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May 26, 2016

France paralysed by radicalising protests over labour laws

The standoff between one trade union, the CGT, and the French government over the labour reform law is escalating after eight days of nationwide protests. The union blocked the printing of today’s newspapers for those who refused to publish the CGT’s appeal to the government to stop the labour reform law. The online versions of the newspapers this morning had pictures of violent clashes at oil refineries and outraged editorials from Nicolas Beytout among others. The news about the fall in unemployment rates was buried.

Over the last couple of days, the strike has gradually spread across France's fuel infrastructure, hitting oil refineries, fuel depots and petrol stations. An estimated 20% of petrol stations have either run dry or are low on supplies. The trade unionists also did not exclude any action on the UEFA Euro football tournament, starting in France on June 10.

Francois Hollande and Manuel Valls both categorically reject any concessions over the El Khomri labour law. They say the CGT closed the door to further negotiations with its violent actions. But the Socialist MPs are less steadfast in their refusal, talking about another round of dialogue instead. Who needs party rebels if Hollande’s own supporters pour oil into the fire, wonders Cécile Cornudet.

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May 26, 2016

What would Keynes do?

Robert Skidelsky wonders what Keynes would make of unconventional monetary policies, and argues that he would consider negative rates and quantitative easing in the same vein as burying bottles of cash to dig them up again: better than nothing if the government cannot thing of anything else to do. He includes the following quote from The General Theory:

“For whilst an increase in the quantity of money may be expected ... to reduce the rate of interest, this will not happen if the liquidity-preferences of the public are increasing more than the quantity of money; and whilst a decline in the rate of interest may be expected ... to increase the volume of investment, this will not happen if [profit expectations] are falling faster than the rate of interest; and whilst an increase in the volume of investment may be expected ... to increase employment, this may not happen if the propensity to consume is falling off.”

The Keynesian insight is that the only way to ensure that new money put into circulation is actually spent is for the government to spend it. But overt monetary financing is taboo these days, even if it would be the only thing to get us out of secular stagnation.

Martin Wolf goes into more detail of the unintended side effects of unconventional policies: the difficulty to calibrate them as they fall outside tried and tested models; the risk of market distortions and asset bubbles; and political objections. But if, as Mario Draghi has said, negative rates are not the disease but a symptom of lack of investment demand, it is not clear that monetary policy is the best tool to address it. Fiscal policy should be used to manage demand. Wolf suggests that in Japan, for instance, the government might tax the massive retained earnings of non-financial corporations to encourage investment. Governments everywhere could increase their investment. But the problem is not only demand weakness, so structural reforms should be undertaken to improve the low productivity growth in the advanced economies.

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May 26, 2016

Will the eurozone survive? Some observations

We would like to take this note from Simon Wren-Lewis as a backdrop to an observation we have made some time ago. The economics profession seems to be moving away from the idea that a monetary union requires some degree of political and fiscal union, so it is capable of surviving without it even in the long run. Wren-Lewis says that, in terms of macroeconomics, there is no obvious crisis that could lead to its demise. High unemployment will persist. This is a bad thing, but it won't end the monetary union. It is also terrible how the eurozone is treating Greece. But that again does not mean it will not continue. It all looks extremely suboptimal, but it is an equilibrium. Not a good one, but a stable one. He says the biggest threat to the eurozone is not economic, but political. The immigration crisis and the associated rise of the far right will mean that no one will risk further political union.

Another argument we are hearing increasingly often is that the problems of the eurozone can all be fixed through insurance, for example against large asymmetric shocks or banking crises. That again means you don't need a political union. Now, we understand that part of this rhetoric is intended to soothe the Germans in the hope that they find the world "insurance" less offensive than "eurobonds". For starters, do not underestimate the ability of the German establishment to identify a joint liability instrument whatever the name may be. Remember the "stability bond" episode, when people thought the solution to overcome German opposition to eurobonds is to call them by a different name? Insurance is of the same category. Insurance works because it is a binding contract, governed by law. Insurance between states is always an act of political will that has to be approved by a parliament. If an insurance payment was ever required, the payer will surely want some form of political union to ensure that the insurance contract is not legally abused by the recipient. In the end, you would still end up with demands for a political union even if you choose a minimal system of transfers, such as those based on insurance.

So it is not clear that a monetary union that refuses to be a political union can survive in the long run. Wren-Lewis mentions the political risks. But there are macroeconomic shocks, too, the eurozone is not equipped to deal with. A fiscal crisis in Italy, for example, which is not an impossible scenario on current trends, has no obvious solution since the ESM is too small to cope with a country the size of Italy.

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