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January 12, 2017

Could Mélenchon make it into the second round?

The French elections have not yet filtered through to ordinary French citizens, and we may well be up for another surprise once they do. One of those surprises could be Jean-Luc Mélenchon. According to the polling expert Jérôme Sainte-Marie, it is not impossible for Mélenchon to reach the second round. Mélenchon is doing well in his campaign to portray himself as the anti-establishment candidate on the left. He uses youtube as his main outlet and organises ad-hoc meetings to the rhythm of current events. This gives him a presence with the radical base. He will have to mobilise those votes who would otherwise abstain. Crucial for him will be the outcome of the left primaries. If it goes to Valls, more disappointed Socialists could choose Mélenchon. The crisis of the Socialist party would then play out in full.

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January 12, 2017

Macron's ideals and recruitments

Françoise Fressoz looks at Macron and what he stands for. For Macron, no politics goes without narrative and no narrative without ideal. So, what is his ideal? Some friends call him a real libertarian, others a real democrat, who has yet to find a socially empathetic narrative. In 2015 he outlined his three dreams - equality, Europe and industry. When it comes to Europe, he may well compare with Jacques Delors, who like him was not loved by the Socialist party and made his way. But this comparison only holds on Europe. Macron's economic ideal is inspired by new-Keynesian thinking, and the idea that social improvement is achieved by eliminating unjust rents that keep up barriers in society. Before him, Dominique Strauss-Kahn tried to put the Socialist party on a new ideological footing with the idea to no longer correct inequalities through redistribution ex-post, but to prevent them from arising in the first place. A researcher from Science Po estimates that liberals constitute about one-third of the electorate, counting liberals from the left and the right. This is the electorate Macron is tapping into. And it is in the first round that this will play out, as Marine Le Pen is sure to keep her base.

We also note two new recruitments from the French establishment. Jean Pisani Ferry leaves François Hollande's government - as head of its think Tank France Stratégie - to coordinate the work of 400 experts on Macron’s programme. The other is Laurence Haïm, one of four French journalists accredited at the White House. She will become one of his advisers on international politics. Macron is to reveal his entire campaign team by the end of this month, according to Le Monde. Not yet known is the campaign manager, whose recruitment seem to take longer than envisaged.

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January 12, 2017

Has Brexit triggered a borrowing binge?

We noted an article on Bloomberg according to which the reluctance of the British economy to collapse after Brexit may be due to borrowing, which may leave the economy vulnerable once the Bank of England starts tightening monetary policy. He noted a report from the credit card company Visa, which recorded a rise in December transactions by 2.6%, compared to last year. This is the strongest annual growth rate in two years. Not all of that, however, is due to the rapacious consumer. Transactions in the hotel sector have gone up by 7.3%. Since December is not a holiday season for British tourists, much of this will be due to business booking and foreign travellers, who are benefiting from the low exchange rate. 

The overall debt statistics cited are interesting, but not yet on the scary side. The ratio of household debt to income was always higher in the UK than on the continent because of the way the housing market works. It was around 100% in 2000, and rose to 160% in 2008. A period of debt deleveraging brought this number down to 137% by the middle of 2015, but this period has ended, and is back back to 143% in the third quarter of 2016. And the default rate on unsecured loans is rising. 

The article argues that one of the reasons for the borrowing binge is the expectation that interest rates will remain low for a very long time. The futures market implies a 26% probability of a rate rise by early 2018, and a 50% chance of a rate increase by 0.25bp by the end of that year. So the biggest risk would be an economy that surprises on the upside.

We would note that this observation is true in a trivial sense but, given the Brexit scare, this is a bit of a luxury argument. In the eurozone, an upside economic shock could force the ECB to abandon QE early and this could be fatal for Italy, especially in the confluence of negative political events. But, for the UK, a positive economic shock would be mostly benign. It would wipe out some of the more reckless borrowers, but would be unlikely to produce a nationwide financial crisis. And if Brexit turns out negative economically, as most economists have forecasts, the optimistic expectations of the futures markets are probably correct, in which case consumers' expectations of continued low interest rates would be borne out.

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January 12, 2017

Towards a European IMF?

We learned on Twitter that Germany is now open to the idea of developing a European IMF:

"Wir könnten den #ESM in einen Europäischen Währungsfonds weiterentwickeln, um den Währungsraum nachhaltig zu stabilisieren. #Schäuble #EUD70 — BMF (@BMF_Bund) 11 January de 2017"

As Jens Bastian points out, this was an idea brought forward by the German finance minister in 2010/2011 when negotiations hit an impasse and the ESM’s mandate has been debated. Why is this proposal coming up again now? Just as a gesture of good will, or does the proposal have some teeth? And, of course, the more fundamental question, would this address the eurozone's acute problems of massive imbalances that might drive it apart?

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