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May 22, 2017

Catalonia's independence blueprint

Other than Sports newspapers, this morning El País is the only newspaper that doesn't lead with Pedro Sánchez, preferring to bury the bad news under the shocking news. The paper's lead story is a leak of a secret draft of the Catalan separatists' "disconnection laws" intended to pave the way for unilateral independence. The Catalan parliament has recently reformed its by-laws to allow such a law to pass by an urgent procedure in 48 hours. 

The leading headline is that Catalonia will declare independence immediately if there isn't a referendum. This law regulates the transition juridical regime in case of independence. It regulates Catalan citizenship; which Spanish laws would remain in force and which wouldn't; or the fate of state civil servants, Spanish government contracts, or Spanish government buildings in Catalonia. It includes a provision that it will come into force as soon as the Catalan parliament ascertains that the Spanish state if effectively preventing the celebration of an independence referendum. It includes a section on the referendum, with the question "do you want Catalonia to be a State independent from Spain?" The law is intended to function as a provisional constitution, and it refers to itself as a "foundational law" of the Catalan Republic. 

On the transitional legal regime, the law creates a new Catalan supreme court, takes over all court cases in Spain's national court or supreme court which affect Catalonia, and an amnesty for those subject to legal proceedings for their part in the Catalan separatist process.

The Catalan regional premier Carles Puigdemont will be in Madrid today to offer the Spanish government a last chance to negotiate the holding of an independence referendum, before proceeding with plans to hold it unilaterally. Last Friday the government offered Puigdemont to debate the referendum in the Spanish parliament at a later date, but Puigdemont has so far rejected to go to the Spanish parliament without a prior agreement with the Spanish government.

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May 22, 2017

Commission wants completion of eurozone by 2025

Werner Mussler, from FAZ, has a cracking story this morning, about unofficial notes from a meeting about the future of the eurozone between Valdis Dombrovskis and Pierre Moscovici from the European Commission and MEPs. Details will be published in a reflection paper in ten days' time. The Commission will make a number of proposals, the most surprising for us being the decision to set 2025 as the date for completion of the eurozone - all EU member states will have to join by then. The Commissioners did not say what forces they would like to deploy to get Poland to elect another government and change the constitution, which would be necessary.  

The Commission also wants to subject the eurogroup to parliamentary scrunity, because the citizens are asking for more democracy and less technocracy, as Moscovici put it. He also called the eurogroup a closed shop. 

The Commission offers several ideas for common eurozone finance instruments. One is a fund to protect public investment during recessions. Another is a permanent eurozone fiscal capacity, as demanded by Emmanuel Macron. Dombrovskis also mentioned a common unemployment insurance. 

FAZ also picked up on a peculiar argument by Moscovici, who said that many euro countries did not have the capacity to keep up investment during economic downturns, something the Juncker investment plan had not changed. Mussler picks up on this argument in an editorial. The Commission is now going beyond "flexibility" by essentially admitting that the stability and growth pact is not working economically, and needs to be corrected. We, too, find this argument mind-boggling. We would agree that the pact is not working, but the solution is not to pretend that it is and plug the holes. Nor will this approach work politically. Wolfgang Schäuble will say that, if governments committed to a fiscal balance of zero, as German has done, they should have enough flexibility during downturns. The problem arises because countries are not willing politically, or capable economically, to fulfil the pact. Observance of fiscal rules has thus become a false pretence, not exactly a good political basis to gain mutual confidence.

We also noted a comment by Moscovici who seemed to have interpreted recent statements by Emmanuel Macron and Angela Merkel as rejecting eurobonds for legacy debt, but not for new debt. He gave no further details. 

This point was raised by Wolfgang Münchau in his FT column. He writes that the present eurobond debate has moved on from legacy debt proposals - like the blue-bond-red-bond, the redemption fund, or the more recent European Safe Bonds - to eurobonds as debt instruments of a future eurozone fiscal union. Such a construction would have many advantages, beyond being politically more acceptable to the North. By creating a sufficiently stable risk-free asset, banks would be able to switch their holdings, thereby reducing their dependence on member states' bonds. In the long run, it will thus become easier to deal with excess debt through member states' default and restructuring without risking an immediate banking crisis. He argues that the key element of a eurozone budget is debt-issuing capacity. Without it, it would be pointless to talk about a common fiscal capacity. He calls the SPD's idea - a jointly funded eurozone investment vehicle - a slush fund.

