Thoughts from Galicia, Spain: 25.5.18

Spanish life is not always likeable but it is compellingly loveable. 

- Christopher Howse: A Pilgrim in Spain. 

If you've arrived here because of an interest in Galicia or Pontevedra, see my web pagehere.

Spain

• Corruption: Something old, something new. In the same week as we've learnt of the sentences for a large group of corrupt PP politicians – in a trial which seems to have taken a decade – we've also learnt of at least 2 more major cases and a lot more corruption among civil servants down in Andalucia. Here, here, here and here are articles on this. Bear in mind as you read them that the immensely corrupt and increasingly authoritarian PP party is still the one who'd get the most votes in an election tomorrow.
• And, if you want a laugh, read this: The PP has claimed its back-handers were 'donations' and that it did not earn a profit from the Gürtel racket. It intends to appeal against the verdict.
• In other news . . .The national budget for 2018 was finally approved in Congress on Wednesday after the PNV (the conservative Basque nationalist party) gave its support to the PP proposal.

Life in Spain

• Spanish loyalties Or not.

The EU/Italy

1. Wow! AEP goes to town in the 2 must-read articles posted below on this fast-moving drama, which might yet see Italy undertaking a stealth exit from EMU, something which would be fatal for European solidarity.
2. And here's Don Quijones on this fresh Euroepan crisis.

The USA

• The spectacle of Trump's rushed talks with Pyongyang, and then swift exit from the table, has only underscored the chaos and inconsistency that has defined his presidency – both domestically and abroad, and from everything from the world stage to protests in sports. More on this farce here. 

The UK

• Romanians are now the 2nd largest group of foreigners in the UK, after the neighbourly Irish. In Spain, I believe, they come first, even beating the Moroccans. They do seem to get around, making you wonder what life is like in Romania.

Galicia/Pontevedra

• The President of AENA, who should know something about the airline business, confesses it pains him that more than a million Gallegos fly from Oporto every year. Nonetheless, he says, he's confident that each of Galicia's 3 small airports can operate profitably if they all do their own thing. Apparently, then, the President of AENA doesn't have much business nous at all. And has not looked at the accounts of the 3 airports in question. Or cast an eye on their failed business plans. Assuming they have any. I mean, it's not as if anyone forces Galicians to go south in their droves to get the flights they need.

Duff Cooper

• I've finished the diary but never discovered – at least not from DC – that his wife had had a couple of 'light-hearted' affairs and that his last(?) conquest – almost 30 years younger than him – had had a illegitimate child by him.
• Nor did I know that we had 2 connections:-

1. After he retired from the Foreign Service, he worked for the same company I did much later. In his case, rather more profitably and for a lot less effort.
2. He came to nearby Vigo, here in Galicia. Albeit in a coffin, after he'd died on a voyage south, in 1953, aged only 63. I guess his life caught up with him.

• Another thing DC neglects to mention is his furious rages, most frequently at Evelyn Waugh, who was also famous for this tendency. Must have been something to see.
• One commentator has written about DC: He was not totally successful in worldly terms but never dull. He could be short-tempered and self-indulgent, and devoted far too much time and energy to wine, women and gambling. However, he was never mean or ignoble and was a proud patriot who sometimes had true nobility, although he was too proud to court popularity and too reserved to attract it readily.
• By pure coincidence, I read this morning of a man found guilty of trying to kill his wife by rigging her parachute. This paragraph immediately put me in mind of DC:- Emile Cilliers was described as a cold, calculated, man who would stop at nothing to serve his own needs and satisfy his voracious sexual appetite. He was very dangerous, coercive and manipulative yet also charming and proved irresistible to the many women with whom he embarked on relationships. Women, eh? What man will ever understand them?
• Finally on DC, for today . . . Here he is himself on the subject of his young final squeeze: I found four letters from Susan Mary awaiting me. They have been getting steadily more affectionate and they are a frank confession of great love – so great that she says it is making her ill. She says she has been fighting against it but that it has proved too strong for her. She has never known anything like it before etc. In fact, she hasn’t seen me since it began. It is a strange imaginative affair – very flattering to me, but a little disturbing. She is a very sweet and charming girl whom I find most attractive, but it would be dishonest to pretend that I am madly in love with her. Nor have I the slightest desire to cloud the happiness of what has always seemed to me a perfect ménage. I guess this was written before he impregnated her.

