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August 15, 2016

Sarkozy to declare his candidacy

The Republican primaries are only 100 days away and everybody is waiting for Nicolas Sarkozy to declare his candidacy by August 25 at the latest. Last week he gave a taster with a speech full of campaign slogans, with strongly populist proposals on security. Sarkozy is in favour of forbidding the veil in universities and enterprises, and the end of substitution meals in canteens. He also puts into question the automatic birthright. Sarkozy suggested creating the status of a "presumption of nationality", allowing not to grant nationality to those who have a criminal record or those whose parents entered illegally into the country, according to Les Echos. The proposals already made waves and provoked strong opposition, not only from the Socialists.

Dominque Moisi is quoted by the FT saying that Sarkozy remains a divisive figure in the sense that, the stronger his proposals, the more he rallies his supporters behind him and the more he isolates those against him. But Sarkozy caught up with Alain Juppé in the polls since the Nice attacks.

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August 15, 2016

Do intra-eurozone current account deficits matter?

Ignacio Ramirez Cisneros is asking a question we discussed intensely before the eurozone crisis: do intra-eurozone current account deficits matter? He argues that they should not matter provided that the central bank does its job. In particular, he takes issue with the IMF's critical review of its own role in the crises of Greece, Ireland and Portugal, in which it acknowledged that it was too complacent about the role of large current account imbalances. Cisneros argues that the IMF's original complacent position was indeed the correct one. What made the eurozone unsustainable were not the current account imbalances but the delayed and unequal response by the eurosystem to the sudden stop of capital inflows. The system should have made much more aggressive use of the emergency liquidity assistance, combined with outright asset purchases. And the monetary authority should also have recapitalised the banking system, rather than leaving this task to the fiscal authorities. Cisneros says the reasons for the eurosystem's failure to act have yet to be disclosed, but he surmises that it is probably due to a mistaken idea of what it means to preserve central bank independence. 

The problem with Cisneros' argument is that it ignores the legal and political underpinnings of the eurozone and the ECB. The ELA existed, and was used, but before the crisis there was no provision for outright debt purchases, and there is no provision for bank recapitalisation through the central bank. We, too, argued at the time that intra-eurozone current account deficit do not matter. But they did, and still do, because of those constraints, and because member states have not been willing to fix the problem.

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August 15, 2016

On the failures of modern macroeconomics

We have had quite a few discussions on the state of macroeconomics. These debates matter because economists continue to wield a huge influence on public debates, mostly recently during the Brexit referendum during which the profession made scary economic predictions, which we believe are vastly exaggerated and will be exposed as such.

In this context, we noted a discussion by Olivier Blanchard on the general uselessness of Dynamic Stochastic General Equilibrium models, the workhorse models used by macroeconomists in academia and central banking. One of the many shortcomings of these models is that they cannot take into account the presence of financial markets - or at least not those aspects of financial aspects that matter for the economy. Blanchard makes the point that these models hardly ever produce any original insights. Paul Krugman has been much more brutal in his discussion of Blanchard's paper, comparing the obsession with DSGE models with academic Marxism of the 1970s - which, too, did not care about whether it was right or wrong, only that it provided a framework. Krugman makes the point that one of the characteristic of any good model is the ability to make a surprising prediction that comes true. That has not happened here.

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