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May 12, 2017

What to do with Germany’s tax windfall

The German economy is growing only moderately - though steadily - but its financial strength is extraordinary. According to the latest estimate, the state will receive an extra €54.1bn in tax revenues until 2021, most of which will accrue to states and local authorities. The annual tax receipts are set to grow from €732.4bn this year to €852.2bn in 2021. For the current year this is an increase of €7.9bn compared to the last estimate. 

The political question ahead of the elections is what to do with this windfall. There is now pressure from within the CSU to use the money for tax cuts. Spiegel Online quotes Angela Merkel as saying that there was a case to raise the threshold for the top tax rate, which many middle-income earners are subject to, but she is firmly rejecting CSU demands for additional tax cuts beyond this one. This means that Germany will use these windfall receipts primarily for debt reduction.

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May 12, 2017

How Macron counts on building a majority

Now that Emmanuel Macron has to build a party from scratch, he faces a dilemma: how to comstruct a majority without being seen as compromising nor offensive. The choice of people without a proven political track record is one way of achieving this. And the list published yesterday confirms that half of the candidates are from civil society. As for the other half, they seem to have opted for the stick-and-carrot strategy: Macron-compatible Republicans got one more week to decide whether they want to jump boat or not. This is read as a signal that a Republican prime minister is in the cards. This is an overture which does not please François Bayrou's nor the Socialists in the movement. Manuel Valls is another example. La Republique en marche! softened its rhetoric against Valls, not integrating him into the movement but not to oppose him either. After a rude rebuttal, which made him the first scapegoat to demonstrate the party’s uncompromising determination, there comes the appeasement. 

In total, 428 out of 577 candidates for the legislative elections were published by the party yesterday. There had been some wrong names and a first political crisis: Francois Bayrou was not happy at all about the list, and he made it publicly known that it does not have the consent of his party. He accused Macron of not respecting what they both had previously agreed. According to Le Figaro, Macron proposed Bayrou 70 districts of which 35 can be won. There were Modem candidates on the short list, though Ricard Ferrand, general secretary of the party La Republique on marche!, explained that when compared with En marche! candidates, the latter were considered more suitable. So no guarantees. 

Another 148 districts are yet to be decided. These are districts with ‘Macron-compatible candidates' on the left and right. Among those are the districts of Republicans such as Édouard Philippe, Thierry Solère, or Bruno Le Maire. There are also no candidates yet in the districts of the Socialists Stéphane Le Foll, Marisol Touraine or Myriam El Khomri. There will also be no opposing candidate against Manuel Valls, a gesture of good will after the humiliating rebuttal of his candidacy to run for Macron’s movement.

Some more facts about this list as it was presented by La République en marche!: 52% are civil society, and the average age is 46 compared to the current 60. Only 24 are Socialists, who will have to forgo their party membership. The party vetted 19,000 applications. All candidates will spend next week together in training. Flash politics. Outcome unknown.

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May 12, 2017

Options for the eurozone

This column, by Mark Schieritz in Die Zeit, is useful because it clearly sets out the options for the future of the eurozone - although it fails to draw a coherent conclusion, which is fairly typical for those German economists and commentators who are broadly in favour of further integration, as he is.

He says there are, in principle, three options. The Schäuble option of seeking maximum convergence by everyone towards Germany, with strict rule enforcement by an upgraded ESM, cannot work and is rejected by France. The second option is a full political union. This requires treaty change, and is thus no option in the short run. Schieritz says he expects France and Germany to set up a working group that will come up with purely symbolic proposals - a joint budget, with some funds diverted from national budgets. 

The third and best option would be a monetary union with a default procedure for sovereign debt, but this would require a genuine banking union: a radical centralisation of banking, with a joint fiscal backstop and joint deposit insurance.

We agree with Schieritz on why a joint eurozone budget will be largely symbolic. But we disagree with his taxonomy. A banking union of the kind he describes is just another version of a fiscal union, because it requires joint fiscal capacity to be used for bank resolution. This is the reason we don't have it. A joint fiscal capacity cannot conceivably be pre-funded, so it will necessitate the right to issue bonds. This is why a fiscal union without the right to issue bonds and without tax-raising powers makes no sense. And if you believe that a fiscal union requires treaty change, as everybody in Germany seems to, including Schieritz, then so would this option. The pure banking union is thus not an independent third option, but a variant of the second. The difference is just about what you spend the money on. The real-world choice is between Schauble’s EMF or a genuine political union. If President Macron does not fight for the latter, we will end up with the former. It’s that simple.

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