The Breakdown - Could the European Recovery Plan Actually Break Europe Apart? Feat. Tuomas Malinen

Episode Date: July 25, 2020

Today on the Brief: Which industries are recovering the best China retaliates against U.S. after consulate shutdown  Dollar heads toward its worst month since 2018 Our main discussion features returning guest Tuomas Malinen, CEO of GnS Economics. In this discussion, Tuomas and NLW discuss: An outline of the European Union’s new recovery plan The new debt issuance structure that marks a first for Europe  The challenges of currency unions  How Europe’s debt crisis changed how Europeans think about economic integration Why the current plan amounts to “stealth federalization”  Why some member states are in a state of mutiny over the fund Find our guest online: Website: GnS Economics Twitter: @mtmalinen

I fear that this would lead the breaking of the European Union. Before it was just the euro, but when they tied the fate of the European Union or the mechanisms of the European Union to the euro, this whole thing may fall apart. That's the gamble they took. And I don't know, it was a stupid gamble if you ask me. Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. What's going on, guys?

It is Friday, July 24th, and today we have a returning guest. Thomas Mellin is back to talk about the European Union's new recovery plan. And interestingly, unlike many of the headlines that we've seen throughout this week, Thomas is very skeptical and perhaps represents a point of view that is being under-indexed in media right now. We'll get into that after the brief. First up on the brief today, let's talk about where jobs are coming back. As I've been saying, I'm trying to keep a balance of the economic data that is negative as well as the economic data that is more positive. And frankly, part of the conclusion that leads me to is that we have to get really specific.

We can't look at, quote unquote, the economy as a monolith, just like we can't look at real estate as a monolith. So let's look at where jobs have been coming back because that may give us some insight into what's doing well and what's not. In terms of a percentage change in employment between April and June, here are the industries that are doing best. Dentist offices are up over 100%, personal services, amusements in gambling, clothing stores, sightseeing transportation are all. over 50% as well. Furniture stores are at about 50%, food service is just under 50%, and motor vehicle manufacturing is closer to 40%. Some of this, it seems, represents just people who are actually coming back, but then others perhaps also reflect an increased demand because of pent-up demand from the few months of shutdown. In terms of the overall percentage of newly posted jobs since May,

the industries that have the most openings are healthcare, which has about 17% of new openings. Transportation and storage, which is about 15%. Business, broadly defined, I don't even know why that's a category because no one knows what the hell it means is roughly 14%. Technology is a little under 10%. Retail is a little over 5%. And again, these are the percentages of the total number of job openings. Finance and insurance, manufacturing, construction, education, and real estate round out the

top 10. The interesting thing about this is that you see health care, obviously, as one of the beneficiaries, or at least as one of the areas where there are more openings. That makes sense in the context of still continuing to have to deal with this crisis and having to live with it. But I think that the promising part of that is that staffing up in that area means that we might be able to better deal with it outside of some do-sex machina like an early vaccine. Ultimately, I think a lot of this is still lagging data, right? And it doesn't necessarily reflect a potential new wave of layoffs that come from continuing shutdowns, or rather continuing issues with the coronavirus and the potential shutdowns or micro shutdowns that might occur. So it's important to

note that this is all very up in the air, but I still think it's worth looking into which industries relatively speaking are doing better than others. Next up on the brief, China has retaliated from the U.S. closing China's Houston consulate. I'm only going to cover this briefly because on the weekly recap tomorrow, I'm going to go a little bit more in depth about the week as it relates to U.S. China. But this is basically a normal tit-for-tat or maybe what we would have expected as a tit-for-tat. China has ordered the U.S. to close the Chengdu consulate in response to Houston, has said that it was a legitimate and necessary response.

