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May 26, 2020

French fashion stores - lockdown is one crisis too many

Was Covid-19 one crisis too many for French fashion stores? This is at least what the front page of Les Échos suggests this morning. After the gilets jaunes protests and transport strikes reduced customers already since last year, the pandemic lockdown was the last straw for a sector already in trouble. Chains like Naf-Naf and Alinéa, in business for more than 30 years, went into receivership. The well known shoe brands André and La Halle are under judicial bankruptcy protection. Some experts predict 30% of the country's 40.000 prêt-à-porter fashion shops could be closing down. This does not necessarily mean liquidation, but consolidation and refinancing will most certainly be on the menu. The contraction of retail is most visible in textiles, where a declining trend was already observed for the last ten years. On the other hand, sectors like DIY or games  survived the lockdown well. 

Banks play a crucial role in this fight for survival. The latest statistics suggest banks offered €21bn in loans to over 100,000 retailers, backed by a third of what the government offered in guarantees. Not everyone is getting a loan, though, and companies in difficulty are likely to find themselves treated differently. For example Conforama, a furniture retailer, found out the hard way when their government-guaranteed loan application was blocked by the bank. Banks do not want to add more debt where a more structural and radical solution is required to make a business sustainable, according to one of the newspaper sources.

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May 26, 2020

An important German supreme court ruling against VW

Germany's federal court of justice, not to be confused with the constitutional court, yesterday cast a big ruling: it declared Volkswagen to have acted immorally. This actually constitutes an official concept under German law, and paves the way for tens of thousands of compensation payments. VW buyers of manipulated diesel cars will get most of their money back. We have seen estimates of over €1bn in total, but this may be a conservative number.

The ruling is important for several reasons: the most important is that it weakens the almost-untouchable status of German companies under German law. The ruling does not go so far as to allow customers to sue for penalties. But it strengthens consumers vis-à-vis producers in an unprecedented way. Germany is one of the most producer-friendly industrial countries on Earth. When large parts of the German car industry participated in a broad-based criminal conspiracy to defraud emissions testers and car buyers, they expected to get away with it. The notion of effective legal immunity, no matter what you do, was part of the corporatist industrial complex. Germany, for example, lacks the legal notion of corporate manslaughter. It is easier to close down a restaurant that doesn't meet hygiene standards, than to close an industrial company that openly breaks the law.

The combination of legal quasi-immunity, specialist technical know-how in several pockets of mechanic and chemical engineering, and wage policies that reduced Germany's real exchange rate inside the eurozone, have been behind what is often described as a second economic miracle. We note that all of these trends are ending. We have reported on the numerous technological changes affecting the oligopolitistic pricing power of the German car industry. Politics is no longer as car-friendly as it used to be. And the principle of mass compensation payments is now legally established. 

The case was brought by a single individual who was suing for his money back from his purchase of a VW Sharan van. He asked for €31,000 and the judges awarded him €28,000. VW's share price was not affected. Investors wisely discounted the long-term implications of the emissions scandal a long time ago, both in terms of direct compensation payments and the much more important commercial effects. There are another 60,000 cases pending. 

One of the FAZ commentators made the point that this ruling will not be the end of the matter, as VW had hoped. It formally established that the company as a whole acted in a criminal conspiracy: it was not the work of some wicked individuals. In particular, the court did not believe the company's claim that the head of engine development did not know about this. This means the legal procedures will go on and on. 

We see this supreme court ruling as an act of German normalisation. This contrasts with the recent ruling by the German constitutional court. The latter reaffirmed German exceptionalism.

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May 26, 2020

Public scrutiny over lockdown rules

Quis custodiet ipsos custodes? Who watches the watchers themselves? This is the Latin proverb that may best describe the public outcry in the UK, Ireland or Austria about public figures who were found trespassing the Covid-19 lockdown rules.

Newspapers called for the resignation of Boris Johnson's close adviser, David Cummings, over a family outing in Durham. This may be technically in line with the lockdown laws, but not in spirit. A topless Irish prime minister Leo Varadkar was caught having a picnic with friends in a park. And Alexander Van der Bellen, the Austrian president, was found in one of Vienna's beer gardens after midnight. Austria's Covid-19 law imposes a stop at 11pm for the entire gastronomy sector. 

The angry reaction is about double standards. The problem is that the rules are not so clear as to settle the debate for good. Those who followed the rules in its strictest sense find any loose interpretation threatening. And, if the breach is by someone in public office, the debate easily turns into one about abuse of power. They should know better, so the verdict.

In the UK and Ireland it may not be clear what the rule exactly meant. In Austria the rule might be clear but its logic not. Why should restaurants and pubs have to close at 23h? Does the virus spread faster in the night? You may find that people are more willing to forgive van der Bellen if, as a result, the gastronomy sector gets longer opening hours. 

This debate not only highlights the ambiguity of existing lockdown rules. It also serves to settle accounts with leaders after two months of having to follow rules that were not of their choosing. It also calls forward those who will use the incident as a perfect pretext to charge against those they want to see out of office. What they did not see is that Johnson has lots of political capital to spend. Irish newspapers are digging into other cases of potential unfair treatment. Varadkar is now under fire.

In any case this is a stark reminder that the rise in popularity ratings for many leaders might be ephemeral. It is hard to win voters and easy to lose them.

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