Martin Schulz, meanwhile, clarified his opposition to eurobonds to such a degree that there is no longer a gap between him and Angela Merkel. In an interview with FAZ, published Saturday, he said the following. We quote the passage in full to highlight the clarity and strength of his anti-eurobond position:

"This is yesterday’s debate. It’s finished. I have supported the ESM, of which we can rightly say that it has been a success. Germany’s guarantees 27%, France 20% and Italy 18%. This is a joint liability union. And this means that the debate about eurobonds is finished." 

"A mutualisation of national debt is not foreseen by the treaty. Aber we have agreed a mutualisation of risk. That was controversial at the time, but was decided with the vote of Ms Merkel in the European Council. Instead of conducting a phantom debate of mutualisation, I think it is more important to talk about growth and investments in Europe.”

We quoted this section at length to demonstrate that Schulz has formulated a very clear position on this issue, which is perfectly aligned with Merkel and - despite pretences to the contrary - diametrically opposed to Macron. Macron has not campaigned on legacy eurobonds but, if his proposal for a joint fiscal capacity makes any economic sense, they will have to include a funding facility that is not dependent on gifts from member states. Schulz’ comments should also make it clear that, from a French perspective, it matters not a lot what the outcome of the German election will be. 

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May 22, 2017

The case for more honesty about the abolition of cash

Satyajit Das raises a number of important points about the future of cash, and links it to the vulnerability of western societies. Unless we get our argument straight, we are in danger of strengthening populism. He argues that the move to a cashless society could be good thing because it would help address the next big financial crisis, by eliminating cash hoarding thus removing the zero lower bound for interest rates. This should be the argument in favour of it, rather than relying on fake utilitarian reasons. Among those are the fight against tax evasion. Some even claim that a cashless society is healthier because it exposes humans less to germ-infested banknotes. Nor will a cashless society necessarily help in the fight against crime. Criminals will seek alternative methods - like gold hoarding, or even real estate. There are also genuine disadvantages that need to be considered. States will be losing seigniorage income. Anonymity in transactions is a human right - not just an advantage for criminals. Cash use remains prominent in emerging markets. The poor are the least digitised. Das' conclusion is sensible: if states are serious about going cashless, they will need to confront those real issues, and not hide behind platitudes. Otherwise, imposing such a radical change on citizens would further erode trust in governments.

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May 22, 2017

The case against an Italian euro exit

Markus Brunnermeier and Harold James provide an intelligent argument against an Italian euro exit, making the point that it would ultimately not work politically. We have some sympathies with that view. The lack of a clear alternative was also the reasons why a euro exit may not have worked for Greece. The competitiveness gains would have been eroded quickly. Reforms would have been necessary, not only to stay inside the eurozone but also to leave it. 

On Italy, the authors make a number of points. They argue that Italy would have been worse off had it not joined the eurozone, because the country would have had less protection during the financial crisis and afterwards - through ECB’s bond purchases, the Target2 system, and the ESM. They note that a notion has gained ground among Italian political elites that the euro imposes restraints that make it impossible for Italy to regain competitiveness. The pervasiveness of this idea is now the main problem, because it gives rise to what the authors call "a psychological mechanism of blame transference". They invoke Hegel’s Phenomenology of Spirit - which portrays a toxic relationship between Master and Slave where the slave is suppressed and the master resented. They discuss the argument that it is best to end such a relationship if only for everybody to accept that each is ultimately responsible for their own plight. At that point, Italians might choose economic reforms voluntarily. But the authors come down against that interpretation. There is nothing to stop Italians from solving their problems right now - the budget constraint is not the real constraint, especially not now. But Europe could still provide a powerful incentive to Italy, by stepping up efforts to share in the managing of the flow of refugees from Africa.

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