EsadeGeo Daily Digest, 13/05/2020

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Project Syndicate – Marcel Fratzscher / Taking the German Constitutional Court seriously

  • The German Federal Constitutional Court’s (GCC) ruling against the European Central Bank’s pre-pandemic asset-purchase program has stunned policymakers and other observers outside of Germany. Many will be tempted either to ignore the ruling altogether, or to escalate the legal battle with the GCC. But both approaches would be counterproductive. The situation calls for an earnest debate about the ECB’s mandate and existing European treaties.
  • There is much to criticize about the ruling, not least its failure to understand the economics of monetary policy. The ECB does, in fact, conduct a regular, broad assessment of the implications of its policies each time it publishes quarterly projections (…) It is not surprising that many economists and legal scholars have described the GCC’s arguments as utter nonsense.
  • Nonetheless, European institutions must take the GCC’s challenge seriously, or catastrophic consequences could follow. Given that the GCC has long been on a mission to challenge the ECB’s policies, there is no reason to assume that it will stop with this latest ruling. More important, one cannot ignore the fact that the court’s arguments resonate with many German economists, politicians, and voters. Across the German mainstream, there is a deep conviction that the ECB does not act in Germany’s best interest.
  • The ECB should revise its definition of price stability and its method of analyzing the implications of monetary policy, not to please the German court, but to enhance transparency. For now, at least, that could help protect its operational, institutional, and legal independence. But in the long term, the EU and member-state governments cannot ignore the German position. Despite several serious weaknesses and contradictions in its reasoning, the GCC raises legitimate and important issues concerning the ECB’s monetary-policy mandate and its role within the EMU.
  • Financial Times – Martin Wolf / German Court decides to take back control with ECB ruling

Politico – Paola Tamma and Hanne Cokelaere Schengen proves hard to reboot after system meltdown

  • The reinstating of borders checks in the majority of the member states of Schengen almost proved lethal for the free-travel area. That’s what the Commission is seeking to address in a package to be adopted on Wednesday, issuing guidelines to EU countries on how to lift internal borders and travel restrictions. This is a very sensitive issue for countries such as Greece, Italy or Spain, which are relying in a revival of tourism to help save their economies.
  • The Commission will present a two-step approach, according to a draft communication. First, countries with a comparable epidemiological situation as assessed by the European Centre for Disease Prevention and Control should lift travel restrictions between themselves provided they still respect social distancing. This would, for example, appear to cause problems for Greece bringing in British tourists, because the coronavirus has been far more severe in the U.K. Only in a second phase would travel be restored throughout the whole Schengen area and beyond.
  • Some countries are creating free-movement clusters. Lithuania, Latvia and Estonia last week agreed to lift travel restrictions and the obligation to undergo two weeks of quarantine on their citizens as of this Friday. People returning from other countries will still be required to self-isolate. And France and the U.K. have agreed to allow travelers from France a quarantine-free trip across the Channel. However, this has not been confirmed yet in the U.K.’s exit strategy, published Monday.
  • Commission President Ursula von der Leyen said back in April that Europeans will find “smart solutions” to go on holiday this year, and EU governments followed suit with a plethora of announcements. However, the complexity of the situation from a health, legal and political point of view isn’t going to be cleared up any time soon.  “This is a very difficult task. Member states introduced different measures in an uncoordinated manner. Unwinding these different national restrictions will take some time,” Home Affairs Commissioner Johansson said last week. Consequently, it seems that restoring a full Schengen will be a question of months, and not weeks.

Foreign Affairs – Branko Milanovic / Is the Pandemic China’s Sputnik moment?

  • When the Soviet Union launched Sputnik, the world’s first artificial satellite, in October 1957, Washington finally understood that the Soviet Union was not solely a formidable ideological antagonist but also a technological and military rival. Sputnik briefly put the Soviet Union ahead of the United States in a crucial technological area, with vast ramifications for its ability to communicate and to wage war. This crisis could be China’s sputnik moment, coming of age in the eyes of the US elites and the world public in general.
  • For this reason among others, the divergent responses of the United States and China to the pandemic threat have served to throw the two countries’ competing political systems into sharp relief. The two superpowers already vied for global influence, so the success of one system compared with the other is not a matter of trivial importance. Writing for this magazine, I described the Chinese and U.S. approaches to the market as political and liberal capitalism, respectively. Each has exhibited strengths and frailties in the current crucible.
  • China has a top-down structure, centralized power and the ability to control vast resources, allowing them to impose Draconian policies very quickly. On the other hand, the fact that central authorities reward local ones on the basis of their perception of how they manage their provinces provided an incentive for hesitation and denial at the local level when the virus was discovered. As for the US, the states filled the vacuum left by a disorganized central government, thanks to the autonomy that they have from the federal government. However, the nature of the epidemic could mean that the very best efforts by one state can be undermined by bad decisions or irresponsible behavior next door.
  • So far, political capitalism is winning. But the Soviet Union’s Sputnik moment proved fleeting, and so might China’s, if the other side chooses to tap into its significant advantages, such as flexibility of decision-making, accountability of local governments, and transparency. The benefit of the latter is reflected, for example, in the fact that Americans have access to several alternative counts of casualties, whereas only one, of dubious credibility, exists in China. The race between the United States and China, and between the two capitalisms, was only adumbrated before the crisis, but now it lies in the open.

The New York Times – Anatoly Kurmanaev et al. / Latin America’s outbreaks now rival Europe’s. But its options are worse.

  • As the coronavirus’s toll eased in New York and in European capitals, a devastating wave has struck cities in Latin America, one that rivals the worst outbreaks in the world, an analysis of mortality data by The New York Times has found. Brazilian cities are resorting to mass graves to bury rows of stacked coffins. In Guayaquil, a port city in Ecuador, the sudden spike in fatalities in April was comparable to what New York City experienced during its worst month: more than five times the number of people died than in previous years. Hundreds of Ecuadoreans are still searching for the bodies of family members who went to hospitals and never returned.
  • In Latin America, the pandemic has been worsened by underfunded hospitals, lean support systems and struggling economies with far fewer resources than in Europe or the United States. The pandemic is hitting the region after a long economic stagnation, which led several countries, including Ecuador and Brazil, to slash health care budgets. These two countries are now seeing the worst death rates in the region. “We cannot have health systems that only serve people who can afford it,” said Carina Vance, Ecuador’s former health minister. “As long as the person with the smallest income cannot access the most basic and essential health services, everyone is at risk.”
  • Exhausted local officials in Ecuador, Peru and Brazil pointed to global test shortages and explained they were being outbid by richer nations on scarce medical supplies. President Trump’s decision to freeze funding for the World Health Organization could hamper its relief efforts, which extend to particularly vulnerable countries like Venezuela and Haiti. And China, which extended multibillion dollar loans to Latin America during the global financial crisis in 2008, has limited itself to sending a few shipments of protective gear and test kits.
  • Complicating the response further, the disease has hopscotched across the region, defying explanation. Relatively well-off Chile has been spared so far, but so has poorer Paraguay. The response to the virus has also been very different in each country, with strict lockdowns in countries such as Peru and botched responses in Mexico and Brazil. However, the death toll in Peru has spiked, despite the actions taken by the government. The country’s president, Martín Vizcarra, ordered one of the first national lockdowns in the continent, and sent police and military to the streets to catch any violators.
  • Foreign Affairs – Ivan Briscoe A perfect storm for Venezuela

Today’s insight:

The selected pieces do not necessarily reflect the views of Javier Solana and EsadeGeo. The summaries above may include word-for-word excerpts from their respective pieces.

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