Weak industrial orders matter more than surging retail sales as an indicator at this juncture. Pent-up demand has inflated purchases. Will spending hold up as job subsidies run down and unemployment bites in earnest? I doubt it.
“Sustaining the pace of recovery will get increasingly difficult from here,” says Neil Shearing from Capital Economics. “The easy economic wins from lifting lockdowns have already happened.”
As for Holland’s Rutte, his negotiating demands are draconian. There should be no fiscal transfers, just loans, and these must be rigorously controlled. Any aid to Italy and Spain – or the East Europeans – must be conditional on “deep reforms to pensions, labour markets, judicial systems, and taxation”.
His tone has caused predictable fury in Rome. He seems never to have progressed beyond the discredited morality tale of 2011-15, when the eurozone’s banking crisis was misdiagnosed as a Club Med debt crisis, and when Italy was subjected to austerity overkill by EU commissars in the name of false economic science.
Chancellor Angela Merkel is now trying to persuade Italy’s Giuseppe Conte to accept a “Troika-lite” regime, meaning a formal request to the EU bailout fund (ESM) along with pension reforms to placate the Frugal Five.
This has put Conte in an excruciating position. His Five Star patrons – still the biggest force in the Italian parliament, albeit in disarray – know that annihilation will follow if they accept such conditions.
If the EU is not careful, its pandemic plan will end up causing an Italian political crisis and therefore a debt solvency crisis, setting in motion the very events it most fears.
By all means buy risk assets as a bet on global monetary reflation (though personally I am waiting) – but don’t be beguiled by the transforming magic of the EU recovery fund.