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September 06, 2017

On the failure of global policy coordination

This comment by Brad Setser is a few days old but we think it is worth picking it up. He writes on policy co-ordination failures by the G3 central banks since the start of the financial crisis. While he concedes that the G20 had its fair share of successes, they got a couple of things wrong. The first was premature fiscal consolidation - agreed at the Toronto G20 summit in 2010. The second was the failure by the ECB and the BoJ to follow the Fed's lead and do QE back then. The ECB did not start QE until 2014. The result was that the dollar was relatively weak during 2012 and 2013, at a time when the eurozone was in worse shape than the US. 

We are now in a very different environment, but Setser is not happy about the current policy stance either, especially over here in the eurozone. 

"...now I worry that the Europeans have gotten perhaps a bit too fond of the policy mix that produced a weak euro—with Europe’s relatively tight fiscal policy (the structural deficit of the eurozone as a whole is about 1 percent of its GDP, well below the structural fiscal deficits of its main trading partners) offset by a relatively large external surplus. Even now the eurozone’s domestic demand is far below what I consider a reasonable estimate of where it should be."

He notes that the recovery is driven by domestic demand, not net exports, which is a good thing but probably the result of the downward shock to commodity prices. The real issue is that, if France and Spain start to consolidate without any offsetting easing in Germany and the Netherlands, the recovery will not affect the external surplus much. And that will make it harder for the ECB to exit the current monetary policy regime.

The fundamental point Setser raises is that there is no real global policy co-ordination going on - beyond joint responses to one-off clear and present threats.

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September 06, 2017

The day Catalonia disobeyed?

This morning the press in Spain is full of stories about how the Catalan parliament is ready to approve - in defiance of a Constitutional Court injunction - the Catalan government's proposed laws on the October 1st referendum and on the legal regime in the transition to a Catalan republic, together known as disconnection laws. Anyone looking at the agenda of the Catalan Parliament's plenary session today would be none the wiser because for the fourth time in a month the board of the parliament has not considered the two draft disconnection laws. And yet it is widely expected that the first order of business today will be an amendment of the agenda to include votes on the two draft laws. At 9am, one hour before the start of the plenary session, the speaker of the regional parliament Carme Forcadell has called an extrardinary meeting of the parliament board. Another possibility broached by La Vanguardia is that the Catalan government will approve the two laws by decree, to be endorsed by an extraordinary plenary session of the parliament already scheduled for Friday. 

The reason the disconnection laws are not on the agenda is that Forcadell is refusing a request by the unionist opposition, Ciudadanos and the PSOE's Catalan sister party PSC, that the legal counsel of the parliament issue an opinion on the laws before they are included in the agenda. While Forcadell's tactics may succeed in getting the two laws approved - after all there is a separatist majority of two seats - they have already lost the support of Podemos ally Catalunya en Comú. The left party used to support the idea of holding a referendum - even though it would advocate to vote against independence - but now says that the referendum as proposed by the Catalan government lacks democratic guarantees. Parliamentary procedure shenanigans will only harden this position.

Meanwhile, the Spanish government is ready to hold an extraordinary cabinet meeting at short notice, in case the disconnection laws are approved by the Catalan parliament. The first action is likely to be to seek another constitutional court injunction.

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September 06, 2017

Waiting for Varadkar

Leo Varadkar became PM by taking the party Fine Gael party by storm but now, almost three months later, there is a sense of unease among party members as the energy created by the leadership contest seems to have evaporated, and with it the party's chances in the polls. Varadkar has yet to outline his ambitions for the party, the government, or Ireland. The team around Varadkar gives assurances that this silence is deliberate, as Varadkar does not want to put a dividing line between him and Enda Kenny’s era, of which he was a part himself. But party members feel that he needs to address the people more to explain what he aims to do. 

Taking about "a republic of opportunity" and helping the people “who get up early” will not be enough, it has to be backed up with concrete proposals. Without a clear and defined message, Fine Gael is not election-ready, writes the Irish Times. The prime minister must find a message that goes with the generational change inside Fine Gael without forgetting other electoral groups. They also have to find new promising candidates. Michael Noonan will retire from politics, Enda Kenny might follow suit. 

The budget will be the next chance for Varadkar to prove himself. He already consulted party members about budget priorities, but this is seen as largely basic stuff, not the kind of groundbreaking change that his victory in the leadership contest foreshadowed. 

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