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January 24, 2018

AfD europhobe to chair of Bundestag's budget committee

Germany doesn't have a grand coalition yet, and may never have one, but the Bundestags acts as though it is a forgone conclusion. According to its internal rules, the main opposition party gets the chairmanship of the budget committee, which is the single most influential committee because any ESM programme would have to go through this committee first. 

The designated AfD politician is Peter Boehringer, who is the party's spokesman on the euro and monetary policies. As FAZ reports, he is an advocate of immediate German withdrawal from the eurozone, which he calls an illegal transfer union. FAZ notes that the importance of the appointment should not be overestimated. The chairman watches over the rules of proceedure, but has little influence on the votes themselves as the majority in the committee reflects the number of seats in the Bundestag. We are not quite so optimistic. Wolfgang Schäuble managed to co-opt the Bundestag during the days of ESM programmes, and this is largely a procedural matter. The constitutional court has given the budget committee in particular the power to vet programmes, and a hostile committee chairman could impose procedural blocks. The Bundestag has been operating a gentlemen's agreement whereby all parties obtain the chairmanship of some committees. There has been a debate to exclude the AfD, but the decision was taken not to treat the AfD differently from other parties. 

With a grand coalition, the AfD would become the main opposition party. The decision to press ahead with the appointment of Boehringer is logical in one respect: if the grand coalition doesn't happen, there would be new elections anyway. So, there is no risk of appointing the wrong opposition politician. 

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January 24, 2018

Watch out for the Labour Party debate on the single market

We have repeatedly dismissed suggestions of a revocation of Brexit. But we think there is a slightly greater chance of a revocation of parts of Theresa May's Brexit mandate. It is possible - though not very likely - that a majority in the UK parliament could be organised for the UK to become a formal member of the EEA.

We know from our own conversations that there is currently a debate going on inside the Labour Party. If Jeremy Corbyn were to change of his mind on this issue, it could unleash a new dynamic. We don't think he is going to change his mind, though, for the simple reason that he benefits more from attention focusing on divisions inside the Tory party rather than opening up divisions within Labour. 

But this debate is not over yet. We noted a comment in the New Statesman by the Labour MP Wes Streeting, who argued that there was still time for Labour to make the case for staying in the single market. He points to a poll of MPs finding that 56% believe that single market membership is compatible with the Brexit vote. This includes 90% of Labour MPs. 

The argument he brings forward is a bit simplistic, and factually not correct. Leaving the EU does not require leaving the single market, he writes. This is not true. Norway, Iceland, and Liechtenstein, have not left the EU. EEA membership was constructed as a step towards potential membership in the future. What is true, however, is that EEA membership is something the UK could in theory seek to negotiate. It cannot claim it unilaterally as some UK lawyers and politicians believe to be the case. 

Where we agree with Streeting is on the internal political dynamics that would set in if the Labour Party leadership endorsed a change in the Brexit mandate.

We feel that it is already too late for a change in the mandate. We are now half-way through the Article 50 process and, while the UK and the EU have not yet debated the nature of the future relationship, there seems to be a convergence of views on the broad outline of that relationship. This is true at least for the formal framework:; the trade part would be an ordinary third-country trade deal like the one with Canada and South Korea, but there would be additional elements for broader co-operation. An aviation agreement is possible, as is some limited access for services industries, but we don't think that it will resemble anything close to what the UK enjoys today.

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January 24, 2018

On the productivity puzzle

The book by Jonathan Haskel and Stian Westlake on the productivity puzzle is one of the more important contributions in economics literature in recent years. For those who don't have time to read it, there is an article in Vox in which the authors summarise the core of their argument, which is focused on the rise in the intangible economy. Measured productivity growth will remain low until governments design the physical and legal institutions this new economy requires.

The authors start with the observation that the ratio of tangible to intangible investment, still strong positive in 2000, inverted around the time of the financial crisis and is now strongly negative. Intangible investments include data, R&D, and developing of business processes. National accounts measure some of it, like software, but not all of it.

The argument is essentially a variant of the mis-measurement theory. If you underestimate the degree of tangible investment, then you underestimate GDP growth. But there is a lot more to it. The authors go into some detailed explanation of other channels through which shifts in intangible investments affect productivity. This is still a new area of research, and it is clear that we are still in the stage of hypothesis formulation. This is clearly not the final word on issue, but probably the most promising avenue on which to proceed.

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