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July 20, 2017

Where France and Germany disagree

We have previously pointed out that the Macron-Merkel agenda towards eurozone reform is very likely to disappoint. We are not saying that it won’t happen. It probably will. We are saying that it will not address the issues that need to be resolved - just as the banking union failed to address the co-dependence between the financial system and the public sector in several member states. 

Politico has done a good job listing the main areas of difference between Angela Merkel and Emmanuel Macron, starting with the observation that there is not a lot of substance behind the show - like the complete lack of details behind Merkel’s support for a joint fighter jet. The article lists five areas of fundamental disagreement between France and Germany that have not disappeared with the election of Macron: Germany’s excessive current account surplus, an issue on which Macron agrees with Trump; Germany’s unwillingness to raise defence spending, another point on which Macron is closer to Trump; continued German scepticism about France’s determination to reform; different visions on the nature of eurozone governance reforms (more on this below); and a battle for Mario Draghi’s succession. 

The article also outlines paths to a limited agreement: Merkel might find it easier to sell limited governance reforms at home if she can get Jens Weidmann appointed as Mario Draghi's successor. But we caution against any big swings in the German position on the substance of this issue. Germany is implacably opposed to any form of fiscal transfers. The most we can see is a common budget with only limited debt-raising capacity. The Politico article makes another important point: the eurozone economy is near peak performance right now. In three years' time, when some of those decisions are likely to be taken, we might already be in a phase of a downturn. 

It is important to highlight the ideological difference on eurozone reform in particular. Germany has a well-thought-out position on the issue, and the country is not going to budge simply because others say so. This is best summarised by Wolfgang Scháuble in a letter to German MPs, as reported by Reuters:

"The rule for this is simple and convincing: To set the right incentives and avoid non-sustainable developments, risks and liabilities must be at the same level and in one hand."

A more detailed presentation of the position has been worked out by the German Council of Economic Experts, or rather four of its five members (minus Peter Bofinger). We thought the following quote summarises the position nicely. It is telling us that Schäuble’s position is backed by the country’s economic establishment:

"There are abundant reform proposals [on eurozone reform], not least from France. These proposals include, for example, a common fiscal capacity or a common unemployment insurance to mitigate macroeconomic shocks, harmonized taxes or even a single minimum wage. Proposals of this kind have been put forward for years, but they follow a misguided diagnosis of the problems of the eurozone. They are based on the assumption that the problems lies in a lack of solidarity rather than on a lack of responsibility. ...They nurture the illusion that the advanced step of collective action requires the soundness of individual action, whereas our experience is the exact opposite."



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July 20, 2017

When the going gets tough, the Dutch go on vacation

After four months of government talks, the four parties currently involved in negotiations will take a three-week summer break and resume on August 9. The leaders of the right-liberal VVD, Christian-democrat CDA, left-liberal D66 and the Christian Union CU are cautiously optimistic about the progress made in negotiations so far. However, differences remain, notably on climate policy, migration (don't call it asylum), and medical ethics. There are also differences on fiscal and labour policy, but they are minor compared with those other three topics.

Migration was the deal-breaker in the previous round of talks involving VVD, CDA, D66 and the Green Left GL. The GL was uncompromising in its opposition to extending the EU/Turkey deal to the countries of North Africa. The CU also had misgivings like the GL did, but its leader Gert-Jan Segers has tabled a compromise proposal. Medical ethics is a sticking point between D66 and CU mostly. Issues include assisted suicide, abortion, embryo culture. Emily van Outeren in her NRC formation blog - linked above - expects D66 to be the one to fold. For this and other reasons, Max Pam writes in his comment on the formation vacation that he cannot see what D66 is doing in that coalition, as it would have to yield on all of its left-leaning positions. Observing that Belgium didn't do so badly without a government for over 500 days a few years back, Pam suggests to let these four parties hold negotiations all the way to the next elections in four years' time. If they get tired of talks they can take a walk or a bike ride through the woods, as the current vacation demonstrates.

NRC has an article spelling out in some detail the areas of disagreement on climate policy. All four parties endorse the Paris accord, but they differ on implementation. The first question is the pace of decarbonisation: D66 and CU want to set into law more ambitious targets than those demanded by the EU. The second issue is road pricing: D66 wants to introduce a new fee on all motor vehicles, while CU wants to exempt passenger cars and put the fee only on commercial and heavy good vehicles. Both VVD and CDA see no need for either of these two measures. The third issue is reducing greenhouse emissions from livestock. All parties are in favour of the easy measures such as using manure to generate energy. But the urbane D66 wants to reduce the livestock populations while CDA and CU don't, as they have more farmers among their constituents. The fourth issue is how to reduce the carbon use of industry. The greener parties D66 and CU favour incentives such as grants and investments, as well as closing coal-fired power plants faster than planned, while the VVD and the CDA prefer to impose fines on polluters and to keep coal plants open. Finally, to improve buildings' insulation and energy efficiency, the most concrete proposal is from the CDA, to create a government-funded development bank for technological innovation in sustainability. One alternative could be loans to households and businesses which they can pay from their savings on energy bills.

Maybe a hot summer vacation can have the effect of concentrating the negotiators' minds on climate change.

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