Finally . . .

• HT to reader Sierra for this news.

ARTICLES

1. Juncker's 'torture tools' are useless against Italy's well-armed uprising: Ambrose Evans Pritchard.

Brussels prides itself on well-honed ways to bring recalcitrant governments to heel. "We have instruments of torture in the basement,” jokes Jean-Claude Juncker.

Europe's cheerful chief enforcer tests our humour. The methods deployed against a string of distressed nations from 2010 to 2014 were illegal, unconstitutional, and scandalous, though carried out with the complicity of vested interests in each country. This created a cloak of legitimacy.

Athanasios Orphanides, a former governor at the European Central Bank,  says the nuclear weapon is the ECB’s control over sovereign bond spreads and liquidity for the banks. “They threaten governments that misbehave with financial destruction. They try to scare them into voluntary acceptance of policies,” he said .

“They cut off refinancing and threaten to kill the banking system. They create a roll-over crisis in the bond market. This is what happened to Italy in 2011,” he said.

Prof Orphanides, now safely distant at MIT in Boston, says the ECB was careful not to leave a paper trail or take decisions that could be challenged in court.  “They operate in a grey area without clear legal authority.”

The trick is to work hand in glove with the Eurogroup, the Star Chamber of EMU finance ministers that is accountable to no democratic body and is essentially under the control of the German finance ministry. “What happens is that everybody at the Eurogroup meeting gangs up on the country they want to attack,” he said.

One saw the reflexes of an authoritarian proto-imperial entity during the crisis. To compound the damage, the policy prescriptions were incompetent. They led to an economic depression deeper than the 1930s. The end did not even justify the means.

Covering this episode closely as a journalist is a key reason why I voted for Brexit, knowing that British withdrawal from the EU would be traumatic. The counterfactual of remaining in Mr Juncker’s lawless dungeon was ultimately worse.

The EU’s gendarmes are now eyeing Italy’s rebel coalition with professional curiosity. This is a harder nut to crack. For the first time since the creation of monetary union they face a government in which the critical mass of sentiment is eurosceptic. The ‘Italy First’ cohorts of the Lega openly extol the patriotic lira  - or the new florin as it may be called.

A crude attempt to bully the Lega and Davide Casaleggio’s Five Star techno-mystics risks defiance and a dangerous chain-reaction, ending in a €2 trillion default on German credits to southern Europe and the devastation of the EU project.

The enforcers must be subtle. They will try to peel off the softer Five Star ‘Grillini’, those such as nominal leader Luigi di Maio are already showing eagerness for EU approval. They will exploit divisions in Italian society just as they are doing in Brexit Britain. They will mobilize the ‘poteri forti’ of Confindustria and the mandarin class.

The Italian drama of 2011 is illuminating. The ECB used the bond market as a political tool. It switched purchases on and off to pressure Silvio Berlusconi, dictating detailed domestic policies in a secret letter (later leaked). It ordered specific reforms of the labour law, a neuralgic issue that had already led to two assassinations. It demanded austerity overkill on the urging of ‘ordoliberal’ quack economists in Berlin.

When Berlusconi balked, the ECB engineered a bond crisis. It chose a moment when contagion from the Spanish banking crash had left Italy vulnerable. This paved the way for a coup d’etat, orchestrated by the ex-Stalinist Italian president of the day. Berlusconi was toppled. A former EU commissioner, Mario Monti, was parachuted in with a team of officials from Brussels.

The ECB had no treaty mandate to do any of this. It was acting ultra vires. There was not a whisper of criticism from the European press corps. Don’t rely on them to expose arbitrary practice and defend the rule of law.

