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June 02, 2017

Is this a disaster for European diplomacy?

We'd better hope that Angela Merkel and Emmanuel Macron have their strategy for the future of Europe clearly mapped out, because their aggressive diplomacy is now creating facts on the ground. One of the questions on our mind this morning the extent to which European diplomacy is aggravating transatlantic tensions, and whether the Europeans truly understand the consequences of their actions. 

There was an interesting snippet in a background report by the Washington Post this morning, on the impact of European diplomacy had on Donald Trump’s decision to pull out of the Paris climate agreement. Macron’s comment that "my handshake was not innocent" had irritated and bewildered the president. The paper said serious efforts had been under way within the administration in the last few days to get Trump to change his mind. It was Macron’s alpha-male aggressiveness that nudged Trump towards the decision he took. Macron last night doubled down with a Tweet: "make our planet great again". Mocking Trump via Twitter may have become the favourite pastime of bloggers and commentators, but for a French president to join in is unusual.

Macron’s comments and Merkel’s beer tent speech constitute the symbols of a new transatlantic relationship. The US is not prepared for this change, but neither are the Europeans. And, unlike the US, the EU does not have the political structures and financial resources to go it alone.

We noted this tweet by Alberto Nardelli this morning: 

“Am told UK declined to sign joint statement with Germany, Italy and France on Trump’s decision to pull out of the Paris climate agreement.”

If true, this would be extraordinary. At Taormina, the UK sided with the other European countries on the substance of the climate agreement. Six members united against Trump. But the UK is not prepared to follow Macron and Merkel into outright anti-Americanism. Germany and France had an opportunity to keep the UK on board here. They are now pushing the UK into a more transatlantic position. 

The next big confrontation will be over trade. We now expect Trump to follow up with a decision to impose punitive tariffs on German exported goods later this month, when the US Department of Commerce is due to present a report on the bilateral trade relationship between the two countries. Trump has yet to make his decision, but his pre-announcement, on Twitter, that he will stop the German trade surplus sound ominous. 

There is also the possibility of retaliatory action from the EU. Martin Schulz threatened yesterday that the EU would block products by countries that fail to respect international rules and EU standards. While Schulz will probably not be the next German chancellor, we should not underestimate his ability to drive the German debate over the next few months. If Trump imposes trade sanctions on German goods, it is possible that Germany might over-react.

We wonder whether it would not be more sensible to regard the four-year withdrawal schedule from the climate agreement as an opportunity. It is possible, but far from certain, that Trump will be reelected in 2020. If not, there is a reasonable chance that his successor, whether Republican or Democrat, might undo the decision. It is also possible that Trump may be hounded out of office early. Even if Trump were to serve a maximum term of eight years, his successor could still opt back into the Paris accord. 

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June 02, 2017

Ethics and politics - French version

The prosecutor in Brest has changed his mind and opened a preliminary investigation into the past activities of Richard Ferrand, after new accusations emerged this week. There is now increased pressure from the media and the public for him to resign as minister. Éduard Philippe postulated the rule that ministers only have to resign once they are placed under investigation. This is a tricky balancing act: Emmanuel Macron cannot give in to this public outrage that demands the head of Ferrand even without judicial investigation, but at the same time he needs to defuse the anger.

For this Macron is sending his justice minister François Bayrou, who presented yesterday a plan to bring back ethics into politics, baring among other things politicians from hiring family members. Under the bill, ministers would also be banned from also having seats at local authorities, and politicians could not serve more than three times in the same position. Former presidents won't get an automatic seat in the constitutional council. Parliamentarians who cannot prove their fiscal responsibility would risk losing their seats. And any parliamentarian who has been convicted on probity offences will be ineligible to serve for a period of ten years. In addition, expenses would be reimbursed only if MPs can provide receipts. The bill will be formally presented to parliament in the coming weeks.

