis of leadership in Germany, the biggest economy in Europe, is not what either Germany or the EU needs at such a sensitive time. Further, depending on the balance of power in any new coalition, Germany’s resulting position vis-à-vis France on deeper EU political integration will be instrumental in Europe’s strategic direction of travel. As ever, the obvious barometers of sentiment will be the foreign exchange and bond markets. One to keep a close eye on over coming months.
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