In the second half of 2020 and throughout 2021, the world will not be in a recession. At least, China and all the economies that revolve around it will not be. Indeed, July 2021, 2021 will mark the XNUMXth anniversary of the Communist Party of China and its leadership will do everything possible and even the impossible to present a stable and growth-oriented country to the Chinese and the world. Even though Xi Jinping has recently emphasized the quality rather than the quantity of growth, we can rest assured that whatever the XNUMX GDP target is, it will not only be met but exceeded.
The CPC, which is historically both a party of third-internationalist origin and a national liberation movement, legitimizes itself with the revolution and the anti-Japanese war, that is, with its past. The 90 million party members decide for the XNUMX billion Chinese because they are the heirs of the founders of the new China. As the decades pass, however, the legitimacy from history fades along with the recollection of events. Then legitimation by inertia takes over, which however the governed grant to the elite only if it continues to guarantee security and growth. Xi Jinping rationalizes this social and political contract using the Neo-Confucian narrative.
The people obey and respect the party and in return the latter undertakes not to be corrupted and to guarantee order and growing prosperity. Even the European Union legitimizes itself through its tragic history much more than through the traditional democratic process, which the founding and inspiring fathers (Monnet and his ideological master Kojève) saw as not only superfluous, but even a hindrance. But the passing of the decades makes itself felt by us too and the memory of the post-war peace (which was actually the result of the Cold War and the American atomic protection over Western Europe) fades.
Here then is that Europe, at the end of the eighties, invents its own ideology (human rights and the patriotism of the constitution). The Union's official philosopher, Jürgen Habermas, starts from Kelsen's Kantianism and Max Weber's modernism and creates a system that, once again, is more liberal than democratic. It is a system which, on the one hand, does not always give much proof of itself once it has been declined in practice (the tragedy of the Balkans, the Ukrainian civil war, Libya, Syria, the management of immigration) and which above all, in its icy formalism does not warm hearts. Thus, even for Europe, legitimacy by inertia remains (dismantling everything would be very complicated, as we see with Brexit), which in any case needs that the political contract by which technocracy is accepted in exchange for security and growth continues to function .
The Italian vote has an anti-European aftertaste not for ideological reasons but because it denounces a perceived violation of the political contract. If Europe does not guarantee growth, its legitimacy begins to wane. True, Italy has been growing again for three years, but the angry voter is not looking at the GDP at 1.6, an abstract datum, but at the son who remains at home unemployed for another year. Flat Tax, Fornero and basic income, which together approach 70 percent of the votes, have a common trait, the demand for growth and reflation. This request can be declined with developmental or welfare accents, but in cold accounting terms it is fiscal reflation to be implemented in deficit.
Fiscal deficit reflation is the absolute evil for European ideology. The Italian elector knows this well, but he flirts with heresy largely guided by his gut, but also because orthodoxy appears to him less and less coherent with itself. What could the 20-30 billion of a possible Italian fiscal reflation be (which if spent equally by all the countries of the eurozone would become 160) when America, between cut taxes and increased expenses, is implementing a double-sized one and are you currently considering making it permanent? And then what's the point of sticking to 20-30 (or 160) billion and portraying them as the antechamber of hell when the European Quantitative Easing has created 2500 out of nothing?
Sure, they're not quite the same thing, but the idea that the whole thing is rather arbitrary is starting to spread. As for the high Italian debt, how to react to the news that in Japan on Tuesday, a normal working day, not a single ten-year government bond was traded in the whole archipelago because the central bank has bought back so many in recent years that Are there very few around now? If a country with a much higher debt does it, can't everyone do it? And let's not forget that the sum of private and public debt, the real metric that the IMF also looks at when judging countries, is 250 per cent of GDP in the United States, 256 in China, 265 in Italy, 275 in Spain, of 280 in the United Kingdom. We are certainly not the only ones having some problems.
A truly orthodox might argue at this point, as some did in the early days of QE, that Quantitative Easing has been profoundly uneducational and has opened a Pandora's box of miraculous expectations that will ultimately destroy faith in money and fear of constraints. An American, on the other hand, would say that at home the Stability and Growth Pact (where growth was added just for the sake of beauty) would, if anything, be a Growth Pact and that's it. In its parallel universe there would be a minimum growth constraint, let's say 2 per cent, and the Commission would open an infringement procedure for countries, such as Italy, that fail to respect it. In the event of a continuation of the low growth, the troika would arrive. Indeed, the Fed has a double mandate, growth and inflation, while the ECB has only inflation.
Be that as it may, the Italian malaise makes the extent of the fiscal reflation that Macron would like to wrest from Germany smaller and psychologically insufficient and which risks ending up like the Juncker plan. The Union is going through a delicate moment. To the east the Visegrád Group goes on his behalf. Eight countries, led by Holland, criticize Macron's fiscal reflation plans and ask him and Merkel not to decide the two of them for all 27 and not to expand too much in their projects (let's do, they say verbatim, what needs to be done and on what would be nice to do). This condition of weakness will induce Brussels and Berlin to be fairly lenient towards Italy.
For its part, the ECB, aware that in May 2019 there will be votes throughout the Union, will maintain a relaxed rhetoric and will try to prolong growth as much as possible, while aware that the very high levels we have seen in recent months will be difficult to maintain . Coming to the markets, we see an improvement in the tone on bonds and a narrowing of credit spreads. There is a huge short on the bonds and the coverings could extend this modest recovery by a few weeks. Inflation, at least in America, is set to rise, but not as fast as the markets had begun to price in. In this scenario, the stock markets would have room for further recoveries, but they are held back by uncertainty about tariffs and, above all, by doubts about what Powell's new Fed will do.
The American economy is showing some air gaps in consumption here and there and the first quarter, in the end, won't be as spectacular as initially thought, but neither will it be zero growth as some economists have begun to say in recent days. The dollar is calm and is benefiting somewhat from Kudlow's appointment as Trump's chief economic adviser. Kudlow is for a fair trade that is as free as possible and for a dollar that is stable and, at best, slightly stronger. With these positions, Kudlow will face the hard-line protectionists of the West Wing, Peter Navarro in the lead. We continue to recommend constructive but light positions. 2018 is a year that no longer has a single favorable wind and instead has many air currents, favorable and unfavorable, which will continue to cross each other in a disorderly way.
