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November 07, 2017

Don’t believe everything German politicians tell you

It has been our experience that, in order to assess a political situation, it is best to understand the protagonists’ incentives rather than to listen to what they say. This is why we are relatively optimistic about Brexit (the interests of the EU and the UK are not identical, but are aligned). And this is also why we expect a Jamaica coalition to happen in Germany. Angela Merkel desperately needs the coalition, or otherwise her political career could end pretty soon. And, with this strong incentive, she will do whatever it takes to secure such a coalition. 

Merkel bounced back yesterday after a notorious period of reticence, alarmed by repeated threats from the FDP that it would be happy to pull out of the talks and face new elections - as the polls are currently benign for the FDP, but not for the CDU or the SPD. She has set a deadline for the talks about talks for November 16. This stage of the talks has produced an awful lot of noise in the media. Merkel criticised the talk of new elections. And she made the point that the parties had an overarching responsibility to reach an agreement - in a comment that seems to equate the interest of the state with her own.

FDP chief Christian Lindner seemed to back off from his previous hard-line position that he would rather have new elections than compromise on his party’s many red lines. And the Greens, too, are compromising over phasing out diesel technology as reported in Süddeutsche Zeitung yesterday.

FAZ has a good insight on the FDP’s negotiating tactics. The reason why Lindner is playing hard-to-get lies in the experience of 2009, when the FDP seemed all too eager to get back into government, with disastrous results four years later.

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November 07, 2017

The Paradise Papers and Leprechaun Economics

The latest tax haven leak, the Paradise Papers, reveals some interesting details of Apple's tax strategy after Ireland - under EU pressure - closed the double-Irish tax loophole in 2014. The leak also goes some way towards explaining the Leprechaun Economics phenomenon, that is, the 26% GDP increase seen in Ireland in 2015. Other than this, we don't expect to be following the Paradise Papers controversy closely, as there are very few active EU politicians implicated, and so the immediate political consequences in our areas of focus won't be significant.

But the Apple story is curious. Readers may recall that the Leprechaun Economics GDP bump in 2015 was eventually traced to the transfer of intellectual property rights to Irish subsidiaries by Apple and other multinationals. This showed up in the national statistics as a huge increase in capital investment, and so in GDP. The Irish statistical service then spent a year devising an alternative measure - Gross National Income - more suitable than GDP to measure economic activity in a 21st-century small open economy.

The best account of this we have found is the BBC's. They explain that, when in 2014 Ireland closed the loophole allowing firms to be stateless for tax purposes, it also reformed its tax laws to introduce other incentives to foreign corporations. In particular, a capital allowance making purchases of intellectual property tax-deductible. What Apple then did was to shift two of its subsidiaries from Ireland to Jersey, an offshore jurisdiction offering a zero corporate tax rate to foreign firms. One of Apple's subsidiaries remained in Ireland and bought the intellectual property from a Jersey subsidiary. The Irish firm got a huge tax allowance that can be used over a period of 15 years, while the Jersey subsidiary paid no tax on its profits from the sale. Apple insists that its tax liability actually increased in 2015. As a result of Apple's and other firms' transfers of intellectual property in 2015, Irish national accounts recorded an increase of about €250bn in intangible assets. 

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November 07, 2017

Where is Macron's left in the majority?

"I am from the left, this is my history and my family”, Emmanuel Macron once said. Yet, his government is focusing on measures for the right-wing electorate. Alain Juppé is content to have Éduard Philippe as prime minister, and 51% of Fillon's voters are satisfied with the president. 

From a strategic point of view this orientation makes sense: there are no elections until the European ones in 2019, so there seems to be plenty of time to adjust. For now what matters is the Senate, and this institution is in the hands of the Republicans. There is no left voice from the government. The Socialist ministers - Jean-Yves Le Drian, Marlène Schiappa or Stéphane Travert - have state roles that do not allow them to explain the government’s policies to the left electorate. Also, after the demise of the Socialist party, it is not clear what constitutes the popular left. 

This non-representation of the left, which is not only visible in the government but also in the assembly, raises two important questions, writes the liberal/conservative newspaper l'Opinion. First, it means there is not enough political debate inside the majority. Instead, there is an explosion of marginal issues. For a majority proud to carry the banner of efficiency, this is not helping to focus their minds on the important battles. The absence of a left voice also raises the question of what the presidential majority actually is. Those with a left background seem petrified by the fate of the Socialist party, but they need to come forward to define what the left voice is inside the majority. Otherwise this majority stops representing the majority. There seem to be discussions in this direction for the European elections. If France reintroduces national lists, the LREM is interested in enlarging its majority, eventually also with the PS. But that depends on where the Socialists will turn after their party congress.

You could say that Emmanuel Macron realises Dominique Strauss-Kahn’s dream to modernise the Socialist party, only that this is no longer within the Socialist party. Strauss-Kahn wanted to change the ideological DNA of his party, a change from socialism as redistribution mechanism to socialism at the root of the production process. He never had the chance to try it, as his sex scandals kicked him out of the game ahead of the Socialist primaries in 2011. Now he claims that the Socialist party deserves to die. But if Strauss-Kahn had succeeded in changing the Socialist party, we would live in a different world and Macron would not be were he is now, writes Françoise Fressoz

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November 07, 2017

Too-big-to-fail supermarket threatens Croatian government

We have called Agrokor, a Croatian agribusiness and retail conglomerate and one of the largest firms in the Balkans, the too-big-to-fail supermarket. The bankruptcy of Agrokor has sent shockwaves through Slovenia, Croatia, and Serbia, all of which have passed special legislation to deal with it. Now the saga threatens the stability of the Croatian government. 

The bankruptcy of Agrokor has been a convoluted process involving the Russian Sberbank as a major creditor, the emergency legislation dubbed Lex Agrokor, and lately the sale of most assets to US vulture fund Knighthead. To complicate matters, the whereabouts of Agrokor founder Ivica Todoric and his immediate family are unknown, and Croatia has issued an international arrest warrant for him. This does not prevent Todoric from pouring vitriol on the government from his blog. He recently announced he will launch a lawsuit against Croatia's economy minister Martina Dalic, as well as against Knighthead and the government-appointed bankruptcy administrator Ante Ramljak. 

The leader of the Croatian Opposition, the social democratic SDP, is launching a no-confidence motion against the government - led by centre-right HDZ - for its handling of the Agorkor crisis. The last straw was the lack of transparency about a 15-month bridge loan that was agreed by Ramljak during the Summer. There is a wider controversy over the alleged role that Ramljak and Knighthead played in the drafting of Lex Agrokor early this year. As the loose alliance supporting the HDZ government has a comfortable majority in parliament, the motion of no confidence is not likely to pass. 

Huffington Post has a mind-boggling summary of the major facts of the Agrokor case, including its long-term involvement with HDZ politics, subsidies, tax forgiveness, accounting fraud, and kleptocracy on a grand scale. 

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