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July 07, 2017

Is Emmanuel Macron just another Matteo Renzi?

We note some eerie parallels between the way Emmanuel Macron is prioritising his reform agenda with that of Matteo Renzi. Renzi also started off with ambitious and comprehensive plans for structural reform, but burned his political capital by focusing his efforts on the constitutional and political reforms rather than on economic reforms. Since Macron's grand speech in Versailles, we now detect the first voices daring to criticise the president and his team. Institutional reforms make sense from within the government, but may not be a priority for the rest of the country. Is Macron a control freak, like Renzi, whose main priority has become to consolidate his own power? We all know where that ended in Italy. Is the reform agenda which brought Macron to power more or less likely to succeed with a technocratic government, total newbies in parliament, and hardly any opposition except for Jean-Luc Mélenchon? 

There are already the first disappointments. Liberalists were underwhelmed by Édouard Philippe's reform roadmap. Too hesitant and too slow, and not worthy of being called a revolution as evoked by Emmanuel Macron, says Gaspard Koenig in Libération. The economist Nicolas Bouzou puts it this way: we go into the right direction, but at 1.5km/hour. Philippe Aghion and Philippe Martin, who helped to design Macron's economic programme, disappeared from the inner circle, as did Jean Pisani-Ferry. The roadmap is a hodgepodge of incremental reforms that any of the two previous governments could have presented. Koenig bemoans the lack of structured ambition, details, or a real project, so this is far from being called a revolution. The major structural reforms - solidarity wealth tax (ISF), capital taxation, and the competitive and employment tax credit (CICE) - were pushed back. The autonomy Macron promised universities on the campaign trail no longer appears in the programme. The same is true of the reform of unemployment insurance. And old patterns still persist, like the €10bn investment fund for new technologies, with the state as strategic investor. Koenig says the fear is that the economists in Macron’s team will be replaced by technocrats and the lack of ambition that goes with that.

The only reform the government remains serious about is labour reform. We see that choosing a prime minister from the the Republicans has helped to win the legislative elections and weaken the opposition, but it may well turn out to be the achilles heel of Macron’s ambition to transform the country.

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July 07, 2017

The real obstacles to a Brexit deal

As ever Andrew Duff gives us a reliable guide on where we are in the Brexit process. This is very different from what one would gather from the media, which seems to exist in some parallel universe. We fully agree with Duff that questions about the future of EU citizens are not going to be the big issue. This is now down to technical discussions, of which there are many. As the EU is now accepting that it cannot treat the UK as a third country, it cannot impose the jurisdiction of the ECJ on the UK forever. There will also be a political deal on Ireland. The main issue is funding, or rather finding the correct sequencing. The main obstacle is confusion within the UK about the detailed future relationship. The issue is not whether the UK will be in the single market or not (it has already been decided it won't), but whether the UK wants an FTA that includes participation in specific EU agencies and spending programmes. 

"Full agreement on the matter of money, therefore, is not achievable in Phase I. Good progress can only be made in Phase I if the UK has made up its own mind about its long-term financial engagement with the EU. For the moment, divisions in the Tory cabinet over the longer term relationship seem to be crippling the Treasury’s efforts to respond substantively to the Commission’s negotiating position. So we are left with a conundrum. Irresolution on the British side makes it an unreliable negotiating partner who may not be able to deliver a final deal."

Duff suggests that the EU27 should make an offer that cannot be reasonably refused. The proposal of a Joint Brexit Committee is a good start. The next step should be a broader reflection on how the EU27 wants to deal with its neighbourhood. 

We also noted a very good comment by Alex Massie who writes that the UK, including its so-called pro-Europeans, has never been committed to European integration. 

“...no-one, or almost no-one, ever bothered to make a case for the EU’s enduring value. Even pro-Europeans couched their arguments in miserably transactional terms: the EU isn’t great but it’s a little better than the alternatives. And having spent thirty years squabbling, during which time every treaty negotiation was treated as Britain vs the Rest, we created a political culture in which the default setting or assumption was that, while still better than the alternatives, the EU could never be anything other than intrinsically hostile to British interests. We never saw the nobility of the project because we never talked about it and, perhaps, because if we had, the British people would have laughed at such talk."

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July 07, 2017

Why Nordstream 2 should be delayed

Georg Zachmann makes the argument that Germany should drop its support for the Nordstream 2 project, or at least postpone the decision to built it. The two reasons he gives are that it increases Europe’s dependence on Russian gas, and that it isolates Ukraine politically. One of the German arguments in favour of Nordstream 2 is precisely that the EU gas supplies are currently dependent on pipelines that go through Ukraine. Zachmann writes there is no real risk associated with this, especially in view of the benefits Ukraine derives from its close association with the EU, which the country will not put at risk. Nordstream 2 will be seen by Ukraine as a vote of no confidence. The country has reformed its state-owned gas industry, and allowed western companies a foothold in that market. There is now hope that Ukraine can be self-sufficient within a few years. Nordstream 2 would further increase Ukraine’s dependence on Russia.

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July 07, 2017

On why the G20 won’t solve the main problem

Dani Rodrik offers some pertinent thoughts on globalisation. He notes that the G20 has its origins in two ideas, one useful, another less so. The good idea is that one needs to include developing and emerging market economies in the discussions on global governance. The less useful idea is that solving the pressing problems of our time requires more global co-ordination. He says the opposite is true. While it is true that climate change does indeed require global co-ordination, this is not true for globalisation:

"But the skewed and unbalanced trade deals ... were not imposed on the US by other countries. They were what powerful US corporate and financial interests – the same ones that support Trump – demanded and managed to obtain. The failure to compensate the losers was not the result of inadequate global cooperation, either; it was a deliberate domestic policy choice.

The same goes for financial regulation, macroeconomic stability or growth-promoting structural reforms. When governments misbehave in these areas, they may produce adverse spillovers for other countries. But it is their own citizens who pay the greatest price. Exhortations at G20 summits will not fix any of these problems. If we want to avoid misguided protectionism, or to benefit from better economic management in general, we need to start by putting our own national houses in order."

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