Thread by @KellerZoe

Global capitals leaving Europe for the US and Britain
The current large monetary outflows from the eurozone may accelerate into outright flight

telegraph.co.uk/business/2021/…

A regime that behaves like the EU is liable to impose capital controls without compunction, or block energy flows through the interconnectors, as threatened 3 times already (I keep count). And as we have seen, anything can be politicised, even random stochastic blood clots.

We want to see reciprocity and proportionality in exports,” said Mrs Von der Leyen. Delicious. The EU is currently refusing to reciprocate temporary UK waivers to smooth post-Brexit trade flows or to reciprocate on bare-bond equivalence in financial services.

If these daily antics from Brussels and Berlin continue, the eye-wateringly large capital outflows from the eurozone that have already been occurring may accelerate into something closer to outright capital flight.

HSBC says outflows reached €500bn in Q4, (annualized pace: 20% GDP), quickened to €250bn in the single month of Dec. The scale is breathtaking. It happened before the vaccine debacle condemned EU to an extra quarter of economic recession and social despair.

Relative to GDP, these outflows were the largest we have seen going back 20 years,” said Paul Mackel, HSBC's currency chief. Hedging contracts have prevented this setting off a disorderly slide in the euro but that does not change the fundamental picture.

You can interpret these outflows in many ways but they are not a vote of confidence in €Z recovery or the political management of the EU. The exodus is likely to gather pace as US reflation and the vast funding needs of the Biden treasury suck capital out of the global system.

The vaccine “shit show” is an accelerant, made more destructive by the failure of every major EU state to stop the B117 variant from running rampant. The waning epidemic from the old variant and the rising epidemic from the new created an illusory stability in case numbers.

The consequences of a 3rd wave in an un-vaccinated population, with no herd immunity until Sept, is to protract what Keynes called the “long dragging conditions of semi-slump” for many more months, inflicting such damage that the recovery may be sickly even when it finally comes.

While the US is spending $2.8 trillion (13%of GDP) in fast fiscal relief – 2/3 this year – the EU has nothing of the kind. The Recovery Fund is for rebuilding later. “A medium-term investment plan. It doesn’t do much in the short term,” said Lorenzo Codogno, LC Macro Advisors.

The Recovery Fund will in theory dish out €87bn later this year in grants and loans (less relevant) if recipients meet all conditions. That is just 0.7% of GDP. It is why the ECB’s Isabel Schnabel has warned that the fund may be “insufficient”, opening a political Pandora’s box.

There is fiscal stimulus worth 2% of GDP at a national level but the EU/US gap is huge. Washington is “going big” even though the US output gap will be closed by June. The OECD now thinks the US will regain its pre-pandemic trajectory by next year, along with China.

Yet Europe is “going small” even though the output gap in the eurozone is still a dire 8% of GDP, reaching 10% in Italy and Spain (IIF data). It is an Atlantic decoupling like never before in modern times.

The story that has yet to gain media traction is cross-Channel decoupling. It is no longer implausible to imagine the UK leaving EU far behind over the course of 2021, a remarkable thought given the counter-story in the British lay press that post-Brexit trade has been a calamity

Markets have shrugged off the 41% collapse in exports to the EU in Jan, deeming it transient noise. One cannot infer much from trade flows that month – except that firms were not ready, and the EU aims to be bloody minded.

Companies had stockpiled before and were holding back afterwards in case of border chaos. Only if these patterns continue into March there will be grounds for alarm. Fears that inward investment would dry up have proved unfounded. There are clear signs of pick-up in flows into UK

For now sterling is in rude good health. The pound has hit a one-year high of €1.17 against the euro this week and is nearing the top end of its post-referendum trading range. Bank of America says the pound is undergoing a “cyclical rehabilitation”.

There has been steady buying of sterling during New York opening hours by US funds. Japan’s giant life insurers and pension funds are scooping up gilts. RBC Capital says they purchased a net $5.5bn of UK bonds in January alone, the highest in five years.

BNY Mellon, the world’s top custodian bank with $41 trillion under watch, says its iFlow data is detecting a marked shift into UK assets by global fund managers. “It has been going on since last year. Funds are rotating back into UK equities,” said Geoffrey Yu, Europe strategist.

The UK will reopen and return to growth months before the eurozone. The measurement distortion that overstated the UK’s economic contraction by roughly 2% of GDP last year will flatter growth this year with a mirror-image distortion on the way back up.

All the stars are aligning for what the BoE’s Andy Haldane calls a “coiled spring” recovery. That does not in itself validate Brexit, but the spectacle of cross-Channel decoupling will profoundly change the global discourse on the UK leaving the EU.

The real test comes later during the hard grind of the 2020s. But my hunch is that the first year of independence will be much better than almost anybody expected.