Wednesday, February 27, 2019

A tale of two treaties

Mid-week market update: Posting will be lighter than usual, I was hit by a nasty flu bug this week and I am barely recovering.

It was the best of times, it was the worst of times. Two treaties (actually one of them isn't a treaty but an MOU despite Trump's objections to the term) have either been signed or about to be signed.

The lessor known agreement is the Treaty of Aachen, signed Macron and Merkel, to revive the EU, and as update to the Franco-German friendship pact the Élysée Treaty signed by de Gaulle and Adenauer in 1963. The Élysée Treaty was one of the key foundations of the European Union. No sooner than the treaty was signed, Der Spiegel wrote about the bickering than nearly scuttled the agreement:
Indeed, despite all the ceremony and pomp in Aachen, fundamental differences between the Germans and the French very nearly prevented them from reaching an agreement. To make matters worse, the two countries have trouble seeing eye to eye in an area that is particularly vital to Europe's future: forging a joint defense and common policies on arms exports. German and French negotiators only barely managed to save the deal thanks to a secret supplementary agreement.
To be sure, the Élysée Treaty needed an update as the challenges for Europe have changed since 1963:
Throughout the history of the European Union, Germany and France have always served as both the leaders and the driving force of the European project. Close cooperation between the two countries is today more important than ever to counter everything from attacks by right-wing populists, to Russian subversion and American threats to impose import tariffs on European goods -- not to mention the looming Brexit chaos that threatens to engulf Europe.
Then the squabbles began:
The crisis began more than a year ago, when Macron unveiled his vision for Europe in a speech at Sorbonne University in Paris -- and received nothing but silence in response from Berlin. Since then, the two partners have quarreled like an old married couple nearly every chance they get, bickering over everything from a joint budget for the eurozone to the details of the digital services tax on major tech companies like Google and Apple and emission limits for nitrous oxide. In addition, Germany's aspirations to become a permanent member of the United Nations Security Council are only halfheartedly supported by France. "I'm afraid there are a ton of issues where we have to get our act together," a government official in Berlin complained.
One of the points of contention was over Nord Stream 2:
But their differences rarely surface as openly as they did in last week's conflict over the Nord Stream 2 natural gas pipeline. The French had long embraced a neutralité politique, as they call it, to avoid sabotaging the German-Russian plans. But only a few weeks after the declarations of mutual devotion in Aachen, the two countries came within a hair's breadth of a major diplomatic spat.

The evening before a vote on a contentious EU directive that would have severely impeded the gas project, the French Foreign Ministry released a statement that left officials in Berlin completely taken aback.

"France intends to support the adoption of such a directive," it said in the press release. The Foreign Ministry showed little sympathy for the shocked reaction in Berlin, adding that the Germans were well aware of French reservations concerning the project, "but perhaps didn't want to hear them."
Both sides have differing views of defense policy:
There's been much talk recently of Europe's "strategic autonomy," which is the official objective of EU defense policy. If the importance of NATO is likely to wane, Germany and France have no choice but to cooperate with each other, as officials in Paris and Berlin know perfectly well.

There is no lack of lofty intentions, but the reality of the relationship is an entirely different matter. "Germany and France have completely different traditions in some areas," says Michael Roth, state minister at the Foreign Ministry in Berlin.

When it comes to security issues, the Germans always initially react with restraint, and military missions by the German armed forces, the Bundeswehr, are viewed as a last resort. By contrast, France sees itself as a global power capable of restoring order around the world, and Paris views its military as a natural instrument of foreign policy.
...and on it goes.

The other "treaty" is the upcoming US-China trade agreement, which was announced by Presidential tweet on Sunday. Despite Trump's objections over terminology, it is being negotiated as a Memorandum of Understanding (MOU) rather than as a treaty. That's because treaties are subject to Congressional ratification, whereas MOUs are not.

Soon after Trump tweet, doubts began to surface. Bloomberg outlined a series of analyst reactions summarized as "Trump Tariff Delay Doesn't Mean Trade War Is Over, Analysts Say". Bloomberg also reported that much of the objection related to how credibly the Chinese could commit to maintaining a stable exchange rate, and what that precisely means:
The U.S. and China haven’t yet agreed on the critical issue of enforcement in a proposed currency deal that would ensure Beijing lives up to its promise to not depreciate the yuan, four people familiar with the matter said.

Treasury Secretary Steven Mnuchin on Friday touted the currency pact as the strongest ever, though he offered no details, following two days of high-level talks in Washington between U.S. and Chinese officials. The discussions were extended into the weekend in search of a broad trade deal to prevent the U.S. from increasing tariffs on Chinese goods next week.

President Donald Trump has previously accused China of gaming its currency to gain a competitive advantage, though his Treasury Department has repeatedly declined to name the Asian nation a manipulator in its semi-annual reports on foreign-exchange markets.

Still, the U.S. asked China to keep the value of its currency, the yuan, stable as part of trade negotiations between the world’s two largest economies. If successful, that would neutralize any effort by Beijing to devalue its currency and make its exports cheaper to help counter American tariffs, people familiar with the ongoing talks said this week.
In addition, James Politi of the Financial Times noted that ending forced technology transfer would make China a more attractive place to invest, and therefore have the perverse effect of raising the trade deficit.

International agreements tend to be well-intentioned, but the devil is in the details of their implementation. More importantly for investors, here are the investment implications of these agreements.

The full post can be found here.

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