Thursday, 21 June 2018

Much Ado About Nothing

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Younger readers might find this hard to believe but there was a time when G7 and G20 meetings not only hugged the headlines but took them over entirely. 

Looking through the news flow attached to this weekend’s convocation of the 20 in Baden-Baden – no better place in the world to be at the beginning of the white asparagus season – it is focused on the “decision”, apparently being brought about at the insistence of US Treasury Secretary Steve Mnuchin, to produce a final communiqué which did not mention free trade and the rest was gentle but persistent sniping at Donald Trump and his legislative programme, which is already beginning to trip over its own contradictions. A G20 meeting without free trade at its centre is like a wedding party without a bridal couple. 

I know it to be controversial to bring into the discussion a certain German dictator who rose to power at the beginning of the second third of the 20th century but I’d like to refer to the work of Professor Sir Ian Kershaw, the leading expert on and biographer of the body in question. He makes a major point of raising the conflicts that occur when elections are won by attracting every demographic within society with the prospect of privileged treatment and a rosy future. I shall be very guarded in making comparisons although promising to regenerate the economy by way of significant infrastructure spending when there’s no cash in the kitty – in the case of the contemporary US, 100% debt/GDP isn’t a great place to start – proved to be fatal for Germany in the 1930s and could possibly prove to be so for the US in the “twenty-teens”. 



In the event, and quite significantly, Secretary of State Rex Tillerson’s visit to China, which coincides with the China Business Forum and his meeting with President Xi Jinping, has scooped the headlines. That points towards a rising primacy of bilateral over multilateral trade policy. Is this the visible beginning of a paradigm shift? The G20 comes and goes and nobody cares while Tillerson swings through Beijing in order to smooth ruffled feathers ahead of a meeting of Trump and Xi and in the aftermath of the former’s roaring silence in respect of his election promise to declare China a currency manipulator on his first day in office. I guess he’s found Germany an easier and less potent target for that particular line of attack. 

It is certainly interesting to reflect on bilateral/multilateral phenomenon ahead of this week’s 60th anniversary celebrations of the Treaty of Rome; among lots of waving of the blue and gold flag and to the tones of Beethoven’s Ninth Symphony, the great and the good of the grand European dream will try to forget the millstone around its neck in the shape of Greece, which still has to meet most of its commitments from the first bail-out, let alone those of the second and the third. What would be interesting is whether Paul-Henri Spaak, the Belgian father of the Treaty, would be happy with what he’d find now or whether he’d feel more like its Dutch uncle. There is no doubt that many problems remain vested in the lack fiscal union but is now the right time to be trying to call for the ever closer union to be ever closer still? The answer is yes and no. No, because it encourages nationalist and disintegrationist elements. Yes, because it looks unlikely that those elements, despite all the hype around Geert Wilders, Marine Le Pen, and the AfD will ever be quite strong enough to overturn the status quo. 

Meanwhile, eurozone monetary policy is going to be central to this week’s market mood. Austria’s central bank governor Ewald Nowotny has become the new canary in the coal mine when it comes to assessing – or trying to assess – what current ECB thinking might be. His comments last week with respect to the possibility of the ECB beginning to raise rates before it has reversed the current quantitative easing programme has caused some confusion. I can’t see why. As opposed to the US or the UK, where rates never actually went negative, the ECB is starting out with the deposit facility at -0.4% and the marginal lending facility at -0.25%. Bringing these negative rates back to zero could well be treated by the ECB and by Mario Draghi, a master of rhetorical gymnastics, not as tightening but as “un-loosening”. Thus, one might assume based of Nowotny’s utterances that the ECB is not quite ready yet to hand the back end of the yield curve over to market forces and to the risk of bear steepening. 

Much relief was taken by markets after the FOMC rate decision when Janet Yellen dovishly indicated that the Fed might apparently be quite happy to fall behind the curve and to let a spot of inflation creep back into the system. The assumption now has to be that the ECB is looking at things the same way and very much not in the vein of the old Bundesbank which would have shot its own grandmother if it had thought that to be good for inflation suppression, a policy stance it was thought to have had blended into its DNA. I must confess that I found the press’s obsession with referring to Germany’s collective fear of hyperinflation after the fiasco of the early 1930s a bit basic as there can be barely anybody left alive who could belong to that much-vaunted collective. 



On the practical side of life, Deutsche Bank is due to price its emergency capital raising – let’s call a spade a spade – today and will issue 687.5m new shares at €11.65, a 35% discount to Friday’s close. I remember Citigroup being in a similar position in the early 1990s when many thought it to be dead but not yet buried. Deutsche is the principal bank in Europe’s largest economy. Despite all the screw-ups of the past decade and a bit, it sits on very solid foundations and it would be a brave man who bets against it being top dog again in the fullness of time. Whether centring its activities in Frankfurt is the way forward I’d be prone to doubt. It must be nearly 30 years since I first observed that “the English can’t build cars and the Germans can’t trade bonds”. Since then the blacks are no longer quite so black and the whites no longer quite so white but Deutsche needs to keep the doors open while moving away from trying to secure its role with a large chequebook. It has to become the place people want to work because it’s the best place to work and not because it slings about the biggest piles of cash. Or at least if it does, let the latter be a function of the former and not the other way around. As the Germans say “Toi, toi, toi!” 

Finally, Article 50 will now surely not be triggered until after the EU jamboree. I travelled to London yesterday where I had the enormous pleasure of attending the one-night-only West End performance of “Billy Elliot” as given by the pupils (I still think of schools being attended by pupils and universities by students) of Dauntsey’s School in Wiltshire, the cast of which included two of my great-nephews. I’m sure most readers will have seen the film or the stage musical and know that it is set during the great and hugely bitter miners’ strike of 1984-85. More than 30 years later, the events surrounding the strike still cause controversy and Margaret Thatcher will be a hate figure for the trade union movement until the sun chooses to set in the east. Thus, no doubt, it will also be for Remainers and Brexiteers. One of my boys played Margaret Thatcher. I wonder whether his younger brother or even his own son will one day be in ”Brexit, the Musical” and in the role of Theresa May? 

Have a good week. 

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