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Tuesday, July 5, 2022

Spain, the euro and uncertainty transformed into style

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Radical Uncertainty: For 15 years, this phrase has defined the turbulent state of international economic waters, which often morph into a hybrid of the Sargasso Sea and the Bermuda Triangle, capable of swallowing anything that comes close. The economy has made instability a style. The Great Depression, which reduced Lehman Brothers and half of the global financial system to rubble, was followed by the Euro Crisis, which bankrupted several Southern economies; Just as societies were emerging from this morass, a pandemic hit, and in the latter stages of the Covid, Russia invaded Ukraine, throwing us back on this toxic wave of radical insecurity that doesn’t seem to surf easily at all. “Some say the world will end in fire; other than on ice,” says a poem by Robert Frost. Finally, after a decade and a half of flirting with a combination of deflationary risks, debt stagnation and secular stagnation (Robert Frost’s ice cream), fiscal and monetary activism brought the fire of inflation. The hawks command again. The world’s major central banks have been quick to show their claws, and rate hikes are likely to plunge some economies into recession and perhaps even a debt crisis. The zero-Covid policy in China doesn’t help either. But Putin’s tanks are perhaps the most worrisome: the conflict in Ukraine has sent commodity prices skyrocketing – leaving famine in the developing world and brutal price hikes everywhere – and the coming months will be a rollercoaster of sorts for European economies. If Putin manages to extend the war by a few months and turn off the gas in the fall, we could see something of a Lehman Brothers case in Germany, with factory closures and a heavy blow to the successful model of heavily dependent heavy industry Russian energy (courtesy of Merkel). And a crucial moment for Europe, by the way, with the risk of a continental recession – Germany weighs heavily on the Union’s GDP – and the risk of European unification, which means the umpteenth litmus test for the solidarity mechanisms, this time with the reservation of gas as the cornerstone the possible impending crisis.

The bad news is that Russia has already demonstrated impressively that it can turn off the faucet: it runs large electricity surpluses due to rising energy prices and has cut 40% of its gas supplies to Europe. Good news always seems to fade. But they are there: The rapid pace of gas storage has surprised analysts, though there’s a very good chance that rationing and factory closures will happen anyway, depending on the harshness of the coming winter. The market tremors of the past few days are playing on this situation of great instability, with stock market slumps and debt market turmoil centered on the usual suspects: Italy, Spain, Portugal and Co., the entire southern front. German Finance Minister Christian Lindner showed this week that he has not learned much from the euro crisis by saying there should be no reason to panic about risk premia. Fortunately, the ECB has a different opinion. He doesn’t arrive with his homework done and he doesn’t have Draghi on the bridge either, but in the problem countries’ cabin.

“We must stop the war to stop inflation,” the financial sources consulted are already saying clearly. There are many voices in Europe and also in the United States that adhere to this discourse. It is not so clear that European leaders are so convinced. The visit of Foreign Minister Olaf Scholz, French President Emmanuel Macron and Italy’s Mario Draghi to Kyiv appears to be another sign of military support for Ukraine and confirmation that Berlin and Paris are pointing to the country’s speedy EU accession. although that will not be easy in Brussels. Is there anything else? think tanks as Eurointelligence speculate that during this visit an obscure compensation: The promise of accelerated accession to the Union will only come in exchange for an agreement with Russia before the winter. Bible Translation: Europe Begins to See the Ears of the Wolf; Germany trembles at the possibility that its factories will have to lower the blinds. Be sure to.

As usual, Spain arrives at this crossroads relatively poorly equipped. With a very high public debt (nearly 120% of GDP) making it a target in case of a possible crisis in the markets if the ECB doesn’t pull itself together. With still strong but declining growth that has not yet reached pre-crisis levels. However, it also has a few aces up its sleeve. First: the strong dynamism of the labor market, which is growing well above the economy and which, in combination with European funds, is a refreshing novelty when the clouds are slowly beginning to appear on the horizon. And secondly, the low dependence on Russian energy, although the recent episode with Algeria overshadows this advantage. In short, economic expectations are down: not here, in most of the world. And expectations ultimately shape reality. Almost everything that happens in the future depends on the war and the unpredictable Vladimir Putin. The apocalypticists didn’t hesitate long to sound their trumpets, although some of you can see the political feather duster here: there’s a legion of economists who’ve been talking about a bankrupt Spain for months, on the one hand demanding lower taxes and on the other warning against the debt crisis. Blow and slurp at the same time: all contradictions are interesting, but this is an interested contradiction. The same economists are also calling for conditionality in everything the ECB does to give the Spanish economy a good slimming diet through adjustments and reforms. In short, the apocalypse almost always disappoints its prophets: “It seemed as if the world was going to end, but it wasn’t,” writes Paul Auster in his latest novel, despite those who seem to want Spain’s demise despite the ice and Fire from Robert Frost and all the iceberg of uncertainty in the search for the Titanic.

He knows all sides of the coin in detail.

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Source elpais.com

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