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November 23, 2017

..the Greek government too

Panos Kammenos, the Greek defence minister, is a weak link in Alexis Tsipras government. New Democracy called him for a Q&A session in parliament over his involvement in a failed munitions deal with Saudi Arabia. Tsipras upped the game by requesting to postpone the session, as he said he wants to be present at the debate but is not able due to a visit to Paris. New Democracy rejected his request for a postponement. They see the issue as a 'first class' scandal that could be used to pressure the government. A preliminary judicial investigation has been launched, too.

Kammenos has so far been able to fight off accusations of wrongdoing, but has had to call on the backing of Tsipras and his party. Some Syriza MPs are unhappy to be put into this position, which prompted a discussion about the alliance between Syriza and Anel, the junior coalition partner of which Kammenos is the leader. Though this discussion has calmed down, it could easily flare up again with new allegations.

Macropolis writes that the chances of the government falling over this are slim. It would take some very serious and credible revelations to trigger a potential split of the coalition. 

But if the scandal continues, Syriza might have to reconsider its coalition partners. What about the new left alliance under Fofi Gennimata? Gennimata dismisses the idea of a coalition with Syriza at this stage. The founding congress of the new alliance party will not take place until January. But she does not completely rule out working with Syriza in the future. After the end of the bailout programme, when painful austerity measures no longer have to be agreed upon, a grand alliance of the centre-left and the left is indeed a real possibility.

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November 23, 2017

The eurozone's impossible fiscal trinity

In a blog post at the Council on Foreign Relations, Brad Setser argues that there is no realistic chance that the eurozone as a whole can adopt a looser fiscal policy stance, which would be necessary to reduce the slack in the eurozone economy itself and help bring the global economy into balance.

The imbalance Setser is referring to is the fact that the eurozone running a current account surplus above 3%, while the US continues to run a substantial current account deficit. This indicates that the eurozone's fiscal stance, with an estimated structural fiscal deficit of about 1%, is too tight, while the US structural fiscal deficit of about 4% is too loose. However, the US structural fiscal deficit is comparable to that of Japan, the UK, and even China, so the eurozone is the odd one out.

The reason the eurozone cannot reduce the slack in its economy is Setser's trinity:

  • member states with large current account surpluses and fiscal space don't want to use that fiscal space because they don't have domestic slack - think Germany and the Netherlands;
  • member states with slack are fiscally constrained by the eurozone's fiscal rules even if they have a moderate current account surplus - think France, Italy or Spain;
  • the eurozone as a whole cannot could pick up the slack because it has no common institutions able to borrow and spend, and no realistic prospect of getting them;

As a result, the eurozone has lacked fiscal stimulus when it has needed to support domestic demand, and has relied excessively on monetary policy to support growth.

The eurozone behaves as the sum of nineteen small open economies because in a monetary union each member needs to keep its own fiscal house in order, which explains the aggregate imbalance highlighted by Setser.

The lack of a eurozone fiscal capacity causes the whole to run a current account surplus and adopt a tight fiscal stance.

A political problem is that slack is concentrated in some member states, so that a eurozone-level fiscal capacity would probably be denounced as a transfer union.

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November 23, 2017

Did Hammond do enough?

The UK media are saturated with reports on Philip Hammond's budget, which is fiscally expansive in contrast to his last one. It addresses the country's perennial housing crisis not by raising supply, but by increasing demand in the form of a tax exemption for first-time homer buyers. The effect will be to drive housing prices further up. 

But the more important part is the politics of the budget. The consensus is that Hammond did enough to survive in the job of Chancellor. He and Theresa May have not been getting on so well, as he has challenged her Brexit strategy. He set aside some money to cover the eventuality of a hard Brexit, though the puny sum of £3bn is unlikely to be enough if this calamity were to happen.

Among commentaries we noted one by Nick Timothy, who was Theresa May's chief of staff until the last elections. One has to take Timothy's comment with a pinch of salt, as much of what he writes is about vindicating his own record. But his judgement that this budget was sufficient to move things forward is probably correct - especially considering that he is no fan of Hammond's. Timothy writes that Hammond managed to address the two things that are absolutely necessary right now, by showing that he understood the twin challenges of British politics - the need to address the productivity crisis, and the need to support people who are struggling to make ends meet. Timothy's applause is not really genuine - he noted that May forced Hammond to get this balance right. He believes Hammond's instinct would have been different. 

Timothy is one the brains behind the UK's new industrial strategy, an initiative to be formally launched by the government next week to make the British economy less reliant on financial services. He makes the point that the budget allows this strategy to proceed in a meaningful way. We strongly agree with Timothy that the key issue for the British economy is to raise productivity growth, which has collapsed since the financial crisis. Timothy noted that Hammond sounded outright enthusiastic about the new industrial strategy, but withholds judgement on whether this is a genuine change of mind, or just a cynical act of political self-preservation.

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November 23, 2017

Berlusconi in Strasbourg

Silvio Berlusconi had his day in court - at the European Court of Human Rights in Strasbourg. He and his lawyers argued the case that the decision by the Italian Senate to ban him from office for seven years (until 2019, which is after the next elections) violates European human rights law. There was no decision yesterday: the judges ended the hearing with the announcement that they would let the parties know when a decision is due. Corriere della Sera noted that it is impossible to make a forecast, but it appears to us that Berlusconi's case has, at the very least, at least a superficial legal merit.

The decision to ban him was based on a law passed during the Monti administration in 2012, which allows the Senate to ban people from holding political office if they are convicted of corruption. There are at least two important strands to the argument of Berlusconi's legal team. The first is that this law mixes up the legislature and the judiciary, by giving politicians the right to pass legal sentences. The second is that the law was applied retroactively, to an incident that took place more than a decade before the law took effect. Both arguments seem strong to us, but the Justices in Strasbourg need only agree with the latter one, which constitutes an important legal principle in Europe, for Berlusconi's ban to be quashed.

The issue is not so much whether Berlusconi, now aged 81, will return as prime minister. We don't think this will happen even if he wins the case. But a victory in court would constitute an important political victory for him and the Italian centre-right, and strengthen the narrative that his removal from office constituted a conspiracy orchestrated by the left.

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