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February 06, 2017

The Schulz effect, mark III

Martin Schulz hasn't really said much, so the dramatic rise in the SPD's poll ratings cannot be explained in terms of policies. Then again, Angela Merkel doesn't say much either. The latest opinion poll, by Emnid, has the gap between the CDU/CSU and the SPD down to only 4pp, so we are now, for the first time since the Schröder days, in a position where the gap is within the statistical error margin of the polls - something we should take seriously especially given the experience of last year. That gap has shrunk from 14pp only a week earlier.

Here is the latest Emnid poll:

in %4/228/1
CDU/CSU3337
SPD2923
Greens810
FDP66
Left Party810
AfD1111

Apart from the shrunken gap, the other noteworthy aspect is that both the Greens and the Left Party have lost 2pp each. This means that more than half of the SPD's gain is compensated by a loss by those smaller parties. The SPD's gains thus do not make a so-called red-red-green coalition more likely. The combined share of the three parties is 45%, whereas the other three parties are at 50%. That's the gap SPD/Greens/Left Party have yet to climb to be able to form a coalition.

But the rise in the SPD's poll ratings gives the SPD some alternative choices. If Schulz manages to close the gap with the CDU/CSU, he could insist on entering another grand coalition as an equal partner, possibly with a claim to the chancellorship, or at least to sharing the chancellorship over a four-year period. We do not think that Schulz would let Merkel, or another CDU politician, remain at the top for four years. So, expect significant political confrontations to arise after the elections if the SPD does well.

The rise in the SPD's poll ratings is also partly due to the divisions between CDU and its Bavarian sibling the CSU. This report in Die Welt says that between 20-30% of CSU voters reject the decision by Horst Seehofer, CSU chairman, to support Merkel and her refugee policies, the main area of disagreement between the two allied parties. His popularity ratings have plummeted by 11pp within a month. The article also makes the point that Seehofer has a thin skin and quotes him as saying that victory in politics falls to those who are united. 

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February 06, 2017

Germany's two asymmetric shocks

This short paper by Hans Kundnani is one of the best we have yet seen on German foreign policy. His central thesis is that the election of Donald Trump constitutes a dual asymmetric shock to Germany. Germany was in the past a free rider on two global public goods provided by the US. The first was defence. The US shield allowed Germany in particular to drive down its defence spending to levels as low as 1.2% of GDP (in 2014). And the US acted as a consumer of last resort, thus allowing Germany in particular to run large trade surpluses. 

Both of these asymmetries are now under acute threat from Trump. On security, Kundnani makes the point that Germany will not act. It has defined itself as a power for peace, and there is no way a German government would dare to step up security spending in a dramatic way, let alone build a nuclear deterrent. Kundnani argues that President Donald Trump will follow up on his campaign promises - a point also underlined by Ed Luce in his FT column this morning. Germany will thus come under pressure to do something on its trade surplus (see also our separate article on Germany as a currency manipulator). But for the moment the attitude is one of complacency.

Kundnani’s conclusion is pessimistic. 

“The logical response to the new situation created by the election of Trump would be for Germany to take steps to reduce its vulnerability — in particular, by seeking alternatives to the U.S. security guarantee and reducing its dependence on exports for economic growth...

Europe should be a way out of the dilemma Germany now faces. In particular, it could provide an alternative source of both security and of demand. This means a grand bargain between EU member states — centered on a compromise between France and Germany — is now more urgently needed than ever. But Germany remains unwilling to make concessions — especially on economic issues."

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February 06, 2017

A Brexit conundrum - or not?

We noted this article in the FT citing business leaders saying that Brexit already has had a negative effect on their business. The article cites an Ipsos/Mori poll, according to which 58% said Brexit had already been negative, while 11% said it was positive. The interesting thing about this is that it asked a question of fact, not of expectations. And yet, despite these negative attitudes, the macroeconomic data do not seem to bear out that pessimism. Why is this so? 

If you recall the early debate about the single market, proponents made strong claims about the effects on GDP and productivity. UK data show that membership of the customs union, i.e. of the EU itself, had a big economic impact, while the single market didn't. Yet large companies and their lobbyists have been telling us that the single market was hugely important.

Is it not possible that the single market constituted a near-zero-sum-game, in which large companies benefited at the expense of smaller companies and consumers, because they had the power to shape regulation while small companies did not? If the single market were as important as the large companies claim, there surely would have had to be a visible macroeconomic impact in the absence of a displacement effect.

This is why we take large company polls like this one with a grain of salt. The real economic issue with Brexit is the quality and extent of the FTA yet to be agreed, and the nature of the transitional agreement. There is clearly a risk of major frictional costs if the negotiations fail and produce the hardest version of a Brexit, but we doubt that the views expressed in this particular survey relate to this specific scenario - which we like to think of as possible but far from inevitable.

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