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April 10, 2017

Nein, nein, nein, und nein

People always say that Wolfgang Schäuble is a European integrationist because of a paper he wrote in the 1990s - the Schäuble/Lamers paper. If you dissect his comments from Malta about the future of the eurozone, there is really not a glimmer of European spirit, if there ever was any. 

FAZ offers a useful and long list of all the proposals Schäuble is rejecting. He says any institutional changes would require treaty change, and this won’t fly politically. The treaty change argument is indeed the German government's legal interpretation, but it is not universally accepted, not even among German constitutional lawyers.

Schäuble rejects Valdis Dombrovskis’ idea of a common eurozone budget, either for investments or for unemployment insurance. The Commission has already given up on unemployment insurance given Germany’s opposition. We think this is a shame, since it makes a lot more sense to harmonise unemployment insurance than to create yet another ineffective fund for investments. The whole idea is to have a cyclical shock absorber.

The reason Schäuble is opposed is the shift in competences from the ministers to the Commission and the European Parliament. This is why he is proposing a European Monetary Fund - a kind of strengthened ESM - because the ESM is an inter-governmental institution. Schäuble said any eurozone governance reforms had to be inter-governmental. He also backed the idea of a sovereign insolvency mechanism.

Schäuble rejects the idea of a permanent eurogroup chief after the departure of Jeroen Dijsselbloem. The paper writes that Schäuble wants an existing finance minister to occupy this office, which means that there will be no space for Dijsselbloem after the formation of the Dutch government. The Germans expect this to happen after the German federal elections in September.

Schäuble also rejects the idea of European Safe Bonds - the idea to bundle existing sovereing bonds into eurobonds - a proposal that will not be seriously discussed by ministers, according to Schäuble. The German government sees the danger of debt mutualisation through the back door. The problem of bank holdings of national sovereign debt has to be solved differently.

Schäuble also rejects the idea of a eurozone bad bank, as proposed by Andrea Enria. This was not a sensible proposal, he said. It would be better to create a secondary market for bad debt.

As we have been writing for several years now, there is no way the eurozone will achieve deeper integration without extreme pressure. The only thing we believe could persuade Germany to accept institutional reform is a credible threat by a large member state to exit. We see no fundamental difference between a CDU-led or and SPD-led government. On the contrary, if Schulz were to become chancellor, Schäuble would most likely remain finance minister and dictate the next German government’s financial policy. If Merkel wins, and the SPD came second, it is possible that the SPD would grab the finance ministry, but none of the heavy hitters, like Martin Schulz or Sigmar Gabriel, are interested in the job. And the SPD has other political priorities. The bottom line is that eurozone governance reform requires either a crisis, or blackmail, or both.

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April 10, 2017

Sounds like a bad Brexit story, but ain’t

By the standards of European negotiations, the upcoming Brexit talks fall into the easy-to-moderate category. The Article 50 deal is largely technical. There will be a two-year or so transition after Brexit, now accepted officially by Theresa May, during which the UK will effectively abide by EU laws and regulations. There are a lot of threats and counter-threats, but as this story in the FT suggests, the playing field is a lot more balanced than some people had feared - or hoped for. And the more balanced the playing field, the greater the chances of a deal. 

The story quotes Michel Barnier as expressing concern that Brexit throws up confidentiality issues, which will need to be discussed within the Article 50 discussion. The EU questions the wisdom of involving the UK in bilateral trade talks that will not come into effect before Brexit, sharing information the UK could use to its advantage in its own bilateral trade talks with both the EU and Australia. The EU has a legitimate point here, but there is no legal basis for excluding the UK from trade talks. That would be a breach of the treaty. The UK government says it is a full member of the EU for the next two years, which means that it retains the full rights of a member state, including, of course, veto rights. We could imagine, however, that the UK may voluntarily accept the EU’s request to recuse itself in exchange, for example, for a speedier discussion on EU/UK trade talks. Both sides would benefit from such an agreement.

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April 10, 2017

On how not to exit the euro

Wolfgang Munchau makes the point in his FT column that the various euro-exit threats by populist parties in France and Italy lack substance and preparation. Euro exit is not an issue you put on a to-do-list as done recently by Luigi di Maio, the Five Star Movement’s presumptive candidate for the job of prime minister. Euro exit would be an all-absorbing agenda. Those who dare to do it would be defined by this and nothing else. Brexit pre-occupies the British government. Euro exit is an order of magnitude more complicated. The lesson of Greece in 2015 is instructive. A parallel currency was discussed as an idea, but the government did not make any serious preparations. The threat was thus not credible. If the Five Star Movement were to win the Italian elections, it would take the financial markets about five sectors to produce a financial crisis. There would be no bailout from the ECB since the OMT programme does not support countries that are wishing to exit. Italy would be on its own. The government would have to take a decision within minutes of whether to pull the referendum for good, or introduce a parallel currency right away. If it choose to do the latter, it would have to deploy the military, close the borders, and crack down on riots. Munchau doubts that any of the populist parties that are advocating euro exit have really thought this through. They are charlatans, not populists.

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