July 10, 2014

Bruno Maçães proposal for contracts , Portugal’s secretary of state for European affairs, argues against proposal to centralise fiscal policy, and says the eurozone governance should rest on the idea of mutual contracts (We think this proposal is downright potty)

    July 10, 2014

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    Bruno Maçães reinvents the wheel

    What always irks in discussions about the future of the eurozone is when people propose as new ideas policies that have been tried again and again and that have demonstrably failed. One of these comments was from Bruno Maçães, Portugal’s European affairs state secretary in Vox, who made a plea against a United States of Europe – the ultimate strawman in any European debate. He argues against proposals to centralise power over fiscal policy or structural reforms, and wants more subtle form of co-ordination, based on contracts and partnerships. Member states would reforms and received the necessary support in turn. 

    This is unbelievably naïve. We mention this comment only to demonstrate the extent to which our debate on the future of the euro is moving in circles. The whole experience with the stability pact has taught us that voluntary agreements that are not policed are for the birds. Germany and France were able to break the pact because they could. They are sovereign nations. When sovereign nations can breach a pact that has been an integral part of EU law, why should a contract work? If the member states value absolute sovereignty of fiscal policies that much, they will regain monetary sovereignty in the long-run.
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    July 09, 2014

    Frankfurter Allgemeine reports about the outrage expressed by the CDU vice president of the EP’s ECON committee at committee’s refusal to elect AfD chief Bernd Lucke as one of its vice-chairmen;

      July 09, 2014

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      The CDU/CSU feels sorry for the AfD

      Germany’s Frankfurter Allgemeine is the mouthpiece of the country’s sururban conservatism, and we always noted an undisguised sympathy for the AfD, the anti-euro party. That sympathy radiates also to deep inside the CDU and in particular the CSU. We reported yesterday that the European Parliament’s ECON committee did not elect AfD chief Bernd Lucke to one of mostly ceremonial jobs of the vice-chairmanship of the committee – the jobs are usually distributed across the party groups under some formula. Werner Mussler und Hendrik Kafsack of FAZ describe how the CDU members of the committee express outrage about the vote. They are even outraged at the argument put forward by Sven Giegold (which seems totally plausible to us) – that you do not want to hand confidential ECB documents to somebody who wants to break-up the eurozone. The article quotes Markus Ferber, the conservative Bavarian MEPs, as rallying to the support of Lucke, defending his honesty. 

      The truth is the Lucke says what some of these CDU/CSU guys are thinking but are not allowed to say. Over the years, we would expect the CDU, post-Merkel, to open up to co-operation with the AfD, just as the SPD opens up to co-operation with the Left Party. The Left Party’s uncritical support of Vladimir Putin was a setback for SPD/Left cooperation. But the parties are now talking to each other. Expect the German political dialogue to become more confrontational once the Grand Coalition love-in ends.
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      July 09, 2014

      Josep Ramoneda writes in El País that the sense of impunity displayed by the likes of Sarkozy and Berlusconi polarizes society along an elite/masses divide which feeds populisms and is very worrysome given Europe’s history;

        July 09, 2014

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        The Berlusconization of Europe’s elites

        In his El País column, Josep Ramoneda writes that the “Berlusconization” of Sarkozy is indicative of a growing sense of impunity among the political class. Though, he says, his political credit is spent in Paris, he is still treated with reverential fear in “the Paris bubble”, illustrated by the grovelling journalists who interviewed him after he was released from police custody the last week.

        The combination of ostentatious power displays with cynical “outsider” populism to get out of political trouble has, according to Ramoneda, the ultimate effect of replacing the left/right political axis with an elite/people opposition. Ramoneda links this to the success of populist discourse which he represents by the catchphrase “the caste” to refer to the elites, popularised by Podemos. He ends with a warning that Europe has historical experience of what happens when politics becomes a confrontation between “impudent elites and indignant masses”, as “money and the military always take ultimately the same side”. 