This is a quote, to the unreasonable behavior of the U.S., and creates the necessary conditions for bringing the bilateral relationship back to normal. So again, it could not be more of a tit for tat if you define tit for tat. And as I said, I will go into this more tomorrow in the weekly recap, but you'll remember my overall framework is, is this a new Cold War or are we seeing a new Cold War emerge? And two, if the main critique of that line of thinking is that these countries are too interconnected, then we should be watching things and moves and political machinations that serve to unwind that connection. Last up on the brief today is the dollar losing its luster. The U.S. dollar is having its worst months since the beginning of 2018, and a new article

in Bloomberg identifies a few reasons why. The first is negative real interest rates. The second is the ongoing issues with the coronavirus, and the third is a pickup in global risk sentiment, i.e. an attraction to riskier assets again. There are some really interesting comments from a number of global investors in this article, and I want to read a couple. This one is from Australia at QIC Limited and says, U.S. exceptionalism has eroded with perhaps only one pillar still standing, demand for big cap U.S. stocks. The U.S. no longer has a yield advantage. There's no growth advantage with the recovery from the coronavirus, likely to prove more challenging than other developed markets.

Another comment, which is from GSFM in Canada, I've generally had a disposition for a few years, to be a dollar bull, but that has changed a bit this year. The Fed has lowered rates. Europe seems to have gotten its act together on the fiscal front, and the dollar is also suffering from completely dysfunctional politics in the U.S. Interestingly, a lot of these global actors view the euro as potentially the beneficiary, as U.S. politics look completely ineffectual, and Europe has, at least to some, outdone itself, or at least outdone expectations as it related to addressing this crisis. The dollar and the role of the dollar in the world and its relative strength or weakness is, of course, one of the most important ongoing macro conversations and certainly one that we keep coming back to

and will continue to keep coming back to on the breakdown. But with that little update, let's actually turn our attention to Europe. Our main conversation today is with Tuamus Malinanin. Tuomis is the CEO of GNS Economics. He is an adjunct professor of economics at the University of Helsinki. and he was on the show a few months ago talking about the global response to coronavirus economically and specifically the European response. At that time, he discussed the idea that the best way to save the European Union might be to abandon the euro. And effectively, his point was that

member countries don't want to support each other because they are compelled by Brussels to do so. They want to have the ability to have bilateral relationships with one another. And the currency union was increasingly putting pressure on that type of arrangement. As you will see on this show, his views have now evolved even further, and Tuomis is firmly in the Eurosceptic camp. He calls the new recovery plan stealth federalization, and I thought it would be great to have him back to explain, one, what was the recovery plan that was passed earlier this week that made news around the world, what did it consist of, and two, why was it creating

consternation? As Tuomis tweeted recently, the fund will not lead to a recovery in Europe as it is way too small and the crisis is global. The fund will just illegally establish a transfer union in the EU and push us into a federalization and without the consent of the people. Let's dive in. All right, we are back with Thomas Malinan. Hey, how are you? Fine. Thanks, I'm doing fine. How are you? Good, I'm good. It's great to have you back.

So, you know, I was just saying this to you beforehand. but a couple months ago we had you on the show to talk about effectively what the crisis meant in terms of a pivotal moment in the history and trajectory of the European Union. And part of what you were arguing at the time was that the right way to save the union itself might be to abandon the euro. In other words, you were looking towards less economic integration in some ways, but instead we've seen kind of the opposite happens. So maybe you could describe first for people who haven't been following the U.S.

the news. What has been going on and what was just passed as the recovery plan? Yes. Well, okay. The situation has changed quite drastically when we last talked. It's that what the European Commission with the strong support of Germany and France basically did, is that they tied the fate of the EU to the fate of the Europe. So what they proposed, was a fund where the European Union would issue debt using our guarantees and distribute some part of that debt as grants and the other part as loans. And what the European leaders now agreed in a meeting ended just on Monday was that, yeah, we have the 750 billion euros fund. from which there will be, 390 billion euros will be given out as grants and 360 million euros as loans. And as it goes, all the countries will issue guarantees for the European Commission, which will then issue debt and give it out in accordance with the sums that I just described.

