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January 24, 2017

The geopolitics of Trump

The noise level during and after the Trump inauguration is so massive that his critics are doing themselves no favours because they are in danger of losing focus. We saw exactly the same after the Brexit referendum, which left the Remain campaign in such a shock that they have been unable to muster a coherent and unified opposition to the British government - which might have consisted an immediate call for Britain to enter the EEA. Instead, some chose to advocate a second referendum while others became fascinated by various have-your-cake-and-eat-it-scenarios. Some are still in campaign mode.

While we can get all very excited about the meaning of "alternative facts" and other Trumpian outrages, the real big issue of the first week of the Trump presidency is the decision to revoke TPP. Cecilia Malmström made the point that Trump never mentioned TTIP, which is formally correct. But if he pulls the plug on a treaty already negotiated, there will be no TTIP. We doubt that there will be another free-trade treaty over the next ten years. Ceta is as good as it gets for the trade liberalisers, for now.

In the context of Trump’s decision on TPP yesterday, we noted a story this morning according to which Australia wants to revive TPP with China as a replacement to the US. The Australian prime minister Malcolm Turnbull said he had talked with Shinzo Abe and the PMs of New Zealand and Singapore about whether China could be included. Some of the aspects of the treaty would have to be renegotiated. 

The FT, meanwhile, reports that the China-led Asian Infrastructure Investment Bank has now managed to recruit 25 countries from Africa, Europe and South America, which shows China's determination to push its own global political agenda. Ireland is one of the European countries to join this year.

And in another article, the FT writes that the White House threatened that it would prevent China from accessing artificial islands on international waters in the South China Sea. 

If you combine all these stories, it is not hard to see the potential for a major geo-strategic conflict between the US and China. Given the current mood in the EU about Trump it is possible, indeed likely, that the EU may politically align with China in this conflict - so we may be looking at a new geostrategic axis: US/Russia vs EU/China.

And finally we noted a brave commentary by Christopher Caldwell, who writes in the FT that Trump’s critics should stop hyperventilating about his inauguration speech. It turns out he actually meant all those things he said in the campaign.

“There is nothing especially radical about Mr Trump’s diagnosis of globalisation, except that he seems sincere about it. Every western politician of the past 20 years, from Hillary Clinton to Helmut Kohl to Jeremy Corbyn, has bemoaned that it leaves people behind. But they did not understand that the New Economy was a new economy. It involved phasing out every aspect of the old economy, including its personnel. The theorists of the New Economy said it should be possible to compensate the “losers”. But that never happened. Because when the money came in, the people who managed the new economy did not recognise the losers as belonging to the same community.”

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January 24, 2017

On the future of the eurozone

When Eurointelligence started - exactly ten years ago this month - our main focus was the future of the eurozone - its gradual development from a purely monetary union into a wider political union. There were many alternative pathways how this could be accomplished. We favoured a proper central government given our disillusion with policy coordination. Co-ordination failures later gave rise to the eurozone crisis, and the debate has since moved on.

It is now accepted by many commentators that a federal solution cannot happen for political reasons. We would still argue that a federal solution is without alternative because no other system can provide stability and prosperity for every participant in the monetary union in the long run. So, we are in the situation that the only workable solution is not politically realistic - and this means that the monetary union itself is not sustainable unless the parameters change.

We noted two discussions yesterday that are relevant to this debate. Yanis Varoufakis argues that the EU’s troubles are the result of denial, an insurgency, and a fallacy. The denial was of the fact that the EU’s architecture was insufficient for a sustainable monetary union, and the fiscal rules merely produced disinflation. The denial gave rise to an insurgence by populist parties. And the fallacy is that a "federation-lite" - such as the one proposed by Emmanuel Macron - would solve the problem. What is needed instead is a solution to the economic problem - large-scale green investment, an employment guarantee scheme, effective anti-poverty policies, a universal basic income, and protection against evictions.

We also noted a comment by Valentina Milano and Pietro Reichlin who argue that the solution lies with risk sharing, involving fiscal transfers. Risk sharing among eurozone countries currently falls short of the level achieved within countries such as the US and Germany.

We partially agree with Varoufakis in as much as a federation-lite is not going to produce the outcome he seeks. We disagree some of his specific policy objectives, but would agree that a set of common policies is what is needed for a monetary union to be sustainable in the long run. But it takes a federation to impose those. You will never get 19 independent governments to agree those. We have now tried all alternatives - a rules-based system that, as Varoufakis rightly said, produced deflation; lose policy co-ordination in the early part of the monetary union that produce imbalances; and the insurance-method - the ESM - only managed to kick the can down the road without solving the underlying problems. We disagree profoundly with Milano and Reichlin that the fiscal transfers are the way forward. There is no way states would agree to permanent fiscal transfer for as long as they are sovereign. National electorates do not vote this way. Again, you will need a proper federation with strong independent powers in order to deliver any stabilising policy. And if a strong federation is politically infeasible, then the only logical conclusion is that the monetary union is not sustainable unless some of the facts change.

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This is the public section of the Eurointelligence Professional Briefing, which focuses on the geopolitical aspects of our news coverage. It appears daily at 2pm CET. The full briefing, which appears at 9am CET, is only available to subscribers. Please click here for a free trial, and here for the Eurointelligence home page.

 

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