Newsletter: A Brexit agreement is in sight
Tuesday, 3 November 2020
Good afternoon Future is blue readers,
This week we are covering the just announced budget proposal for 2021 presented by the Spanish government. In a nutshell: its expansionist nature goes in the right direction but some forecasts in it seem quite optimistic.
We’ve also asked Iain Begg, Professorial Research Fellow at LSE and Funcas Europe, to share with us the chances for a Brexit deal now that the deadline (end of the year) is approaching.
“The strong likelihood is that, in the coming days, the remaining problems will be solved, both sides will proclaim victory and – magically – a new relationship between the EU and the UK will begin”, says professor Begg.
Further below you can see, as usual, some recommended readings.
A budget that can’t afford to go wrong
Spain has just started discussions on a new general budget for 2021. The capacity to control the economic and social impacts of the pandemic and to see a recovery depends largely on the public budget.
The private sector, immersed in this second wave, is in no condition to lead the way. Some businesses are on the verge of bankruptcy. Uncertainty reigns in the COVID era and this is something particularly challenging for companies. Households, understandably, prefer to save because families are scared of losing a big chunk of their income.
On the other hand, the pandemic, given its global nature, needs cooperative solutions that can be best achieved through public policy. Indeed, fiscal policy, rather than monetary policy – which is currently verging its limits – is key.
At first glance, the budget proposal that the Spanish Government has presented goes in the right direction given its expansive nature. Public spending will grow by EUR 62 billion, of which EUR 26,6 billion are part of EU funds.
The proposed raise in taxes is essentially cyclic and is dependent on rather optimistic forecasts (an unlikely economic growth above 10% and new tax instruments that will take some time to be implemented). Therefore, it is likely that public deficit will not meet the 7.7% targeted in the budget proposal.
Despite the rebound, the Spanish economy will end 2020 in an unfavorable position
However, the devil lies in the details. Public spending will not foster recovery without three conditions. Firstly, the prevention of the COVID-19 spreads. The budget proposal includes some details on healthcare investments, but falls short on how different administrations will coordinate (needless to say the track record is poor in this regard).
Secondly, we should minimize the impact of the outbreaks on the business activity and employment. The extension of ICO’s credits is good news, but more is needed. Germany is compensating up to 75% of businesses losses and France has adopted a plan against insolvency and another one for recycling workers on partial unemployment.
Finally, the budget proposal brings unprecedented spending linked to digitalization, green transition and education, all key conditions to transform our economic model. However, little is said on prioritizing its business projects that can add value and be productive in the world after Coronavirus.
A Brexit agreement is in sight, Iain Begg
The end of the Brexit transition period is now just two months away, yet the negotiations on the future relationship between the UK and the EU are still incomplete and the wars of words continue to dominate the headlines. Behind the scenes, however, an agreement is in sight, implying that much of the posturing of recent weeks has been about the respective leaders playing to their domestic audiences.
Despite suggestions to the contrary, two things are increasingly clear. First, both sides have strong economic incentives to agree a deal, because the costs of ‘no-deal’ are substantial, including disruption of supply chains, increased costs of doing business across borders and pressures on public finances. Statements by the leaders on both sides about being relaxed about no-deal are, quite simply, empty rhetoric. Second, the idea that the effects of Brexit will be inconsequential compared with the damage being wrought by the pandemic is dishonest. Instead, they will cumulate.
A first irony in all this is that one of the main sticking-points – fishing – is a tiny proportion of the economy on either side of the English channel, and the outcome could well be EU fishermen losing access to British waters, while British fishermen are unable to sell their catch because of prohibitive tariffs: a perfect example of lose-lose. A further irony around the EU insistence on the UK adhering to regulatory standards is that there is almost no appetite in the latter for what has been called ‘Singapore on Thames’. In addition, the problems in Northern Ireland risk becoming more acute if the impasse continues.
In short, the strong likelihood is that, in the coming days, the remaining problems will be solved, both sides will proclaim victory and – magically – a new relationship between the EU and the UK will begin.
What we are reading
European Union recovery funds: strings attached, but not tied up in knots
Ensuring effective recovery spending is a high-stakes challenge for the European Union, with the potential for derailment because of fuzzy objectives and overloaded procedures, claims Jean Pisani-Ferry.
Why is Europe yet again at the center of the coronavirus pandemic
Strategies for exiting spring lockdowns did not work, and goodwill leached away, allowing infection rates to rise.
Don’t fear artificial intelligence (AI). It will lead to long-term job growth
COVID-19 has accelerated the automation of many tasks, leading some to fear AI will take their jobs. But AI creates more jobs than it destroys, argues this World Economic Forum article.
The post-Covid consumer: is back-to-basics shopping here to stay
Big consumer goods companies have been boosted by changes in lifestyle during the pandemic.
Have a nice week!
Raymond Torres
Funcas Europe Director