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May 17, 2017

Whither the Dutch coalition talks?

So, the Dutch coalition talks collapsed. Now what? All eyes are on the small Christian Union. Will they be more amenable to a deal than the Green Left? Yesterday we outlined that the CU is probably more aligned with the larger parties VVD, CDA and D66 on immigration, but not on inequality and the environment. Volkskrant goes into more detail of the CU's position today, and the picture is not encouraging for coalition negotiations. They quote former CU leader André Rouvoet saying that the VVD and CDA probably overestimate the differences between the CU and the GL even on immigration. And the CU has a principled disagreement with the liberal D66 on euthanasia. As a Christian party, they can't go along with the liberals on assisted suicide. Rouvoet says that inequality and sustainability lend themselves to quantification, which makes negotiating easier. But immigration and asylum are non-negotiable. The CU is, however, more pragmatic than the GL which is still painted as too idealistic. So it is still to be seen what the current CU leader Gert-Jan Segers will do.

Now, looking back at the failed negotiations, it seems that they only got going in earnest last week. There is a suggestion that "scout" Edith Schippers strung the parties along by keeping them at the table for a long time so it would be harder for any of them to walk away. But as soon as she pressured the parties to take a definite stand, the differences proved insurmountable. According to NRC, when the time came to get down to business on the areas of disagreement Schippers chose immigration and demanded clarity. If Schippers had chosen a different topic, such as the environment, she would have put the CDA and her own party VVD in a tough spot, because they are the two parties with the less ambitious agenda in that area. But she chose immigration which resulted in ejecting the Green Left from the table. Even though there was an attempt not to apportion blame, it is inevitable that the way the situation played out the GL will be seen as responsible for walking away from the negotiations. 

If this is the way things are going to play out, VVD and CDA might as well go ahead and form a government with Geert Wilders' PVV. The only reason this is not being seriously considered is that Mark Rutte and the leader of CDA Sybrand Buma are still reeling from the experience of the first Rutte cabinet in 2010-2012. This was a coalition of VVD and CDA with outside PVV support, which fell apart after Wilders' refusal to sign up to an austerity turn. Now Wilders is insisting that his party is ready and willing to be part of the government, and asking Rutte and Buma to let bygones be bygones.

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May 17, 2017

Is fiscal federalism necessary and sufficient?

Martin Wolf argues in his latest column that Emmanuel Macron’s federal solutions are neither necessary nor sufficient for the solution of the eurozone’s fundamental problems, which he describes as: inadequate risk-sharing; inability to pursue appropriate macroeconomic policies; and asymmetric internal adjustment.

The key argument is that, for shock absorption, not much is needed: a combination of national fiscal policy and some emergency funding regimes (deposit insurance, central bank intervention) is sufficient. The best way to cushion country-specific shocks is through national fiscal policies. Trying to stabilise the eurozone from the centre would require an unrealistically large budget. It would be much better to use national budgets in concert, which is of course not happening given Germany’s deficit rule. 

But the biggest problem of all is asymmetric adjustment. Germany’s pursuit of national competitiveness has been copied by everyone in the eurozone, but not by France. If France adjusts through deflation as well, the consequence may well be a populist resurgence next time. The solution to the eurozone’s problems would be rising German wages. Wolf is pessimistic that this will happen.

We recall that discussions took place at the beginning of monetary union on co-ordinating wage and fiscal policies. Those informal meetings led nowhere. The reason it was impossible to co-ordinate national fiscal policies was that it was impossible to co-ordiante electorates. We recall the Agenda 2010 reforms in Germany very well. There was a clamour in Germany for these reforms, and nowhere else. The exchange rate is the adjustment mechanism in economic relations between countries. Once it is taken away forever, sovereign must end, or the system becomes unstable. There is thus no point in demanding that nation states adjust. It is the right of a nation state not to adjust.

The argument in favour of federalism is that it allows for correction when conditions in member states diverge, as they often do, and will continue to do. A central economic government would have two principal functions. It would correct imbalances through fiscal policy in the short term, and reduce imbalances through harmonised regulation of labour markets in the long run.

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May 17, 2017

What the UK elections will and won’t achieve for Brexit

In an article in Prospect Magazine, Wolfgang Munchau argues that the UK elections will ultimately make it easier for the UK and the EU to strike an Article 50 agreement, but not for the reason that is cited most often. The EU could not give a toss about whether Theresa May has a mandate of her own, or whether the Tories have a small or a large majority. What matters is the timetable. There won’t be an election for another five years, and this should allow the EU and UK to solve the financial part of the Article 50 agreement elegantly and simply - through a transitional agreement that keeps the UK within the EU budget until the end of the multi-annual framework in 2020. Münchau argues that the transitional period will have to last longer still. That period is, for all intents and purposes, virtually equivalent with full membership - except that the UK will no longer take part in EU decisions. But this is ok for a transitional phase. Having made Brexit hard from the outset by not requesting access to the customs union or the single market, May now has the opportunity and the time to soften it. Five years is still a fairly tight timetable, but a lot more realistic than three.

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