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May 18, 2017

German hard line on Brexit already cracking

We have been arguing for a while that the German hard line on Brexit is pure show. Nobody wants to stab Angela Merkel in the back for now, so German industry has decided to stay quiet for the moment. Some of our British friends have interpreted this stillness as evidence that the Brexit negotiations are going to be really tough.

FAZ has the news this morning that the scientific advisory council of the economics ministry - a group of German economics professors, in short - wants the German government to fight for a free trade agreement with the UK because economic relations are very deep. A sudden Brexit would cause massive economic damage, they argue - and rightly so. The council is also right to conclude that this will not happen within two years, and recommends that the UK joins Efta as an intermediate step. We fully agree, too. The council is pressing for a balanced agreement. Contrary to popular belief, it is not true that only British companies benefit from EU market access. Many German companies have supply chains that reach deep into the UK. The council even notes that the City of London will continue to play an important role post-Brexit because of the structural depth of the derivative markets - which will not be easily replicated by any other EU member state. FAZ notes in its coverage that the German debate is mostly about the jobs that might come over from London to Frankfurt, while this is possible the more important issue. 

We don’t often agree with German economics professors, but they are spot on. The EU is currently massively overplaying its hand. This will become more apparent as the negotiations progress. These negotiations will deteriorate. But in the end, we expect deal quite similar what the council proposes for the simple reason that every other outcome would be a disaster for all sides. Expect pressure by German industry in particular to rise as these negotiations continue.

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May 18, 2017

Spanish parliament rebukes justice minister

There is no impeachment procedure for ministers in Spain. The parliament may vote a motion of no confidence on the cabinet as a whole, and must propose an alternative PM. But unlike in other countries there is no way for the parliament to remove an individual minister. What the Spanish parliament has done in the past, and repeated yesterday, is to pass a motion rebuking a minister. In this case, the justice minister Rafael Catalá. The fact of the rebuke reflects widespread concern about the independence of justice in Spain. Catalá said after the rebuke that he had the support of prosecutors' associations. But the progressive union of prosecutors (@UPFiscales) retorted on twitter that this was not true, as two of the three professional associations of prosecutors had already complained about his interference with public prosecutors.

This is not the first time one of Mariano Rajoy's ministers is rebuked. Last autumn the parliament voted to rebuke the - then caretaker - interior minister Jorge Fernández Díaz over allegations that he had used police resources to launch politically motivated investigations into political opponents, some of which were later leaked to the press. What makes yesterday's rebuke more notable is that the attorney general Felipe Maza and the head anti-corruption prosecutor Manuel Moix were also rebuked. The reason for the rebuke of the entire top of the state prosecution is alleged obstruction of an ongoing investigation, on the so-called Lezo case involving embezzlement at the Madrid regional government.

A rebuke has no real effect. The minister is not required to resign, nor is the PM required to dismiss them. Rajoy reacted to the vote by expressing his "full confidence" in Catalá, Maza and Moix. This may not be reassuring given the fate suffered by many others who have received the PM's full confidence in the middle of corruption scandals. 

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May 18, 2017

Kenny's resignation and the likelihood of new elections

Enda Kenny resigned as party leader of Fine Gael, and will step down as prime minister as soon as his successor is chosen. His departure has been in the pipeline asince last year's election, when Fine Gael lost its majority and was forced to rely on Fianna Fáil to form a minority government. Despite many clashes, in particular over water charges, the minority government lasted until now. But it may not survive the transition to a new party leader, and new elections could be the consequence of Kenny’s departure, writes the FT.

The two candidates for his succession are housing minister Simon Coveney and social welfare minister Leo Varadkar. In his resignation letter, Kenny said he would like the leadership contest to be completed by June 2.

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May 18, 2017

Getting real about fiscal union

The election of Emmanuel Macron has clearly triggered a new debate in the EU about the future structure of the eurozone in general, and about the shape and size of a fiscal union in particular. Guntram Wolff has a very useful article in which he dissects the various options for a eurozone fiscal capacity. He discusses five conceivable alternative functions: 

The first is the most extreme, and least likely variant: turn the eurozone into a federal entity, with a large budget, and tax-raising and debt-issuing powers. Such a budget could then take the role of fiscal stabilisation, as national budget do now. 

The second option is to use the eurozone budget as a tool to deliver public investment. He rightly criticises this rather intellectually lazy idea, and points out that the same can be achieved with a much simpler construction: a tweak in the fiscal rules to allow for an investment component through adoption of the golden rule. 

The third option is to create a eurozone borrowing capacity - at the expense of reducing borrowing capacity at national level. This is an idea we like a lot, but it also faces formidable hurdles, notably constituional balanced-budget rules in all eurozone member states. Under such a system, there would be no more bailouts. It would require tax-raising powers. Wolff points out that this option would only be viable if all parties involved had sufficient trust in the decision-making process at the federal level.

The fourth option is more moderate - to support countries at risk of losing market access, a souped up ESM. And the fifth option is to provide public goods, but here the question is: why at the eurozone level, rather than at the EU level? 

So, when you hear someone favouring fiscal union, like Macron is now, it is worth questioning what type of fiscal union they really want. The SPD, for example, is talking about joint investments. We agree with Wolff that you don’t need a eurozone budget for that. It would end up as a slush fund to use for north-south redistribution, possibly the worst kind of fiscal union imaginable. Full macroeconomic stabilisation is probably out of reach, certainly as a first step, but a combination of financial stabilisation and limited macroeconomic stabilisation should indeed be possible.

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