        For a couple of years, high-brow commentators have borrowed Acemoglu and Johnson’s concept of “extractive elites” in Spanish political commentary, but the success of Podemos is replacing this with the cruder “the caste” which is now being used even by people who are critical of the concept.
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        July 08, 2014

        CGT and FO union boycott French labour talks today, marking the end of Francois Hollande's success with the unions;
        • Hollande tries to put a lid on, though comments warn it could set a precedent for further trouble;

        July 08, 2014

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        Two trade unions in open revolt against Hollande's government

        The social dialogue between the unions, employers and the government - hailed as one of Hollande's rare successes - is about to derail as the large CGT union and the FO announced an unprecedented boycott of the labour summit today, over what they call unfair government's preference towards employers, due to reap €40bn in tax credits over the next three years standing accused of giving nothing in return. Last week it was the employers' association Medef that threatened to boycott the meeting unless the government delayed the implementation of an early retirement scheme for workers in strenuous jobs. It got the concession - a one-year delay until 2016 - but at the price of irking the unions. The boycott was the result.

        Médiapart accuses Francois Hollande of destroying the social basis behind his electoral success in 2012 by completely breaking away from his electoral campaign. Le Monde says while it looks like the honeymoon between trade unions and the French government is over, Manuel Valls promised to consult with trade unions about all those 'hot' subjects. Elsa Freyssenet in Les Echos warns that the "rupture" will set a precedent for future turbulences and it will be interesting to see today whether the number of rebels inside the Socialist party is rising as a result.

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        July 07, 2014

        Corriere della Sera reports on Italian concerns about Jyrki Katainen as economics commissioner and of Luiz de Guindos as eurogroup chief –whilst betting on Pierre Moscovici as a stalking candidate;
        • Tito Boeri explains that Italy stand a good chance to benefit from the 2005 flexibility clause in the stability pact, but says Italy would at least need to propose one significant reform, plus implementing measures;

        July 07, 2014

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        Italy wants to prevent Katainen and/or de Guindos

        Corriere della Sera reports that the Italian government is alarmed at the prospect that Jyrki Katainen is set to become the next economic commission, and that Luiz de Guindos is headed for the permanent job as eurogroup chief. The article said that Pierre Moscovici could emerge as a candidate who could stop either Katainen at the Commission or de Guindos at the eurogroup. Given that Mario Draghi is at the head of the ECB, Pier Carlo Padoan cannot be a candidate for the eurogroup, and that this would also preclude Matteo Renzi’s other idea – of Federica Mogherini as the successor to Catherine Ashton as the EU’s High Rep.

        Tito Boeri has a good discussion on Lavoce about what flexibility means in practice. He looked at article 5.1 of the reformed stability pact from 2005 – in which countries can get a maximum of three years to slow down the path towards structural balance (which in Italy’s case is the medium-term objective). But this is only applies to countries with deficit of below 3%, and can only be invoked by countries that implement the reform. A pure announcement is not enough. To benefit, Italy would least need to do one big structural reform, accompanied by all the measures of implementation. He writes that the government should not keep on proposing more and more reforms, but focus on one of them and see it through. It is always hard to estimate the impact of a reform on growth – which is why any assessment by the Commission will be qualitative. For as long as Italy reforms, it should be able to get a prolongation on the deficit reduction path.

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        July 04, 2014

        Jorge Galindo of Politikon contests the likely decision by Spain’s PSOE to not vote for Juncker’s appointment as Commission President, arguing for the long-term objective that the “Community method” prevails over the intergovernmental approach that has served Europe so badly in the crisis;

          July 04, 2014

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          Why the left should support Juncker

          Blogging at Politikon, Jorge Galindo argues against Eduardo Madina’s statement that “his” PSOE MEPs would not support the appointment of Jean-Claude Juncker as EU Commission President, presumably deviating from the favourable vote of the rest of the PES European Parliament group. While personalised in Madina, this is a position shared by all of the PSOE leadership candidates. Galindo states that the Euro crisis is more political than economic, and that the intergovernmental method has been damaging to the EU as a political process. Hence the pre-election commitment by various national and European parties to the Spitzenkandidat process, to give the Commission a supranational political mandate. Even Alexis Tsipras, points out Galindo, said that “Juncker should be the first to attempt to form a majority” while corresponding with a number of concessions to the centre-left. As a left-wing majority (even with the support of the Liberals) appears impossible, the only alternative to Juncker is what Britain’s Cameron intended, imposing a candidate external to the Spizenkandidat process. Galindo ends by reminding the PSOE leadership that part of the job of politicians is to explain to the voters the short-term concessions necessary to achieve long-term goals, in this case for the Parliament to win its long-running tug-of-war against the Council and for Europe to prevail over the member states. 