And, yeah, and well, but it still has to pass. all the 27 parliaments. And I can tell you now that it will not be easily passed in Finland. There is a mutiny growing here. Well, and that's exactly what I want to get into. But just I think a couple things to help people get into this a little bit before. You had this great thread on, you called the stealth federalization. And the first part of it was an explanation of, it was almost a general or

theoretical look at the challenge of currency unions. And basically, your argument was that they tend to lead to the weak, getting weaker, eventually leading to a debt crisis. So can you explain that that theoretical part first? Because I think it was really helpful for helping people understand where we are now and the specific decisions being made. Yeah, sure. It's actually both theoretical and empirical, because we know that this is how the situation has evolved in Curzinos. But It starts from the notion that there is a complex mix of political, institutional, cultural, and economic norms and developments that guide or drive the development of both competitiveness and productivity in each country.

So each country has this mix. And the mix is naturally as long as the history of a country. And in Europe, some countries like Greece and Italy, they have over 2,000 years of history, almost 3,000 years. And so when a country has its own foreign exchange rate, its job is basically to reflect these differences, to even them out. and also reflect the ability of the government to keep up with its finances or the sustainability of the government finances. And when you remove that foreign exchange rate, when countries join a currency union, so you remove this stabilizing force, but the mix of culture, political and economic norms and actions of factors, of factors. factors still remain. And what happens is that in the currency union, usually weaker countries then lose their competitiveness and productivity in respect with the stronger countries. And so

the weak countries tend to get weaker in a currency union in economic terms. But what also happens is that when a weaker nation joins a currency union with the group of stronger nations, its interest rate or interest rates start to come down as the international investors view the currency union kind of a creditor backstop meaning that if a weak country or any country in the currency union gets into trouble the investor will be bailed investors will be bailed out and so and this is what has actually happened in in Europe but what do so what happens? So what happens? tends to happen in a currency union. It's weaker countries, get weaker, their productivity declines, and also the productive

capital, or the production, productive capital moves to the strong nations. But their cause of their borrowing falls, so they become less productive, but more highly indebted. And then a shock hits, you know, it can be anything from a pandemic to find. a crisis or whatever. There's always a shock in economies. And when that happens, the private investors who have been giving money to the institutions, the weaker nations, they get scared of the risks that their investments there pose and start to go away from the country. So there's a capital, there's an outflow of private finance capital. And the government usually tried to cover this by issuing more of their own debt and increasing their revenues, expenses, that is.

But at the same time, when the economy goes in a more bad way because of the shock, the government debt in share of GDP becomes very high, and at some point, international investors think that or start to doubt that the government cannot pay the debt back, and then a debt crisis emerges. And this is actually what happened in the Eurozone between 2008 and 2010. And so this is, I think, really key because it feels to me like part of what you have been observing is an evolution that's a shift away from the European Union's original kind of charter and mandate. So I guess can you explain how the EU was set up to deal or not deal with this type of issue initially? And then what has been changing, whether sort of legally or not? Well, yeah, when the EU was created, especially when the euro was created, it was agreed that we don't share the fiscal burden of other countries.

It was called the no bailout rule, and it was defined in a treaty of the function of the European Union Article 125. So this is very crucial. There was also other article which relates to the current recovery. Fund, which was the TFO Article 310, which effectively states that the European Commission or the budget of the European Union cannot be deficit financed, meaning that it cannot take debt to cover its expenses. So these were the two key elements. And the no bailout rule became a problem in 2010 when there was the debt crisis or it was actually a banking crisis. But there were Greece, Italy, not ideally, Italy, Spain, Portugal and Ireland got in the top

trouble because of the process I just described so they were heavily indebted. And then they would, you know, the German and French leaders basically get scared because their banks had lend heavily to the southern countries or the weaker countries of the Eurozone. And so they had to, you know, create some kind of a pay-out fund. And so they created the European Financial Stability Facility, great name, EFSF. And it issued debt back by the members of the Eurozone and gave out loans to the crisis-it countries. And they were, these loans had conditions. which meant that the countries needed to make structural reforms,

got their pensions, got the social security funds, etc. So that's when the European stealth federalization started, but it was the original aim of the EU and also the Eurozone. There would be no fiscal, mutual fiscal responsibility. That has now been broken. BitStamp is the original global crypto, currency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top financial institutions. BitStamp is built on

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What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September. What is this the new mechanism around European debt that the recovery fund implements? Well, yeah. Well, first, the first time ever creates a process or a mechanism where the European Union actually, the commission and take debt. and issue grants through the budget.

