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November 24, 2016

Martin Schulz will go to Berlin

The big news in Germany this morning has been the decision by Martin Schulz not to seek a renewed term as president of the European Parliament, and to move to Berlin early in the New Year. The story was reported by Süddeutsche Zeitung, and confirmed by German TV, which reported that Schulz had told them of his decision. He is due to make a statement this morning. 

Both news reports are cagey about what Schulz will do. In fact, they contain no hard information at all. What we can say with a high degree of confidence is that Schulz will become foreign minister, to succeed Frank-Walter Steinmeier who is the grand coalitions' official candidate for the German presidency, due to be elected on February 12. The SPD simply has no alternative candidate. We also know that Schulz wants to become the SPD's candidate for chancellor. It is up to Sigmar Gabriel to decide whether he wants to have a go at the candidacy, but Schulz is likely to be the more effective candidate - though he will have a tough time surpassing the CDU/CSU. The latest polls have the gap between the two parties at between 9 and 13 percentage points, but that gap could be reduced with a fresh candidate, especially somebody who is not soiled by German domestic politics. We also recall that Gerhard Schröder fought the 2002 and 2005 elections from a similar starting position relative to the CDU, and managed to win on the first occasion and lose only narrowly on the second. While the CDU/CSU has no alternative to Merkel, there is also disillusionment with her inside the party. A Schulz candidacy would introduce a new dynamic, and create new narratives. 

The trouble is that Schulz also wants to become SPD chairman. As Helmut Schmidt and Gerhard Schröder discovered, the job of chancellor and SPD chairman naturally go together. There are no signs, however, that Gabriel is willing to give up the chairmanship of the SPD. Gabriel and Schulz are personal friends - as much one can say this about professional politicians. As SPD chairman, Gabriel has the first right of refusal. We would not be surprised if he allowed Schulz to take on Merkel. But we are not sure whether or how the two will resolve the conflict about the SPD chairmanship. One option is to postpone a decision until after the elections.

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November 24, 2016

Doubling down on poor forecasts

The Office for Budget Responsibility was a creation of the previous British government, and is now exacting revenge on the Brexiteers. The discussion about yesterday's rather lacklustre autumn statement by Britain's chancellor Philip Hammond was overshadowed by gloomy predictions for the future of the UK economy by the OBR. Budget planning is based on the OBR's predictions. Given the track record of economic forecasters in Britain and elsewhere, it would be wise to treat the OBR's forecast as an opinion rather than as a serious professional exercise. Any such endeavour would have to start with the acknowledgement that the economic predictions for Brexit have, so far, proven to be completely wrong. 

The core of the OBR's Brexit forecast is that Brexit will have a cumulative economic impact of 2.4% of GDP. We do not deny that a revolution on the scale of Brexit will leave economic traces, positive and negative, but the magnitude and net effect will surely depend on how Brexit is managed and how long uncertainty lasts. There are circumstances that may well lead to such an outcome - or worse - but we think that is extremely unlikely given the politically most probably course of events: a transition period to be followed by a core free trade agreement. 

The Times notes in its coverage that, even under the OBR's projections, the UK is still expected to grow faster than France or Italy. Hammond acknowledged that Brexit would have an impact on growth, but said the uncertainty would last for two and a half years, and would dissipate in 2019. 

Martin Wolf notes that, if a governments wants to take advantage of a lower exchange rate, it would need to tighten fiscal policy rather than loosen it. He describes Hammond's policy as a loosening within a tightening. Britain is merely relaxing the path of fiscal consolidation, a strategy Wolf approves of. Wolf also noted on the OBR's forecast that the experts were now striking back. 

Partick Minford, who heads a group called economists for Brexit, argues that the OBR and consensus opinion among economists has proved to be consistently wrong. We agree with him on this specific point. We disagree with him on his own forecast for Brexit. But he is right in criticising the forecasters' tendency to double down when their forecasts are proved wrong. 

“These bodies tried to forecast economic disaster based on uncertainty before, in the months leading up to and just after the referendum, when uncertainty was at its highest. Yet there is no sign that there was any economic effect. So it is illogical in the extreme to forecast further disaster owing to uncertainty, just as the picture is becoming clearer. Of course it is true that if bodies like the OBR push out continual gloomy statements, if Downing Street gives no direction and if, when it does take a lead, takes Britain down the worst possible economic path then all this could come true. But, just as they did in the spring and the summer, they are mistaking the very worst outcome for a sensible forecast.”

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