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          July 04, 2014

          we take a closer look at the extent to which the leadership candidates for Spain’s PSOE diverge from the Brussels economic policy consensus, and find the gap is quite substantial;

            July 04, 2014

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            The PSOE’s economic programme through its leadership hopefuls

            With a thorough questionnaire on their blog last week, Economistas Frente a la Crisis probed the opinions of the candidates for secretary general of Spain’s PSOE, on which it is difficult to find substantive disagreements between them. Therefore, the exercise is more useful as evidence that the PSOE consensus diverges from the Brussels consensus. The interviews are lengthy, so we only report the parts clearly at variance with the European conventional wisdom. The respondents are Pedro Sánchez, Eduardo Madina and José Antonio Pérez Tapias, plus Alberto Sotillos who failed to obtain the necessary endorsements by party members to be declared a candidate this week.

             

            • On “competitiveness”, all candidates agree that for Spain improving productivity is preferable to reducing labour costs.
            • On tax reform, all agree fiscal balance should be achieved by raising tax revenues as both government revenue and expenditure are below the EU average; also, because of their greater potential for progressivity they support raising direct taxes rather than indirect (consumption) taxes.
            • To fight unemployment, all except Sotillos mention “aggregate demand”, to be increased at the European level; all reject “internal devaluation” as a job creation strategy and would roll back the PP’s labout market reforms as well as the idea that “normative rigidities” are responsible for high unemployment, preferring “active employment policies”.
            • On the welfare state, all are against cuts to education and health care which they consider cornerstones of the welfare state; Sotillos makes a special mention of support for families with dependents, which Sánchez puts forward as a as a way to support the welfare state while creating jobs; all defend the current pension system, with Madina and Sotillos arguing that sustainability would be assured just by solving the problem of high unemployment.
            • On European fiscal policy they all agree on the need to reform European fiscal rules, with different emphasis; Sánchez points out the zero deficit goal has no support in economic theory, Madina criticises the procyclical bias of current policies, Tapias advocates eliminating R&D spending from deficit calculations, and Sánchez aims at “democratizing” the ECB and rolling back key elements of the Maastricht treaty; only Madina defends on the introduction of a constitutional debt brake by Zapatero’s government in the Summer of 2011.
            • On Inequality, Sánchez proposes redistributive fiscal policy and reinforcing the welfare state, Madina focuses on improving education and increasing investment in it, and Tapias and Sotillos go for “basic income” solutions.
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            July 04, 2014

            Nicolas Sarkozy presents himself as a victim of unjust judges very much like Silvio Berlusconi;

              July 04, 2014

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              Sarkozy lashes out against judges, like Berlusconi

              Nicolas Sarkozy is on the frontpages of all newspapers with his televised counter offensive, in tone and attitude very much like Silvio Berlusconi, observes Mediapart and JDD. Like Berlusconi, Nicolas Sarkozy poses as a victim of illegitimate, terrorizing, cruel and unjust judges who are obsessed with political power. The UMP, meanwhile, is condemned to wait and see what the judges have to say. The leaders inside the party all came out in support of Sarkozy. Alain Juppe also made sure to take his distance after Sarkozy's TV intervention, saying that vilifying the judicial system seems not a good method. According to the latest CSA poll for Les Echos, Sarkozy's popularity is now trailing behind Alain Juppe for the first time. 

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              July 03, 2014

              Thomas Ochsner writes the minimum wage legislation in Germany has some design flaws – the biggest being the lack of voting rights by independent experts in the committee that revises the minimum wage in future years;

                July 03, 2014

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                On the German minimum wage

                Arguably the single most important legislation of the German grand coalition is the law to introduce a statutory minimum wage. The legislation will provide a floor of €8.50 per hour for all workers in all industries, with only a few exceptions, including for jobs earmarked for the long-term unemployed and for young people on training programmes. The German commentariat has enormous problems with the Mindestlohn because it believe that state interference in wages goes against free market principles. An enlightened sceptic is Thomas Ochsner of Suddeutsche Zeitung, who brought some constructive criticism about the way the law is implemented. He writes in an editorial that it was wrong for the government to set the initial wage, rather than leaves this decision to the committee that will have the job to revise the number in future years. He said this committee was too heavily influenced by the protagonists themselves – employers and trade unions – with no voting rights for independent experts – a situation that is different in the UK, where the independent advisers contributed greatly to the accepted of the minimum wage by many of the critics.