The forgiving verdict is that EU officials had to take these measures to save the euro. Yet the eurozone financial crisis was of their own making. It happened because the ECB failed to fulfil its primary central bank purpose as a lender-of-last resort in a crisis (at a penalty rate, true to Bagehot). The crisis stopped instantly when Berlin lifted its veto and authorized Mario Draghi to “do whatever it takes” in mid-2012.

Claudio Borghi, the Lega's economics chief, says the EU cannot pull off the same trick a second time. Italians are alert to the legerdemain. "Everybody can see that the spreads are a tool of political manipulation," he said.

What unites the Lega and Grillini is a shared suspicion that Germany has gamed monetary union, setting the rules to its own advantage. Many think it pursued a mercantilist beggar-thy-neighbour strategy (in effect, if not by intent), undercutting Italy's real effective exchange rate (REER) and trapping the country in a depression.

The effect in the particular circumstances of Italy - which used to have a trade surplus with Germany - has been debt-deflation, corrosive deindustrialization, an unjustified banking crisis (Italian banks were not the villains of pre-Lehman excess), and youth jobless rates above 50pc in the South. The Lega-Grillini may not understand the exact economic mechanisms. But their intuitive conclusion is broadly correct. Italy was as much sinned against than sinner.

The ECB's liquidity weapons can only work against a nation that is naive, has disarmed itself, and fears ejection from EMU. If subjected to Juncker's torture, the insurgent alliance would probably activate its plan for 'minibot' Treasury notes and launch its parallel currency. It would reassert national control over the banking system.

In other words, Italy would do what Yanis Varoufakis wanted to do in Greece: wage guerrilla warfare. The Greek finance minister was famously stopped by the Syriza 'war cabinet' in 2015. The plan was too radical.

The battle-scarred Mr Varoufakis is now watching the Italian drama with forensic fascination. He thinks the Eurogroup has met its match this time. German talk of a Target2 payment freeze to the Bank of Italy rings false. "It is an empty threat," he said.

Lega strongman Matteo Salvini almost seems to relish the chance to fight Brussels, Berlin, and the bond vigilantes. He dares his enemies to play the spread game.  He once described the euro as a "crime against humanity" - to me as it happens.

"Salvini positively wants to get out of the euro. Alexis Tsipras did not. That is a profound difference," said Mr Varoufakis.  He sees an unstoppable sequence as the Lega-Grillini budget blitz blows up the EU Fiscal Compact and the Stability Pact.

"The flat tax will create a big hole in the budget. There will be market tensions and the usual reactions from Germany," he said.  The coalition will defend itself with minibots (though he advises them to keep it digital, rather than issuing paper - a fine legal point - and to avoid calling it a 'currency'). "There will be immediate capital flight. They will have to impose capital controls. Italians will find almost surreptitiously that they are no longer in the euro, without a referendum, without a vote," he told The Telegraph. It will just happen.

So the EU has a choice. It can bow to the fait accompli of Italy's revolt and allow Rome to let rip with fiscal reflation. It can accept that the euro has slipped German control, and that EMU is henceforth a lira-zone on Club Med terms. In which case Germany may leave.

Or it can pull out the thumbscrews, the pillory, and the rack, working day and night to overturn Italian democracy. If this succeeds, it can only be at an extremely high political cost. But it might not succeed. In which case Italy may leave, taking Spain, Portugal, Greece, and much of the German banking system with it.

In a dysfunctional monetary union, you pick your poison.

2. World's bankers awaken to full horror of Italy's parallel currency: Ambrose Evans Pritchard

Any move by Italy’s insurgent government to issue parallel liquidity will set off a red alert in financial markets and call into question the survival of Europe’s monetary union, Standard & Poor’s has warned. The rating agency said the ‘minibot’ plan being prepared by anti-euro Lega nationalists and the alt-Left Five Star Movement would create a rival payment structure based on ‘IOU’ notes. This subverts the monetary control of the European Central Bank and risks a disastrous chain-reaction. “People need to be very careful. It is equivalent to introducing a quasi-second currency,” said Jean-Michel Six, S&P’s European strategist. “If we go down that route, it would be a signal to markets that some circles in the coalition were considering exit from the eurozone,” he said, speaking at a forum of the Institute of International Finance.

