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January 15, 2018

Is the section on Europe for real?

There seems to be a consensus in Germany that the SPD did not gain much in the pre-coalition talks. But this is not true in our view. The first and by far most radical section of the agreed document contains a blueprint for reform of the EU and the eurozone. It contains much of what we ourselves have been demanding over the years - such as a fiscal union anchored at the level of the EU. Before we discuss whether any of this is for real, it is worth summarising the main points to get an idea of the enormity of the policy shift: 

  • enlarged EU budget, enlarged German contribution;
  • eurozone budget, within the EU's budget, with special focus on macro stabilisation, support for structural reforms, and repair of social imbalances;
  • turning the ESM into an EMF (without further details), and anchoring the lot in the EU (not intergovernmental);
  • strengthening the European Parliament, including in respect of eurozone governance (this is a point on which Germany and France disagree, but this is not insurmountable);
  • total agreement with Macron on tax avoidance and tax evasion;
  • support for a common corporate tax base and a minimum corporate tax rate;
  • a new attempt to legislate for a financial transaction tax.

This section clearly has the handwriting of Martin Schulz all over it. There was almost complete silence about this aspect of the agreement. The eurosceptics in the CDU and CSU did not say a word. Nor did the euro enthusiasts in any of the three parties. The debate was about taxes, pensions, health insurance, and the solidarity surcharge - a remnant from the days of unification. We assume that Merkel agreed to this on the grounds that none of it will ever happen. Instead of vetoing it at the coalition talks, she can rely on the Dutch, or the Hungarians, to veto this when it comes to treaty change negotiations. But it is possible to accomplish much of this under the treaty's chapter on enhanced co-operation, which was written specifically for this purpose.

Also noteworthy are some of the omissions. There are no specifics on the EMF. Can it intervene in member states economic policies? Can it trigger a debt restructuring? There is no mention of European deposit insurance in the document. Both major German parties have a problem with this. Even the SPD insists on the principle that banking systems have to be cleaned up before deposit insurance is possible. 

Also consider the limits imposed on the entire process by Germany's constitutional court. A fiscal union of the kind described in the document is no problem. But the Bundestag cannot agree to interstate fiscal transfers, nor to any form of uncapped liabilities that bind future parliaments. None of these legal constraints will change as a result of this agreement, if indeed it is implemented.

We are left, therefore, with a stark choice in German politics.  On the one hand the SPD party congress, or later the party members in a referendum, could reject the agreement. The result of this would be new elections; probably a new, more conservative, CDU/CSU leader; and a coalition between CDU/CSU, FDP, and the Green Party. This coalition would be a shift to euroscepticism.

On the other hand, the SPD could support this agreement, and Schulz manage to implement the sections on the EU. This would constitute the biggest integrationist move since the Maastricht Treaty. So, we have finally reached the stage of bifurcation in German politics. The era of managed procrastination, a hallmark of Merkel's reign, is ending.

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January 15, 2018

Can Drahos upset Zeman?

The incumbent Czech president Milos Zeman came first in the first round of the presidential election yesterday. However, having secured under 39% of the vote only, he will have to face Jirí Drahos - a former president of the Czech academy of science running as an independent - in a runoff two weekends from now. Drahos got under 27% of the vote. But polls conducted before the first round already put Drahos as a winner in a hypothetical runoff against Zeman. This may have consequences for the process of forming a government. As we covered last week, the parliament postponed to this week the first confidence vote on a minority cabinet led by controversial business tycoon Andrej Babis. Babis would form an illiberal tandem with Zeman, who has already said he would rather renominate Babis for a second confidence vote than go to fresh elections. As Babis won under 40% of the seats in the recent parliamentary elections, there are few alternatives to a government led by Babis either alone or in coalition. But if Zeman fails to get re-elected new elections look more likely.  

The runoff will be difficult for Zeman. He is a controversial figure, variously described as authoritarian, xenophobic, anti-Western, and pro-Russian, and has polarised the electorate for or against him. But in the first round of the election the anti-Zeman vote was fragmented. In addition to Drahos there were three other independent candidates - diplomat Pavel Fischer, media producer Michal Horácek, and activist Marek Hilser - who scored about 9-10% each, in addition to former social-democratic PM Mirek Topolánek who entered the race late also as an independent and came sixth with over 4% of the vote. All four have already endorsed Drahos for the second round.

Drahos is a moderate with no political experience and conventional pro-EU and pro-NATO leanings, whose main appeal to voters - despite his apparent lack of charisma - is his lack of involvement with any political scandals. He compares himself to Slovak president Andrej Kiska and Austrian president Alexander van der Bellen. 

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