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January 19, 2018

On the futility of discussing the German current account surplus

There is a ritual in the debate on German current account surpluses. Somebody - like the European Commission or the IMF - launches a criticism of German policies as encouraging the surpluses. Germany dismisses the criticism, always with the same arguments. 

We have long ago come to the conclusion that Germany will only change policies if confronted with a clear and present threat of trade sanctions - even though it is also absolutely true that the surpluses are not the result of unfair trade practices. The causes of the surplus are complicated in nature, but there are domestic policies Germany could enact to increase investment and to reduce its large fiscal surplus, which would help curtail the continuously large current account surplus. Contrary to German protestations, its current account surplus is not falling.

The issue came up again in yesterday's discussion in Frankfurt at a joint conference between the Bundesbank and the IMF. The speakers went through the same old ritual as just described. Maurice Obstfeld noted that of Germany's 8.5% surplus, 4.5pp are beyond what can be justified by demographic developments. In other words, policies could reduce the surplus by at least 4pp. He called on fuelling public investments at a time when the economy was already showing signs of overheating. Jens Weidmann predictably dismissed the criticism, noting that the surplus is not the result of misaligned incentives or protectionistic measures. He presented a calculation according to which a 1pp increase in the fiscal balance would have virtually no effect on the current account.

What complicates the discussion is that the Germany's surplus is genuinely weird. It is the result of a dysfunctional monetary union, which has led to a permanent depression of Germany's real exchange rate. The two ways to solve the probleare m for Germany is to end the obsession with fiscal surpluses, or for the eurozone to break-up. Neither is very likely. In the absence of US trade sanctions - which, if they happen, will happen for the wrong reasons - we see no chance of the German surpluses coming down.

It is interesting to note how the German media reports this. Handelsblatt writes that the criticism of Germany is part of a mercantilist plot by others to gain advantages for themselves - by asking Germany to import more. We thought it was interesting too that the authors felt it necessary to explain the relation between the balance of imports and exports on the one hand and that of investment and savings on the other - a concept that is virtually unknown in the German public debate.

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January 19, 2018

The Brexit revocation madness

The debate on Brexit revocation is not ending. We think that Simon Jenkins has got it spot-on:

"They wander Westminster with staring eyes. 'Repent,' they cry, 'or be doomed. We are all doomed.' They are the second-referendum adventists, the priests of the afterthought, the prophets of the second coming. They meet with decrepit peers in cobwebbed attics. They mix potions and spells, and stick pins in plasticine Theresa Mays. They are mad. As mad as the flat-earth leavers."

In terms of UK politics, we think this is, or at least should be, the final word. It probably won't be. 

In terms of how a UK exit would play in the rest of Europe, we highly recommend the study of Andrew Duff's analysis on the issue. He bases his observation on the assumption (which he himself dismisses as unlikely) that the UK goes ahead and revokes.

The EU would not simply say: "great, come back, all is forgiven". Time has moved on. The European Commission has an action plan until 2025. David Cameron's deal will not be revived. On the contrary, the EU will want the UK to recommit to the principle of ever closer union. The UK would need to accept an end to the British rebate, and an end to several opt-outs (though we agree with Duff that this would probably not affect the opt-outs on the euro or Schengen). But the various opt-outs on the charter of fundamental rights, and on a common immigration policy, would all have to go. Oh yes, the UK would be under pressure to join the banking union, too. 

All these things would have to happen for the European Council and the European Parliament to accept a British revocation. We would like to point out that second referendum advocates in the UK make the implicit assumption that the UK can revoke unilaterally. This is not the case at all. Revocation requires the formal assent of the EU. So what happens if the EU says No?

"What is certain, at least, is that if its revocation of Article 50 were to be rejected, the United Kingdom, acting before midnight on 29 March 2019, could protest to the European Court of Justice. The Court could then order a stay in the withdrawal – a temporary fix that would have much the same practical effect as a European Council unanimous decision to prolong the two-year timetable.

In normal circumstances, stopping the EU clock is an honourable practice and often leads to crisis resolution. When it comes to Brexit, however, almost anything could happen. A hypothetical British decision to stop Brexit in its tracks would be a highly calculated risk."

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January 19, 2018

Varadkar, the enfant terrible in the Brexit negotiations

Leo Varadkar warned the UK not to backslide on its commitments for Northern Ireland. Varadkar said in his speech in Strasbourg on Wednesday that he will make sure that what has been promised in theory will be delivered in practice. 

In December, to move forward to phase 2 of the Brexit talks, the UK agreed with the European Council that 

“in the absence of agreed solutions … the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 [Good Friday] Agreement.”

Sammy Wilson, a spokesman for the Northern Irish DUP, who attends the Brexit negotiations as part of the DUP support deal with the British Conservatives, lashed out against Varadkar calling him a nutcase, naïve, inexperienced and arrogant. Wilson warned the Irish government that siding with hard-line EU negotiators could destroy the Irish economy, according to Politico. Instead he called on the Irish to cut the UK some slack.

We all knew that a hard Brexit is incompatible with respecting in full the Good Friday Agreement as well as the North-South Cooperation. There needs to be an agreed solution to find a way forward. And this is where Varadkar plays his bargaining chip, much to the irritation of Tories and Unionists.

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