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June 30, 2020

Europe disunited on how to face Turkey

Russia and Turkey have a clear responsibility in Libya, while the EU needs a common strategy. So far it seems the EU's messages are all over the place, and as ever it is easy to divide the member states. It is easy to agree that a political solution to stabilise the region would be best. But what if this is not in the cards? At the moment it looks like Turkey and its Libyan allies are getting ready to push towards the strategically important regions of Sirte and al-Jufra next month, according to Al-Monitor. Is the EU ready for this?

Emmanuel Macron had a call with Vladimir Putin last week, and came out with the promise of further trust-building talks. This is a stark contrast to Angela Merkel, who just the weekend before warned about Russia's hybrid warfare destabilising Europe. In Meseberg Macron made an effort to bridge the differences, acknowledging the Kremlin's ambivalence about taking responsibility for what happens in Libya.

Macron, on the other hand, increased his charges against Turkey yesterday, saying its involvement is a historic and criminal responsibility for a Nato member. He accuses Turkey of not respecting any of the conditions from the Berlin peace initiative, instead increasing its military presence and re-importing extremists from Syria to join the fight. This poses a risk for all neighbouring countries and for Europe. Turkey's conduct in Libya is unacceptable, but what does this mean in practice? Interestingly, as noted by Ulrich Speck, Merkel decided not to comment on Libya. 

Greece, meanwhile, played on de-escalation with Turkey. Kyriakos Mitsotakis had a call with Recep Tayyip Erdogan last Friday. This was meant as an ice-breaking mission, starting with low-conflict subjects such as opening the borders for tourists. The call was widely seen as a first step toward restoring communication channels between Athens and Ankara after months of heightened tensions. 

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June 30, 2020

Covid-19 digital shock

Whether aggregate output will move up quick or stagnate for a while will be of less overall importance than a massive technological reshuffle we are current seeing between the old and the new economy. The best illustration of that shift we have seen is this graph - hat tip Adam Tooze.

source: Isabelnet.com

Tooze notes that this begs the obvious question - when will prices collapse? That might happen, of course, but we think it begs a different question. Are we finally seeing a structural de-coupling between road haulage, as a representative of the goods-based economy, and the stock market? That is obviously not visible in the data themselves. But when the percentage of digital trade to total output increases over time, then surely there is no reason for the stock market to follow the same cycles as the truck industry or the Baltic Dry Index. To us the real story of the US stock market is not the average recovery since the collapse earlier this year, but the massive gap in the recovery between the high-tech stock and the industrials. While trucks are needed to transport digital gear, there is little relationship between digital services and road haulage.

The ECB also weighed in with a large occasional paper on digital technologies and how it will affect the economy and monetary policy. This is too big a paper to summarise, but we would describe the bottomline as an uneven positive supply shock. This chart tells the story.   

The impact of the digital revolution is positive in several dimensions, very uncertain on the labour market, and disinflationary at least in the short-term. The main inflationary trend the ECB could make out in the long-run would be through monopolies. It’s going to be a policy nightmare:

"Digitalisation may affect the transmission of shocks. This may also apply to monetary policy shocks if – in a digital economy – firms are able to change prices more quickly. ... Different adoption rates and the use of digital technologies across the euro area countries may lead to country heterogeneity regarding monetary policy transmission."

Areas we have highlighted as particular relevant in the years to come are 3d-printing and robots. We thought it is interesting that the EU and the eurozone outstrip the US in the use of robots, but still lag behind Japan. The exception is Germany, which has the highest concentration of robots among advanced countries. Industry surveys have revealed that more and more companies are willing to invest in these technologies, not only in the prototyping stage but also in mass production.

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