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November 10, 2016

A disaster for Merkel, the EU, and the economics profession

We noted yesterday that the election of Trump was Brexit all over again, and this is true on so many levels. Our coverage today will mainly focus on this one subject because of its huge reverberations for Europe. We think that the Trump presidency is a disaster for the EU - though not for economic reasons. The disaster is political. It hits the EU at a time when it is most divided. 

The EU leadership is also hopelessly unprepared for what is happening. One group of people who got it wrong is the German establishment, including virtually everyone to the left of the AfD and, most importantly, Angela Merkel. Tagesspiegel called the election result the largest conceivable disaster for German foreign policy. It writes that German government officials acknowledge that they do not have a single contact in the Trump team. The defence minister Ursula von der Leyen told them that she does not even know whom to call in Washington.

Most peculiar was Angela Merkel's reaction yesterday when she talked about Trump in the same way she talks about Vladimir Putin or Racep Tayyip Erdogan: that she is willing to co-operate with him only as long as he respects shared values. She might be in for a surprise. Die Welt reported that Merkel would be particularly sore if Trump cancelled the international climate agreement, which she regarded as her personal triumph.

It looks as though Merkel is trying to forge a distinct, anti-Trumpian European response, which we think is doomed to fail not least because of Germany's own behaviour during the eurozone crisis. If Merkel had agreed to functioning crisis-resolution mechanisms during 2008-2012, the EU would now be well on its way towards a political union, and would be in a position to forge an effective foreign and security policy rather than the working-paper diplomacy it now has. Merkel herself chose the intergovernmental approach because it suited her and her party for domestic political reasons. The strategy has had multiple costs: ongoing crises, uncertainty about the future of the euro itself, and a lack of political union when you need it the most.

We very much agree with Mark Leonard who writes that the EU has about two months to get itself a coherent foreign and security policy, which of course it won't. A divided EU has little to offer as we saw during the Iraq war in the previous decade. He says the EU needs to invest more into its own security, and should form alliances with other powers that also have an interest in reining in Trump's revisionism, China being the obvious candidate here.

We would like to add that there is no way the EU can do this as EU-28 or EU-27. This will have to happen within a meaningful subgroup - and that group should include the UK. There is no way the EU is in a position to build an effective foreign and security policy without the UK. That alone would be a reason to offer the UK something other than a hard Brexit. It is more likely is that the EU will not act, and disintegrate further. 

We agree with Paul Krugman, who wrote yesterday that the Trump presidency is a disaster in its own right but is not necessarily bad for the economy. Trump is a political calamity for the US and the world, but his promised infrastructure spending programme is likely to have positive impact on US growth. We assume that fiscal multipliers must be very high after years of austerity. That was also borne out by yesterday's market reaction. The US stock market rallied, with the S&P up 1.1%, close to its all-time high. Remember all the ludicrous forecasts about market crashes and an immediate global recession, both ahead of the US elections and the Brexit referendum? Forecasts like these make us underestimate the true threat. 

In both cases the economics profession warned of impending disaster, the most recent example being the 370 US economists who wrote a joint letter warning against Trump. When disaster failed to arrive in the UK, some doubled down to say that the disaster would happen later, or pretended to ignore what is happening, like Simon Johnson who wrote only last week "of the sharp slowdown [to come in the US], much like the British are experiencing." If the world does not behave according to the model, then surely something is wrong with the world that needs to fixed. 

We also noted a story in FT this morning, according to which Trump's economic advisers reiterate what they said during the campaign: that they are seeking to replace Janet Yellen when her terms end in early 2018, criticising her and the Fed for having created "a false economy". The principle of central bank independence that has strengthened the power of central bankers is also disappearing. We are not surprised by this development. Society has lost the consensus about what monetary policy should do, and consensus has been the political foundation for central bank independence.