Nicolas Beytout comments that these ambitious laws would not have prevented Ferrand making advantageous property deals with his partners, nor Marine Le Pen using her EU assistant for FN work, or parliamentarians taking out substantial revenues eventually risking a conflict of interest. For this the state funds available have to shrink, writes Beytout, in order to lessen the temptation.

Another aspect is that the laws proposed by Bayrou will make it difficult for people from civil society to become parliamentarians, writes Marianne. This is because, under the new ethics laws they might not be able to politically engage with areas that are related to their former activities, if this is considered as risking a conflict of interest. Does this then mean that the LREM MPs with a past cannot vote on bills that concern their former area of expertise? in extremis, this means that if parliamentarians are to vote for a law about parliamentarians, no one can vote. 

The other question is whether, with only 10 days to go before the legislative elections, this affair will spoil Macron's party? Ideally La Republique en Marche! would garners a majority without any help. And for the moment the polls suggested that this is indeed possible. If not, Plan B would require some form of alliance. The government may have to rely on Bayrou's Modem party to ensure a majority. Here, his appointment as justice minister might come in handy. Among Republicans there are also certain groups, like the one around Jean-Pierre Raffarin, who are ready to become a constructive partner for Macron’s government. 

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June 02, 2017

Expect more European divisiveness

The EU’s budget was always a bone of contention, but the differences between member states are becoming toxic. Italy, a net contributor, wants to limit structural funds to countries that don't take in refugees. And the German government has recently issued a position paper in a similar direction. Only countries that abide by EU rules and standards should be worthy of receiving cohesion funds. Politico writes that the initiative is directed at countries like Poland and Hungary, which are restricting basic freedoms. 

The paper now reports that Jean-Claude Junker has rejected this idea because it would split the EU. He called it "poison for the continent" but added that he understood the emotion behind it. We would add that Brexit will be super-charging this situation, as it removes one of the largest net contributors.

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June 02, 2017

On the lessons of a resurgent Labour Party

The rise of the Labour Party in the polls may not be enough to get Jeremy Corbyn into Downing Street, but it is an extraordinary event compared to the many earlier predictions by commentators. Michael Chessum notes in the New Stateman that he, too, misjudged the Corbyn effect. The rise in the polls is

“a vindication of a very simple mantra - that radical social and economic policy, clearly articulated, is the party’s only route back to power.”

This is contrary to the conventional wisdom among UK commentators that the party was wrong to ditch the New Labour centrism in favour of the new radicalism. Corbyn is now set to get more votes that Ed Milliband in 2015, which would be an astonishing achievement given how low the expectations had been only a few weeks ago. And Chessum is right that, by turning to the Left, Labour is avoiding the electoral catastrophe suffered by other Social-democratic and Labour parties in Europe, most recently in France and the Netherlands.

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June 02, 2017

On the limits of an inter-governmental eurozone

In our discussion on a e-book edited by Agnès Bénassy-Quéré and  Francesco Giavazzi we made a point yesterday that we have reached the limits of inter-governmental approach to eurozone governance reforms. There seems to be a consensus among non-German economists in particular that it is more practical to advance European integration through loose co-ordination than through treaty change. We think the very opposite is the case. Difficult as treaty change may be, we are aware of the extreme limits imposed on the inter-governmental process in Germany.

To underline this message, we noted a comment by Hans Werner Sinn this morning. If you truly wanted to get ahead in this debate, he argues, you would need to create a genuine political union first - the full Monty, with a European army and a common foreign policy. Then you can have a central budget. 

“Germany’s powerful Constitutional Court has already made it clear that eurozone bailouts and other interventions represent the outer limits of what is possible under Germany’s Basic Law. The court may have deferred to the European Court of Justice on the question of the European Central Bank’s ‘outright monetary transactions’ scheme; but it will not be able to do the same with respect to fiscal sovereignty, because the constitution is clear, and the ECJ has no standing to interpret German constitutional law.”

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