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March 23, 2018

European Council supports UK more strongly than expected on Russia

The European Council last night produced a strong statement on Russia, going much further than the rather lukewarm support offered to the UK in the foreign affairs council on Monday. The foreign ministers stopped short of agreeing with the UK assessment, only acknowledging it and taking it seriously. The EU leaders last night went a step further, and gave their full support to the UK. In view of some briefings and news reports we have seen before yesterday's meeting, this development is a surprise.

Several countries are now considering expelling Russian diplomats. In addition to the strong statement blaming Russia for the attacks, the Times reports this morning that Latvia and Estonia are already preparing to expel diplomats, while France and Poland said they will take concrete action in the coming days. Germany hinted that it, too, would take measures.

The European Council made the following declaration last night (emphasis ours):

"It agrees with the United Kingdom government's assessment that it is highly likely that the Russian Federation is responsible and that there is no plausible alternative explanation. We stand in unqualified solidarity with the United Kingdom in the face of this grave challenge to our shared security."

There are no sanctions yet agreed at the level of the European Council at this stage. The Council's official position is that it wants to wait until it receive a detailed response from Russia. The statement by the European Council was preceded by a series of bilateral meetings by Theresa May with Angela Merkel and Emmanuel Macron, both of whom signalled strong support for the UK.

The Times reports that, as May held her meetings, Vladimir Putin was in contact with Alexis Tsipras, his most loyal supporter in the EU. Greece, along with Italy, Bulgaria, Luxembourg, Cyprus, and Austria, are moving away from the EU's consensus on Russia, They had pushed for a weaker version of last night's council resolution, which would have said only that the EU took London's view of the matter "extremely seriously", similarly to the wording used by the foreign ministers on Monday.

We noted a report in FAZ - written before the meeting - which speculated wrongly that Donald Tusk's efforts to harden the language would be opposed by the European Council. And, while the EU has at this stage not agreed to a unified response, the sanctions about to be taken by individual member states are serious. The FAZ story also mentioned the strong support from Manfred Weber, head of the EPP group in the European Parliament, who yesterday talked about a 

"non-declared war of Russia against the European Union,"

an expression that goes further than May's own characterisation of the attack. She stopped short of characterising the attack as an act of war, preferring to use the expression "acts of Russian aggression". Tom Tugendhat, who chairs the foreign affairs committee in the House of Common, talked about a "warlike act", which again is different from an act of war. These linguistic nuances may seem like hair-splitting but diplomats and lawyers spend hours haggling over these terms, which have a precise legal meaning.

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March 23, 2018

Eurozone policy renationalisation is not the solution

Ashoka Mody has an article in VoxEU where he discusses the politics of the eurozone from its origin in the 1970s policy discussions to the recent elections in Germany and Italy which have seen the rise of anti-euro populist parties. The history is well-known: mostly English-speaking economists criticised plans for monetary union since their inception on the grounds that a single monetary policy would cause the diverse national economies of European states to diverge rather than converge. European policymakers argued instead that monetary union would foster political union, and pressed ahead under the idea that there was what he calls a permissive consensus on European integration. But Mody observes that this permissive consensus started to fray at about the time of the euro's introduction, and that this political dynamic has only gotten worse, not better, since the financial crisis.

Mody concludes that there are no easy answers to the eurozone's economic and political woes. In particular peripheral EU states often lag in development of human capital, and national governments need to direct more energy towards this rather than towards the unattainable goal of making eurozone policy more accountable. On that we agree. Where we part ways with him is when he then argues that the answer is to renationalise economic policy rather than pursue more political integration. Re-nationalisation of fiscal policy or banking is not politically sustainable within the existing EU framework. There has to be another way for the EU policy establishment to take into account national concerns, and to stop dismissing national revolts against European integration.

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March 23, 2018

The state of macro is not good

Martin Wolf argues that macroeconomics is a practical discipline that should meet several tests. The first is whether its practitioners understand what might go wrong with an economy, and the second whether they know how to put it right. Halfway through his column, he introduces a third test, whether the knowledge of how to respond to a crisis is put to use. Macroeconomics, he argues, passes the second test - Keynesian remedies of fiscal and monetary stimulus work to recover from a crisis. But the political experience of Europe fails the the test - the remedies were not applied, or were applied too late; and the canonical macroeconomic theory it is based on, rational expectations, and market efficiency, fails the first test. Radical uncertainty explains the existence of institutions such as money, debt, and banks, and the equilibrium macroeconomics tends to ignore them. Wolf concludes that even if the economy is too complex to understand properly, effort should still be spent on the practical problems of making economies more resilient to crises, and fixing economies once crises hit.

While parts of mainstream macro are descended from Keynes, his more radical insights about radical uncertainty are largely beyond the pale. And Martin Wolf is right to point out that Hyman Minsky's ideas about the inherent instability of financial capitalism was more right than the mainstream macroeconomics based on the efficient market hypothesis. Wolf also quotes Willem Buiter decrying at the time of the financial crisis that most macro developments since the 1970s had been inward-looking and largely irrelevant. But Buiter is in the tradition of James Tobin, who got the Nobel prize in 1981 only to have his programme for including finance into macroeconomics sidelined by the rise of DSGE models. So perhaps we know where to look, theoretically, we just haven't been looking in the right place for the past 40 years.

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