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                July 03, 2014

                we review the PSOE leadership contest between Pedro Sánchez, Eduardo Madina and José Antonio Pérez Tapias, in advance of a primary for the general election which hasn’t been called off;
                • there are few substantive policy disagreements among the candidates, and the PSOE in general rejects austerity and would be on board with Renzi in Europe.

                July 03, 2014

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                The PSOE leadership contest

                Spain’s PSOE is having a leadership contest to replace its current Secretary General Alfredo Pérez Rubalcaba after the debacle in the European Elections, which will be resolved with a vote of party members on June 13 followed by a party conference on June 26/27. Three candidates have cleared the hurdle of receiving the endorsement of 5% of party members: Pedro Sánchez, Eduardo Madina, and José Antonio Pérez Tapias, reports EFE. A fourth candidate, Alberto Sotillos, did not get the requisite endorsements.

                Sánchez is an MP and economics professor from Madrid and sometimes said to represent the economic right wing of the party; Madina is an MP from the Basque country who’s also the whip of the PSOE parliamentary group in the Spanish parliament; and Pérez Tapias is a professor of philosophy in Granada and a former MP until the previous parliamentary term ending in 2011. Tapias, the older of the three, represents the left of the party as the candidate of minority faction Izquierda Socialista and is noted for being one of few Socialist MPs to have voted against introducing a debt brake in the Spanish constitution, one of the last acts of Zapatero’s government in September 2011. Sánchez could be considered a stalking horse candidate as he leads the other two in endorsements but had not been mentioned as a Secretary General hopeful before the current contest, unlike Madina who had been talked about for years alongside others who finally did not enter this contest. Both Sánchez and Madina take pains to deny they are the candidate of the party apparatus, reflecting general discontent among the party base. Tapias has stated that should he become Secretary General he would not run in a subsequent party primary to be the party’s candidate for Prime Minister in next year’s general election, but the others have made no such commitment. Before Rubalcaba’s announcement to step down, the PSOE had scheduled an open primary for its candidate for PM to be held in November. The primary process for the 2015 general election is one of the main issues to be decided by the upcoming party conference, and the PSOE is not used to having a candidate separate from the party secretary general, be it at the national or regional levels).

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                July 01, 2014

                Slovak PM promises a €250m package for poor households, with cuts in payroll charges, raising pensions and cutting gas prices by at least 10% over the next two years;

                  July 01, 2014

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                  Slovakia's fiscal boost for small income households

                  The Slovak Prime Minister Robert Fico Slovakia's said his government will raise the minimum wage and cut household gas prices as part of a €250m package for poorer households (This is about 0.3% of GDP), Reuters reports. As part of the package, the government said people with lower wages - about 800,000 in the nation of 5.5m - would pay lower payroll charges, a quasi-tax including health and social insurance. Fico said he would raise pensions and subsidise train tickets for students, pensioners and commuters. The government will also cut natural gas prices by at least 10% in the coming two years.

                  Slovakia has overcome the euro zone debt crisis with fewer bruises than many other countries in the currency bloc. After years of austerity, the economy has been accelerating, boosting tax revenue. Last week, the Finance Ministry raised its 2014 tax revenue forecast by €290m, or about 0.4% of GDP. It expects the economy to grow by 2.3% this year and 3.0% in 2015.

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                  July 01, 2014

                  Mark Schieritz says the BIS’ annual report is unbelievably conservative and questions the BIS’ denial of the potential effectiveness of fiscal policy;
                  • we argue the BIS is probably right to use the concept of a balance sheet recession, but we are puzzled about its optimism on inflation;

                  July 01, 2014

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                  Schieritz on the BIS

                  Mark Schieritz takes a swipe at the conservatism of the Bank for International Settlements (see their annual report yesterday). He says it could have been written by the Bundesbank. The BIS understands this crisis as a balance sheet recession. But why should macroeconomic policy not work in such a circumstance? Why should one necessarily conclude that fiscal policy is ineffective? 