One important recurring question is: why does the establishment persistently underestimate the populists? You can't blame the polls alone. They showed a 3-4 point Clinton lead ahead of the elections, which was wrong, but not that wrong in view of the final results (which had Clinton ahead by a whisker in the popular vote). The problem is how we interpret the polls. The only logical conclusion one can draw from this - and also the pre-Brexit polls - is that the result was too close to call. And if a result is too close to call, then none of the outcomes should really come as a surprise. But this is not what's happening. The policy establishment - and the media in particular - is completely incapable of separating what they want from what they think is going to happen. And they are incapable of learning. They do this every time. You could build a viable trading strategy on this mismatch alone. We will have plenty of occasions to witness this mismatch in the numerous elections next year.

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November 10, 2016

Populists of Europe united

The Trump win is boosting the populists' claim to power in Europe, and is shifting the political debates especially in countries with forthcoming elections - France, Germany, and the Netherlands. 

After Trump’s election Le Pen has never appeared more presidential. Alain Juppé, the favourite in the polls, looks like Hillary Clinton in this scenario. Will the US results shift the centre of gravity in French politics? This question is immediately relevant for the Republican primaries. Nicolas Sarkozy sees his more populist strategy vindicated. The question remains whether the polls got it wrong on Sarkozy as they did on Trump in the primaries. Or whether Trump's win shifts support towards his narrative.

The French Socialists are also waking up to a new reality. Now that the prospect of a Le Pen victory seems more real than ever, the socialists' inward-looking discourse seems like a silly waste of time. Party chief Jean-Christophe Cambadélis tweeted that, if his party continues with these childish games, Le Pen will win. 

But is Le Pen really France's Trump? Sure, they stand for the same when it comes to protectionism, immigration control, challenging globalisation and international treaties, denouncing elites and media, and looking for a new alliance with Russia. But there is an important difference. Trump mobilised the silent majority, something Le Pen never managed to do, argues Marianne. Her strategy of polishing her discourse to become more acceptable to the mainstream enlarged her electorate in the past, but she never could get the abstaining voters to vote for her. Why should this change now? After all, compared with Trump, Le Pen looks like a mainstream candidate.

In Germany, the head of the AfD Frauke Petry said Trump’s election represented a historical opportunity. Her insurrectionist rhetoric is more like Trump’s, building on a messagy of "we want our country back". She told the journal Junge Freiheit that people had enough of being guilt-tripped and bullied by the media. But Petry is of course not Trump. Still, the AfD stands to gain from these developments, and to rise in the polls though we are pretty confident that won’t see a chancellor Petry.

In the Netherlands, with parliamentary elections next March, Geert Wilders polls at 18% just behind the ruling VVD party. Wilders himself is convinced it’s his time to govern his country, writes Politico.

The hype for insurrection is not only limited to the far-right. In Italy, the 5-Star Movement chief Beppe Grillo also compared his party's meteoric rise to the success of Donald Trump. The 5-Star Movement defies the usual left-right classification. Their most extreme position is their stance in favour of a euro departure.

In Greece, it is again the far right Golden Dawn hailing Trump’s election as victory for the idea of ethnically “clean” states. Remember that they continue to come in third in the polls despite all the scandals. 

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November 10, 2016

Reflections on populism

Commentators who look only at the man Donald Trump as a populist leader miss the point. It was not Trump who seduced the American electorate, but it was the electorate that used Trump to express their dismay and anger. With a sort of guerilla tactic  - under the radar screen of the media - they brought to light a poltergeist to deliver their message of insurrection. The results suggest that the prospects of globalisation, digitalisation, and multi-cultural societies, overwhelm a growing majority of citizens throughout the West. 

And there is some evidence in Europe that people are indeed turning their backs on openness. A new study by BuzzFeed News used a YouGov poll of 12,000 people on "authoritarian populist" opinions - a combination of anti-immigration sentiments, strong foreign policy views, and opposition to human rights laws, EU institutions, and European integration policies. Their findings is that almost half of all adults in 12 European countries now hold anti-immigrant, nationalistic views. Fringe political views are becoming the new mainstream.

In Britain, 48% of adults hold populist views, despite fewer than 20% of the population identifying themselves as right-wing. In France, a clear majority of people surveyed - 63% - hold authoritarian populist views, while in Italy the figure was 47%. In Germany, it was 18%, which appears low by comparison but, given the country’s history and the extreme nature of its far-right groups, is regarded by analysts as surprisingly high.

