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December 12, 2017

Unconventional ideas as a metric of the SPD's despair

This story in Spiegel Online is an indicator that the SPD's leadership is getting nervous about a grand coalition. It seems that the leadership wants it badly, but does not know how to sell it to the members. Martin Schulz is now considering the option of a minimal coalition agreement - where only a few parameters are agreed, rather than an entire programme. The rest is discussed and negotiated in the Bundestag. The thinking behind this is that stronger parliamentary involvement would make the grand coalition more attractive for sceptical SPD members. The SPD managed to get a lot of its own policies agreed during the last grand coalition, but SPD members and voters were not fully aware of this because everything had been pre-agreed in a 185-page coalition agreement.

We are not sure that this proposal will do the trick of persuading the SPD's hostile membership. With hindsight, it would have been the right thing to do last time. In the last parliament, the combined forces of the left had a majority. But this is no longer so. If you leave policy areas open, the SPD may find that it will get persistently outvoted by a majority of CDU/CSU, AfD, and FDP. In any case, we doubt that Merkel would want a situation where she needs to find majorities with the AfD. 

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December 12, 2017

Rodrik on why a fiscal union is necessary

Dani Rodrik does a good job debunking recent proposals by two authors who argue that a fiscal union for the eurozone is not necessary, provided some other conditions are met. One of the authors even argues for full renationalisation of fiscal policy.

Rodrik focuses on the complex interaction of private versus public finance. The key argument is that sovereignty will allow states to change the rules ex-post, as a result of which financial integration is impossible.

He contrasts this situation with a hypothetical bankruptcy of a large bank in the US. There is no need for state governments to get involved because residents are protected by the central authorities. But, because EU member states retain their sovereignty, they cannot make the same commitments as the federal US government does. A regional shock will thus affect other borrowers in the same country in a self-fulfilling manner.  

"Pretending that we can separate private from public finance may exacerbate, rather than moderate, financial boom-and-bust cycles. In contemporary societies, finance must serve a public purpose beyond the logic of financial market profitability. So it is irrevocably politicized – for good as well as bad reasons. It appears that conservative and progressive policymakers alike are resigning themselves to this reality."

We would acknowledge that it is possible, in theory and in a parallel universe, to create a system in which fully decentralised fiscal policies are sustainable in a monetary union. But the theoretical conditions under which these might work - such as the notion of a perfect banking union, or the voluntary abandonment of all fiscal rules, are politically even less realistic than the idea of a fiscal union. It is far easier for Germany, for example, to agree to a fiscal union than to a pan-European deposit insurance. We see no chance that European countries will give up their remaining sovereign rights in relation to their banking system. It is easier to create a fully-fledged European state than those warped alternative constructions under which a monetary union might work.

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