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February 12, 2018

What the euro debate is really about

As the EU and its member states get down to the nitty gritty of eurozone governance reforms, with everyone vowing to make progress by June, it is easy to believe that this is a purely technical discussion and lose sight of the moral dimension that the eurozone crisis acquired at its height, and which is still implicit in much of the current debate. Erik Jones brings back into focus the conflict between what he calls the engineering and the ethical approaches to the eurozone crisis.

Jones notes that we now have two technical proposals for eurozone reform on the table: the more comprehensive one by the European Commission, and the more abbreviated one by fourteen German and French economists for the CEPR. He notes that the Franco-German proposal is more politically realistic, as it attempts explicitly to bridge the gap between French and German preferences. The Franco-German economists lean more towards intergovernmentalism than towards the community method favoured by the Commission, and place more emphasis on national responsibility and fiscal discipline enforced by the markets.

Jones notes that both the Commission and the CEPR proposals involve compromises as any good engineering solution should, but he worries that those with an ethical approach to eurozone crisis resolution will feel disinclined to make compromises, because ethics is about right and wrong, not about what works. And he notes that both the German finance ministry non-paper and the Dutch coalition agreement last year, which reject any sort of common fiscal capacity at the EU level, are rooted in an ethical view that the eurozone crisis was a failure of man, not institutions. Jones concludes that, as long as people of this persuasion are in power in places like Germany and the Netherlands, it will be difficult to make technical progress on eurozone governance.

By contrast, an example that there can be technical solutions to ethical problems is a recent piece by Maria Demertzis for Bruegel. Demertzis notes that a serious problem in the upcoming negotiations will be lack of trust, both among EU member states and lack of trust in the EU itself. To solve this problem of trust, she proposes three technocratic fixes: set annual targets for improved institutional governance; take a systemic approach to policy-making to break out of the false dichotomy between risk sharing and risk reduction; and close the gap between Brussels and the national capitals and between what the EU does and what Europeans believe it does.

We think Erik Jones is a bit too charitable to the ethical view of the eurozone crisis. It reduces the crisis to a morality play, and insists on a liquidationist policy that has caused untold human suffering, ignoring the dictum "first, do no harm". In addition, we fear the most lasting impact of the eurozone crisis will not be economic but political in that what used to be a budding European polity ten years ago has been replaced with a smoking crater. It takes five minutes for a columnist to come up with the PIIGS acronym, but that has now taken a life of its own among the people who would otherwise disparagingly refer to the European "mezzogiorno" or the "club med". The view of the eurozone crisis as a morality play having to do with national character rather than with capital flows and mercantilistic vendor finance was captured by the metaphor of the ants and the grasshoppers, and culminated in the "booze and women" episode of last year. The political damage from all this will be difficult to repair.

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February 12, 2018

How Brexit can still falter

We have reached another difficult moment in the Brexit negotiations. There is now a non-trivial probability that the talks will fail and that an Article 50 deal is not agreed, or not ratified if agreed. The would lead to a hard Brexit in 13 months' time. 

We noted in December, at the time of the phase-one agreement between the EU and Theresa May, that the British establishment is delusional about the trade agreements the EU is likely to offer. It is clear that the UK did not take the agreement on Ireland seriously, hoping to fudge this issue way beyond the Article 50 stage. While we think that terms such "Canada" or "Norway" are too imprecise to be useful in practice, the EU will not offer a continuum of post-Brexit bilateral working arrangements. We noted discussions on Twitter according to which there is disagreement among several member states with the line pursued by France, Germany, and the European Commission. This is indeed true. We recently reported on a memo that Germany fears a breakdown in the unity of the EU's negotiating position. But disagreement among EU member states is not going to help the UK, since trade deals need to be ratified by all of them. The logic behind the EU's current negotiating position is to maintain unity. Everybody could live with a customs union arrangement. And a mutually agreed, goods-only, trade deal would be ok for most people as well. It is the intermediate options - such as a trade deal with separate market access for financial services - that would cause more grief than the extremes

The UK establishment is slowly coming to terms with the EU's unrelenting negotiating position, and the binary choices available: a customs union agreement - along the lines of the Turkey deal but very different in content; or a classic third-country trade deal, which will need to be a lot more detailed than the Canada deal given the sheer volumes of bilateral trade. We detect signs of a hardening in the position of otherwise level-headed newspaper commentators, as well as within the UK government itself. We noted a story in the Daily Telegraph reporting that senior cabinet ministers will give major presentations to the prime minister over their vision for Brexit. But Philip Hammond, the chancellor and the loudest advocate of a soft Brexit in the cabinet, has been sidelined from this exercise.

Juliet Samuel notes that the UK has manoeuvred itself into an impossible position. It is too weak to leave without a deal, but cannot accept a deal imposed by the EU on the UK either, because of the EU's insistence that Northern Ireland must remain part of the customs union. 

She recommends the following course of action: explain what trade deal the UK wants; accept the reality of a longer transition; and embark on a soft-power strategy to mark the EU's bullying approach to the negotiations as unfair - also in order to sow discord on the EU side.

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