The results do not automatically mean that there will be a surge in support for populist parties in Europe, though their support has increased. We still have to see President Trump in action and, depending on how much he is ready and capable to act on his pledges, voters will reassess their populist leaders and what they can achieve through politics. If Trump fails to deliver it could lead to something more dramatic, or to an apathetic response from the voters unless they have an epiphany.

For now, the immediate question is how this insurrection will be expressed in our Western democracies. How stable will a society in search of its new direction be? Will politics still attract able politicians after the experience of Brexit and Trump? One lesson from Brexit is that those who lost should not delve in their despair nor separate themselves from the fate of the nation, but get ready to participate in defining the common future. 

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November 10, 2016

EU now openly critical of Turkey

Yesterday the Commission released its annual enlargement report. The report covers the countries of the Western Balkans (i.e., former Yugoslavia plus Albania) as well as Turkey. We will focus on the Turkish report because it has the most direct impact on broader EU policy, through the refugee deal struck earlier this year and which is in jeopardy in the aftermath of the summer's coup attempt. The report describes Turkey's efforts to shelter nearly three million refugees from Syrian and Iraq as outstanding, including the provision of services to the 10% of refugees living in camps, as well as regulating work permits for refugees. The report acknowledges the exceptional circumstance of the coup attempt, but in connection with the crackdown on civil servants and judges allegedly linked to the Gülen movement, the report reminds Turkey to respect separation of powers and due process. 

We reported yesterday that according to WSJ sources Turkey's accession should be on the agenda of the foreign affairs council next Monday, and that suspending accession talks might be discussed. In light of the report we don't think the EU will suspend accession talks, especially given that the death penalty has not been reintroduced and in light of the positive assessment of Turkey's efforts in accommodating the massive influx of refugees. There's likely to be a sternly worded statement warning Turkey about the rule of law. On the other hand, the report is sufficiently critical of Recep Tayyip Erdogan's post-coup crackdown on the judiciary, the press and the political opposition that it would not be surprising if the Turkish government took offence. We recall the Turkish government recently urged the EU to introduce visa-free travel by the end of the year or face consequences for the refugee deal. What the EU will do on this remains an open question, but on the facts of the report the conditions for visa-free travel simply are not there.

Even before the coup, Turkey's legislative reforms to make visa-free travel in the EU were falling short of European standards on the rule of law and fundamental rights, especially in the area of data protection. The report expresses concern for the lifting of parliamentary immunity (which happened in May, that is nearly two weeks before the coup attempt) and, lately, the arrest of a number of opposition MPs including the two co-chairs of the leftist-Kurdish HDP party. While acknowledging that the Turkish government is carrying out anti-terrorism operations in the Southeast, and that the Kurdistan workers' party PKK remains on the EU's list of terrorist organisations, the report questions the proportionality - and the respect for human rights - of the crackdown on local government officials in the region, especially after the coup attempt.

Of the areas where convergence with the EU is necessary, Turkey has been backsliding on the independence of the judiciary, and on freedom of expression. Even before the coup judges were being arrested on allegations of conspiring with the Gülen movement, and the post-coup crackdown has affected about a fifth of all judges and prosecutors. The report admonishes Turkey to respect the separation of powers, and notes that the extension of detention without trial beyond 30 days - which has been applied to members of the judiciary - under the state of emergency is against the case law of the European court of human rights. In addition, anti-terror legislation is not in line with the EU acquis, and the principle of proportionality is not applied in practice. The report expresses serious concern for the widespread arrests of journalists and the closure of publications after the coup attempt. In general arbitrary application of anti-terrorism legislation is used to suppress freedom of expression. The report notes freedom of assembly is "overly restricted in law and practice".

Finally, regarding Cyprus' reunification talks, the report acknowledges that Turkey supports them, but notes that Turkey has not implemented some aspects of the association agreement, including direct transport links and free movement of goods with Cyprus. A number of accession negotiation chapters will remain blocked as long as Turkey does not fully comply with its commitments on Cyprus. In the area of international relations, the report notes the EU has expressed concern about Turkey threatening member states and urged Turkey to commit to peaceful dispute resolution with its neighbours.

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