                  What struck as puzzling is the BIS’ unbridled optimism on inflation. If you start with a framework of a Richard Koo-style balance sheet recession – which is probably a good starting point – should one not at least consider the possibility of a persistent fall in the inflation rate, which is what happened during Japan’s great balance sheet recession? As Koo has pointed out many times in the context of Japan, and as Schieritz argues in his piece, fiscal policy can become very powerful in those episodes. What strikes us about the BIS’ framework is not so much their conservatism (they are central bankers after all), but their inconsistency. This is neither neo-Classical, nor Keynesian, nor Monetarist. There may indeed be some parallels between the BIS and the Bundesbank. German conservatives embraced monetarism when it coincided with their world-view, and dumped it when that was no longer the case. This is why in Germany today almost nobody cares about low M3 growth rates, while pretending to be worried about asset prices, or whatever else would allow them to raise interest rates. Perhaps the BIS could enlighten us about the nature of its analytical framework. At least then, we could have a proper discussion.
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                  June 26, 2014

                  Germany's Laender budget deficit increased by €6bn, with budget situation worsening in eleven out of sixteen Laender;

                    June 26, 2014

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                    German Laender struggle with higher debt

                    The German state might have a budget surplus but the regions struggle with rising debt. In eleven of Germany's 16 regions, the budget situation is currently worse than a year ago. Saxony, Bavaria and Lower Saxony are currently the only three Laender with a surplus; a year ago there were five. The regions spent €6bn more than their revenue income in the first five months this year, increasing the deficit to €1.8bn compared with the same period last year.  The reason for this development is increasing spending, Spiegel Online picked up from a Handelsblatt article. For staff, investment and the municipalities, the provinces spent more money on a broad front. Total expenditure increased by 4%, while revenues were only 2.7 % higher than the same period last year. Only the lower 8.3% interest expenditure prevented an even worse record, the newspaper writes. Also in the German towns and cities, social spending get out of hand. The local umbrella organizations expect an increase in cost in the region around €1.8bn annually. Social spending is the reason why the communes will not achieve a balanced budget for some time.

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                    June 26, 2014

                    Guntram Wolff argues that EU member states should forego a grand debate on fiscal rules, but should instead focus on investment;

                      June 26, 2014

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                      Wolff says don’t waste time on fiscal rules, focus on investment

                      Guntram Wolff says the debate on fiscal rules is counter-productive. He makes three points. The first is there is not sufficient fiscal space in several countries for large-scale stimulus spending. The best governments can do is a reform of the state, and an adjustment in fiscal expenditures from social spending to growth enhancing public goods. The second is an explicit recognition that debt sustainability is hard to achieve when inflation rates are low, and those countries with fiscal headroom should invest in infrastructure, education or R&D. The third is a plea for more investment into European public goods.

                      Points one and two constitute an ideal first-best scenario, but we do not think it is going to happen for political reasons. Renzi does not have sufficient political capital to undertake such a radical shift. And Germany will not breach its own “debt brake” – a constitutional law after all - for the benefit of third countries. The ECB, meanwhile, has clearly recognised that low inflation is a problem, but it is not clear that the tool they deployed will address the problem. It is going to very hard to pull the eurozone out of its misery by reliance on domestic programmes.
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                      June 26, 2014

                      A Ceps paper confirms Paul de Grauwe’s financial fragility hypothesis, and the notion that the OMT was instrumental in reversing the crisis;

                        June 26, 2014

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                        Testing Paul de Grauwe’s financial stability hypothesis

                        Orkun Saka, Ana-Maria Fuertes and Elena Kalotychou have been testing Paul de Grauwe financial fragility hypothesis, which says countries in a monetary union are prone to financial contagions. They provide further statistical evidence in support of the theory, and especially in support of the role played by the ECB’s OMT programme. However, the fragility is not gone. One source of potential conflict is the legal uncertainty resulting from the ruling of the German constitutional court. The finding of their study strongly supports the notion of a common backstop. 

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                        Bruno Maçães reinvents the wheel

                        • Bruno Maçães proposal for contracts , Portugal’s secretary of state for European affairs, argues against proposal to centralise fiscal policy, and says the eurozone governance should rest on the idea of mutual contracts (We think this proposal is downright potty)

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