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March 20, 2017

Does the language of communiques matter?

FAZ and the FT write in their coverage of the G20 finance ministers’ meeting in Baden-Baden that there was no agreement on the usual G20 pledge on the need to avoid protectionism - a formulation the new US treasury secretary Steven Mnuchin was not happy with. As Wolfgang Schäuble confirmed, the discussions had focused mostly on trade but there was no consensus on how to go forward, as the discussion had reached an impasse on protectionism. On the contrary, Mnuchin used the occasion to reiterate American criticism of Germany’s current account surpluses, along with the demand to eliminate them. Mnuchin is also quoted as saying that he could not care less what previous G20 communiques had said, since he was not finance minister then. 

The FT noted in its coverage that China and the US clashed at the meeting, with China insisting on language condemning protectionism. Japan and the UK were more supportive of the US position. In the UK’s case the support is not in terms of substance but in terms of tactics. Philip Hammond said one should give the US a bit more time.

The German press also noted that Donald Trump had confirmed the US’ hard line on Germany’s surpluses during Angela Merkel’s awkward visit last week. Trump told her about the losers from free trade policies, to which she responded that there were similar worries in Germany when the EU negotiated a free-trade deal with South Korea. That deal ended up creating jobs on both sides. We have no reports on how Trump reacted, but we would be surprised if that left any impression, let alone change policy. 

Guntram Wolff notes that the EU needs to formulate a clear response to Trump’s trade agenda, rather than becoming overwhelmed by it. The starting point should be to take his agenda serious. Trump, Mnuchin, Peter Navarro and Wilbur Ross really mean what they say. In particular Wolff argues that the EU needs to find answers to four questions.

  • How to deal with Trump as a person? Is it sufficient to give him some symbolic victories he can brag about? (We think the answer is no. They may be wrong on trade, but they are not stupid, especially as they are now using bilateral trade balances as the yardstick for policy).
  • How should the EU react if the US violates WTO rules? Wolff’s answer is that using WTO arbitration procedures should be part of the answer. But should the EU go further? He leaves the answer open.
  • What if the US questions the legitimacy of the WTO? Wolff suggests that the EU should forge a closer relationship with China as a response.
  • And finally: can the EU project its power in trade matters across the globe? 

These are good questions to ask, but not easy to answer. The fundamental problem is that, if you have a current account surplus of over 3% for the EU as a whole, you are not in a credibly strong position to counter protectionism with protectionism. That’s probably what would be required to provide some disincentives to the Trump administration, but we doubt very much that the EU is willing to make such sacrifices. Such a strategy would be best in the long run, but not in the short run.

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March 20, 2017

Spain snap election rumblings

Last week we speculated about the possibility that Mariano Rajoy might call early elections if he lost patience with the constantly defiant parliament, after his government suffered the unusual setback of having a legislative decree on dockworkers fail to be endorsed by the parliament. The fact that the decree was an attempt at implementing an ECJ ruling makes the situation more than just a case of political football as Spain is already incurring fines for noncompliance.

Over the weekend Rajoy himself issued veiled threats of early elections at the PP regional party congress in Andalusia. The earliest that elections could take place is the last weekend of June,  which is a year after the last elections. For this, the parliament would have to be dissolved the first week of May. This is unlikely to happen because the government has given itself until the end of June to amend the 2017 budget. Should that fail, Spain might have to go to the polls again after the summer. One powerful reason for Rajoy to avoid dissolving the parliament over the summer could be the plans by the separatist Catalan regional government to try and organise a unilateral independence referendum by September. In this case Rajoy might want to avoid being in a caretaker capacity.

The budget will be the next major confrontation in the Spanish parliament. It needs to be amended to comply with the European Commission’s requirements to tighten the structural fiscal balance by 0.5% of GDP. The government had been hoping to negotiate the support of the socialists, but the PSOE is now immersed in a leadership contest that will run until May, followed by a party convention in June. El País writes that Rajoy is now resigned to trying to pass the budget without the socialists. The situation is the same as in the run-up to Rajoy’s reappointment as PM: the government needs the PSOE to at least abstain to win votes in the parliament. Mariano Rajoy has the support of liberal party Ciudadanos for the budget, and is negotiating with the Basque Nationalist Party. However, even this would put support for the budget at 175 out of 350, insufficient to pass without a PSOE abstention.

The PSOE leadership contest pits the former secretary general Pedro Sánchez against Patxi López, who was speaker of the parliament between the first and second elections last year, and against Susana Díaz who is the regional premier of Andalusia. It appears that six of seven PSOE regional premiers support Díaz, while the other supports López. Moreover they expect a confrontational relation with Sánchez should he be re-elected. The majority of the party’s 84 MPs support Díaz also. However, the leadership contest will take the form of an open primary, and polls of likely PSOE voters are reported to put Díaz well behind the other two contenders.

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March 20, 2017

Will there be a Brexit deal?

It is rare that we disagree with Kevin O’Rourke, but today we had the exact opposite answers to the same question: will Brexit come with or without a deal? O’Rourke is pessimistic. He writes that there are at least three reasons why an off-the-cliff Brexit is now the most likely scenario. The first is that this is what the Brexiteers want, and it is running the show. They are prioritising sovereignty. The second reason is that the Brexit ministers are not on top of their briefs. And, finally, the UK civil service is not going to be able to make up for all this. They are competent, but there are only so many of them.

Wolfgang Münchau makes the exact opposite point. A deal is far more likely than people think. The main reason for his optimism is that the decision will not be taken by backbenchers, or even negotiators, but by the European Council. If they want a deal, they can have it. The agreement by the British parliament and the European Parliament will then only be a formality. Another point is that the argument that you need to penalise the UK in order to avoid imitations is now fortuitously dispelled. There is no country to follow the UK, and thus no need for such an attitude. Münchau's conclusion is that, in the age of Trump, a deal is in everybody’s best interest.

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