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February 14, 2018

SPD nominates Nahles

It is interesting that not a single German commentator nowadays makes forecasts about the referendum of SPD members on the grand coalition. Monday’s disastrous poll - now repeated by another polling organisation - may concentrate minds among SPD members, and get them to pull back from the brink. We hear some anecdotal evidence from Bavaria that would point in that direction. Some will no doubt conclude that this is perhaps not the moment to hold another election. But, then again, with Andrea Nahles and Olaf Scholz the party’s old guard will resume power. Another four years of a grand coalition with this leadership duo could seal the fate of the party. These are genuine dilemmas, of which many members are aware.

The party’s executive committee met yesterday to nominate Nahles as the offical candidate for chairman, and to give Scholz the job of acting leader. This is seen by some as a setback for Nahles, but it was intended to defuse the criticism that a decision to give her the acting job now would create facts on the ground. We find the process somewhat pre-democratic. The leadership is shocked that somebody in the party dares to mount a competing bid for the leadership. And we also find it strange that political parties in Germany still feel the need to "organise the succession". You hear the same expression ("Nachfolge regeln") used in the CDU. In democracies party leaders don’t organise their successors. What normally happens is that candidates make a leadership bid, and the parties then vote between different candidates.

Of the six SPD deputies, Scholz has had the worst election result at the December party congress. Nahles is more popular than Scholz. She is the best orator the SPD has. Like Schulz, Scholz, and Sigmar Gabriel she is also a member of the Seeheimer Kreis, a group of conservative SPD politicians. As Jasper von Altenbockum writes, there is really no alternative to her right now, but her style is not fundamentally different to that of her predecessors. The author also makes a point we have not heard before: The German constitution has no place for party referendums. Like the Brexit referendum, it is not binding for SPD MPs. President Frank-Walter Steinmeier could bypass the whole process, and organise a vote in the Bundestag right now that would enthrone Merkel as chancellor. 

Alan Posener writes in Die Welt that SPD’s strategy might at best succeed in the short run, but will fail in the long run. He notes that young generation in both SPD and CDU/CSU is departing from the compulsive centrist tendency in German politics. The left in the SPD is looking to Jeremy Corbyn, and the right in the CDU/CSU to people like Sebastian Kurz of Austria. 

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February 14, 2018

Why the CEPR proposal won’t work for Italy in particular

In the debate on eurozone governance reform, we have the European Commission's proposal, Emmanuel Macron's vision, and the German finance ministry non-paper. Then a who's who of German and French economists came up with a synthesis of the German and French positions for the CEPR think tank. Assuming the German and French governments agree on something along the lines of the CEPR paper - for which a German grand coalition is a prerequisite - what do the rest of the member states have to say about this? So far, nothing much, except that the Dutch coalition agreement essentially took the German non-paper as their official position. Now, CEPS publishes a paper by Italian economists Marcello Messori and Stefano Micossi who have taken a look at the CEPR paper and are not impressed. They write that the CEPR paper, more than a compromise between the French and German positions, basically accepted the German non-paper wholesale, and even toughened it in parts. Therefore, they don't think the paper provides a basis for a viable compromise between Germany and France on the one hand, and the rest of the eurozone countries on the other. 

Messori and Micossi argue that the eurozone crisis was due to a market perception of redenomination risk - that is, that some member state would become unable to service its debt in euro and decide to do it in a newly issued currency. Their main charge against the CEPR paper is that it does nothing to address redenomination risk, and in fact worsens it with its proposals. On banking union, the CEPR paper takes on the German idea to reduce banks' holdings of government debt, which in a crisis can act as a stabilising buffer. This buffer is removed, increasing the potential for financial instability. The CEPR paper proposes that the ESM should only get involved with bank resolution or deposit insurance after national resources are exhausted, and with strict policy conditionality. It takes on board the idea of sovereign insolvency within the eurozone. And the fiscal rules continue to make countercyclical stabilisation harder. Messori and Micossi then argue that the market cannot fail to see the implications of this for the stability of banks and governments in different eurozone countries, and will act accordingly. The only thing preventing them from doing so - and allowing the CEPR paper to ignore the financially destabilising consequences of its proposals - is Mario Draghi's "whatever it takes", which may not continue beyond 2019.

From Italy, the CEPR paper looks like either a complete capitulation of France to German demands, or else an alignment of France with Germany because they think redenomination risk does not apply to them. And in this they may be right - from the demise of the ERM in 1992 we know that the Bundesbank was willing to intervene in the markets to protect France, but not Italy or the UK. If anything, German opinion is even less likely today to come to Italy's rescue. Are the French economists considering Italy's problem as not their problem, or are they fooling themselves that France can be Germany?

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February 14, 2018

Why cryptocurrencies are pointless

We recently noted that Agustín Carstens criticised bitcoin among other things for the fact that the bitcoin mining process uses more energy than the whole of Singapore. This is an amusing statistic but it doesn't tell us much because Singapore is a small city state. But we caught another energy statistic that may be more meaningful: Icelandic electric utility HS Orca is warning that energy use for bitcoin farming is growing exponentially in the country and may soon surpass residential electricity consumption. Will bitcoin bid Icelanders out of their electricity supply?

Iceland is known for its well-developed geothermal energy supply, which gives the country very cheap electricity in international comparison. Back in the bubble days before the global financial crisis ten years ago, cheap geothermal electricity attracted another sort of energy-intensive business: aluminum smelting. Foreign aluminum multinationals such as Alcoa would set up smelters in Iceland, ship in bauxite, and ship out aluminum taking advantage of cheap, zero-carbon geothermal electricity. Another point of comparison is the accusation that bitcoin is a bubble or a Ponzi scheme, and we all know how Iceland's experiment with international banking turned out.

Which brings us to a piece by Jon Danielsson at VoxEU, who does not see the point of cryptocurrencies either. In short: cryptocurrencies are inferior as money to fiat money; they are not a store of value but speculative assets - though Danielsson absolves them from the charge of being Ponzi schemes; and they don't generally offer the privacy and security advertised by their advocates. The most damning argument of all, in our view, is that bitcoin is actually very poor as a payment system. The statistics cited by Danielsson are that each bitcoin transaction costs about $25 and one hour to process. This is why, we would observe, it makes sense for bitcoin miners to move to Iceland for cheap power. The reason each transaction takes so long to process is that the blockchain requires a complicated cryptographic "proof of work" problem to be solved in order to add each transaction to the ledger, which only grows with time as it contains every transaction ever undertaken.

We recall another story from last month, when a bitcoin conference decided to stop taking registration payments in cryptocurrency because it took too long to process the transactions. Any other fintech that had this to show for efficiency and scalability after seven years of deployment and development would be declared a failure. The fact is, Luca Pacioli had the double accounting right in the 15th century, and relational databases from 40 years ago provide reliable and scalable - though centralised - ledgers. As Danielsson concludes, cryptocurrency is a religion. One reason peer-to-pear doesn't scale is that a centralised ledger scales linearly with the number of users, whereas a decentralised ledger scales quadratically as the number of pairs of users. 

Finally, we note that Mario Draghi was asked about bitcoin at the #AskDraghi ECB youth dialogue yesterday. He said it's not the ECB's job to regulate bitcoin. And, on this, we agree. At best it is an asset - a crypto-asset - and, as far as banking supervision goes, there are rules for assets on banks' balance sheets - which are denominated in central bank money. Draghi said the ECB is very interested in the blockchain technology for payments systems, but that the technology is not mature enough yet. As outlined above, we don't think it will ever be.

At least the Icelandic story shows bitcoin doesn't have to worsen global warming.

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