So this preaches the Article 310 naturally and also the Article 125. And there's kind of two mechanisms. This is the first one. So this is the first ever construct that the EU takes debt and gives out grants and loans. Well, the EU has given loans out before, but never grants. And the second is kind of a philosophical one. Because it states the European Commission has argued that we are currently in economic emergency, which means that the rules do not apply, that they can take on death and give it out.

And it establish a practice, if this goes through, it establishes a practice which states that the treaties of the European Union do not apply in economic emergencies, in general terms. And this is a process. Basically, this establishes a transfer union. So I'm interested to get your take on the motivations, right? So who was driving this particular approach and why? And I guess the question is almost two part. One is, what's the financial or political motivation in the short term

or that is specific to this crisis? And then second, is there a force? Is this basically an excuse for a force that is interested in greater fiscal integration anyways? Because it feels to me like part of the issue here is that there's just competing visions for the future of the EU in general. And this is an opportunity in this crisis to drive it to closer fiscal integration for some parties that had perhaps wanted that. Yeah, well, the answer to the second question is yes. But let's go to the first one. So first, first.

So, yeah, so the idea of the recovery fund came from the German and French leaders. And we can naturally just speculate what were the actual motivation. But I'm keen to think that it was twofold. First, French and German banks have lent to Italy close to 500 billion euros worth of. funding or I've given them loans of that amount. And Italy is taking a serious hit now. It's the weaker, weakest nation, basically in the Eurozone at the moment. She has dead levels of over 100% of GDP.

Productivity is low. Her economy has basically grown since 2000. When she joined the Eurozone, it's a, same level. So the European, the German and French leaders got scared that first Italy leaves and defaults and then there will be a serious hit to the banks. And of course they were afraid, I think, that the whole Eurozone would break up. And that could cause Germany deal with because we have the target to imbalances and ECB liabilities and all that. So in short term, we can said in a sort of in a in a in a short term perspective this is a bribe to Italy to stay in the

euro the recovery fund. Interesting. Interesting. And for a longer perspective, in a longer perspective, there's definitely been the push for further integration, deeper integration all along in the European Union. And this is what is now, this is the actual, the second actual aim of the recovery fund. to push us into a transfer union and then into a federation and without asking the consent of the European citizens, which is, I think, just obnoxious.

Does the support break down on those lines? Or I guess maybe let's broaden that question out. What has the response been in Europe? Is it country by country? Is it divided within countries? And to the extent that it's divided, who's on what side? Does it break strictly along the lines of people who want more? fiscal integration versus not, or is it more complex than that?

Well, I don't really have the time to look what other countries have said. But in Finland, I think there is a true mutiny going on now. So when I speak to people who oppose it, they are in all socioeconomic groups, in all kind of political groups. It's very, very wide the discontent of the people. So it basically goes like you have the ordinary people and those who are critical to the European Union before against those who strongly believe on the European Union and the common currency or the EU believers. And I think they are grave minority at this moment. So there is a, the discontent of dissatisfaction of the Finnish people towards the recovery fund is very high now.

So do you think that the recovery fund has actually pushed some people into that position who perhaps were pro-European Union before? I mean, I know you've been going on this kind of journey where, I mean, listeners should know you're not like an anti-European advocate. It. A lot of your positions have been evolving and contextual to specific events that have happened. Yeah, I turned to as an EU skeptic in just two months ago when basically the fund was proposed. I saw it right away that this will take us to the federation without the consent of the people. And we kind of tolerate that. But yes, what I see when I talk to people in my close close to me or, you know, people in general in Finland, many of the EU supporters have turned as critics because of the fund.

Finns don't want to pay the bills of other countries. That's how it has always been. We have always managed by ourselves and try to manage by ourselves as long as we could. Of course, solidarity amongst other nations is a different thing. and Finland have been doing that for a long time, but we just don't like the situation where someone outside a country takes our money and gives it away. And that's where the mutiny of the Finns is currently rising from.