Alexander Privitera,  European strategist for Commerzbank, said the currency plan reveals the ‘political culture’ of the leaders now taking charge of a systemic EU state. “It doesn’t take much to understand that this is a direct threat to the eurozone. Certain people in the coalition have this at the back of their minds, and it must be taken seriously,” he said.

Investors have been struggling to understand the fast-moving drama in Italy. The risk spreads on Italian 10-year bonds actually fell after the election in March, a sign that markets had ruled out the possibility of an unholy alliance between the two radical parties. It is only in recent days that the spreads have surged. They reached 195 basis points on Wednesday when an unknown lawyer with no political experience and an inflated CV - Giuseppe Conte - was formally appointed prime minister.

There is no sign yet of any moderation.

“The EU is threatening us with talk of €10bn in budget cuts. I intend to do the opposite,” said Matteo Salvini, the Lega strongman.

The alliance has proposed Paulo Savona as finance minister, a man who describes the euro as a “German prison”.

Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors, said it is a mistake to view minibots as way to finance extra spending. The drafters are hardline eurosceptics who have thought long and hard about how to engineer a stealth exit from EMU. “They are a way to prepare for the introduction of a national currency,” he said.

William de Wijlder, chief economist at BNP Paribas, said investors should not assume that the ECB can diffuse any bond crisis in Italy by again conjuring the magical words ‘whatever it takes’. The formula devised by the ECB’s Mario Draghi in July 2012 came with stringent conditions. It was anchored to the Outright Monetary Transactions (OMT) that would - if ever activated - require the backing of the EU bail-out fund and a vote in the German parliament. This was not a problem then because Italy’s leader was the pro-EU Mario Monti. Circumstances have changed entirely. Germany will not underwrite a rescue for a populist government openly defying EU spending rules.
“Keep in mind that the OMT had specific rules underpinning it. This is a delicate situation. If there is market stress, we should not think that what happened in July 2012 is going to give us a safety net now,” he told the IIF forum.

Peter Praet, the ECB’s chief economist, said the plans of the Lega-Five Star alliance to cut taxes, provide a universal basic income, and lower the pension age, might cost as much as 8% of GDP. He was coy on whether this would blow up the eurozone’s system of collective discipline, but he issued a veiled warning.‘Whatever it takes’ must be credible. Central banks must careful to be backed by societies, by governments and their representatives,” he told the IIF forum.

Jorg Asmussen, the former German member of the ECB’s executive board and an architect of the Italian rescue in 2012, said the new coalition has been a cold douche for world markets. “It has undermined confidence from Singapore to New York. It puts on the table debt restructuring in the eurozone, which is a no-go zone for very good reasons,” he said. He spoke of shared bitterness in Germany, Holland, Finland, Austria, and Slovakia - among other ‘northern’ euro states - that some debtor countries think they can swat aside agreed rules. This is fatal for eurozone solidarity.

Mr Asmussen said it is too early to judge whether the Italian coalition will go ahead with its extreme plans, but if they do it may take months for a fiscal crisis to come to a head. The Italian treasury is 60% pre-funded for the year. The country has extended its average debt maturity to 6.9 years. “I don’t see difficulties in the short-term’,” he said.

The great unknown is how Germany, France, and the EU authorities will respond to defiance from Rome. Rules are controversial. It was Germany and France that first broke the Stability Pact. Germany is in persistent violation of the 6% of GDP ceiling on current account surpluses.

Erik Nielsen from Unicredit said the EU would be well-advised to play softly-softly and avert a showdown. “I don’t think much of what they want to do will be implemented. Reform is very difficult in Italy, whether good or bad. There are buffers. In Portugal there was a lot of anxiety about the new (anti-austerity) government and it turned out to be fine,” he said. “You have to be careful about rules. Every country in the EU has broken rules. If you pre-empt policy options for the future, you are saying in a sense that we don’t have a democracy in Europe,” he said.