You explained this last time for listeners who haven't listened to that show. I definitely think you should because there's a lot more of even a background in a history. But the way that you explained this before is that this wasn't about a disinterest, in bilateral support relationships. It was a frustration with the mechanism where it's basically those relationships get centralized rather than being able to kind of be decided on a case-by-case basis. And I remember I think your argument then was that if there wasn't a force demanding that the sort of money transfer happened, there would likely be the same or more types

of transfers but done in a way that was with the support of the people. Yeah, that is how the Europe should work. And I think that's where the support for such schemes is. So the northern member countries, Finland, especially just don't want a centralized system of income distribution. That's, you know, in a federal level in the European Union. So that's how it is. One thought that I'm sure some people are having is, you know, it's called or branded a recovery fund. I'm sure a lot of the way that's being sold is it's important for keeping.

businesses and people afloat in the wake of this crisis. You also argue that you don't think it will lead to a recovery. So can you just share a little bit about that argument? Well, it's 750 billion against 14,000 billion, which is the GDP of the European Union. So 750 billion against 14 trillion. So it just doesn't, you know, it doesn't add up in that sense. And the crisis is global. If just look at the U.S. numbers now, it seems that your unemployment is rising again.

China is experiencing bank runs already. And, you know, economics have not recovered. The global economy has not recovered from the heat of the corona pandemic. And now they think that the EU is trying to get us to believe that they are better in the distribution of the funds. The centralized system is better of creating a, stimulus than a national ones. I don't, that doesn't just fly. You know, it, it, it, all the majority of economists in Finland think that it would be more

productive for us to take the debt ourselves and, you know, use it to do resuscitate our economies. And the fact is that giving money from the more productive countries to the less productive countries with less productive outcome. So it doesn't make, economically doesn't make any sense to greatest fund. What do you think, what is the pathway for this to actually be passed? And do you think it has any chance of actually getting there? I mean, obviously, you're kind of saying that it doesn't seem likely in the Finnish context, but do you think there are other countries where it's likely to have a hard time passing as well? I think in the Netherlands.

Sweden, Denmark at least it will have a difficult time. It's difficult to say on the Finnish situation at this point, but like I said, there's a mutiny groin, so it will not be passed easily. And there's a big, big, very big problems in many of the countries or the citizens of countries to accept this idea. And so it will face a hard resistance. And I think for a good reason, because this is not what the EU was designed to do. Do you think there is any resolution of this that ends up keeping the aims and original goals of the EU, or is it too far, has the kind of the window shifted too far?

I fear that this would lead the breaking of the European Union. Before it was just the euro, but when they tied the fate of the European Union or the mechanisms of the European Union to the Euro, This whole thing may fall apart. That's the gamble they took. And I don't know, it was a stupid gamble if you ask me. Well, I really appreciate you jumping on and sharing some of your thoughts.

It was a really great follow-up from the show that we had before. Where can people find you if they want to keep track of these conversations? Go to my Twitter account at Thomas Mullining or the website of our firm, GNS Economics. So there's a lot of stuff there. We are concentrating on the issues of the European Union during the fall. So go there and become our subscribers. Awesome. All right.

Well, thank you so much, Trauma. It was always great to talk to you. Thanks. Part of why I wanted to have Tuamus back is that he has a very clear way of explaining a lot of these issues going on. Second is that I think that he does represent one perspective, both economically, socially, politically, that is growing in Europe. Third, I wanted to have him back specifically because I think it's really important

that we don't stereotype where these different perspectives come from. It's become all too easy to assume that someone who is a Eurosceptic, i.e. a Brexeter or something like that, fits one particular mold when actually these issues are much more complex and cut across a lot of different political persuasions. I think that we do much better,

not just in the U.S., but around the world, if we were able to engage with issues on their merits, on their basis, rather than presuming someone's political perspective based on which group they happened to associate with before. Of course, there are lots of other perspectives on the European Union's plan and this recovery plan, and I will try to bring some of those on as well. But for now, I appreciate you listening. I hope you learned something today.

And until tomorrow, guys, be safe and take care of each other. Peace.