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March 01, 2018

A journalist's murder and Fico's administration

It is not every day that a eurozone prime minister displays a €1m pile of cash at a press conference, but this is what Robert Fico just did in connection with the murder of young investigative journalist Ján Kuciak. Kuciak was killed along with his fiancée at the week-end in what police describe as a professional hit. What makes his killing politically so sensitive, and of wider significance, is the publication of Kuciak's unfinished work, which revealed that one of Fico's aides had ties with a businessman linked to the Calabrian 'ndrangheta. Kuciak was known to be investigating the Panama papers, and tax evasion and organised crime generally, but the revelation of ties between Fico's government and organised crime - however tenuous - is the real shock. The revelations have led to the resignation of the aide, Maria Troskova, and of Viliam Jasan, who was secretary of the state security council. Jasan was the first to hire Troskova, who was later hired by Fico. In addition, culture minister Marek Mad'aric resigned saying that a journalist's murder should not have happened during his tenure. Fico reacted to the whole scandal by giving a press conference in which he displayed a stack of banknotes worth a million euros to announce a reward for information leading to the arrest of the murderers. 

The situation is fertile ground for conspiracy theories. The latest is that a fire on Tuesday in the building of the financial administration in Kosice may have destroyed evidence of tax fraud related to Kuciak's investigations. The fire started on the roof of the building, while the offices are on the first and second floors and the archive in the basement. So, it is not known yet whether any documents were destroyed, writes the Slovak Spectator.

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March 01, 2018

How should Europe respond to Trump?

The US media report that President Donald Trump is considering imposing 24% duties on steel imports, and 10% duties on aluminum. The countries most affected by this are the Nafta countries, China, South Korea, and Germany. How should the EU react?

Sebastien Dullien makes an important strategic point about retaliation by the EU. There is an emerging view in Germany that the EU should be cautious in responding to Trump. German industry can live with a one-off hit, but does not want a trade war. Dullien argues that this thinking is short-sighted. He writes that the European Commission is right to draw up a list of politically sensitive US imports as targets for retaliatory action, because the EU is the only trading region in the world that can stand up to the US. If the EU fails to act, nobody will. 

The issue at stake here is hugely important. This is not just about duties, but about policy certainty for business planning. Global supply chains are based on the premise of reliable trade policies. If Trump imposes anti-dumping duties unilaterally, he not only breaks WTO rules but affects global supply chains. Once companies become convinced that the WTO rules are no longer being applied, they will shift production back home. Since the WTO has no means to defend its own rules, there is no alternative to action by the EU.

We think that Dullien's strategic argument is impeccable, but wonder whether the preservation of global supply chains adds as much to our societies' welfare as economists tend to maintain. This debate interacts closely with that on the future of globalisation, and specifically on the tendency by multinational companies to shift profits to countries with low or no corporate taxes. It is global supply chains and the ability to plan them that makes this possible. Opponents of globalisation would regard the arrival of less reliable supply chains not as a threat but as a desired feature of well-designed anti-dumping policies.

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March 01, 2018

Why economic survival is not sufficient for the sustainability of the eurozone

Our reaction to letters or joint reports written by European economists is often allergic, but this one is a rare example of one we agree with. It makes the overriding point that 

"if the monetary union doesn’t rapidly succeed economically rather than merely survive, it will eventually become politically unsustainable."

The signatories of this letter - which include Lorenzo Bini-Smaghi and Luis Garicano - argue that institutional and political reform should be at the heart of the debate, not short-sighted financial fixes like credit lines. 

They argue that there is no way around the need for a democratically accountable body such as a eurozone parliament. They make four specific proposals:

  1. a credible financial backstop for a common deposit insurance system and a strengthened resolution authority;
  2. an unemployment insurance scheme as a tool of macroeconomic stabilisation;
  3. a eurozone budget with tax-raising and debt-issuing rights;
  4. and a new cohesion policy for states willing to engage in structural reforms.

What needs to end is a crisis response based on permanent internal devaluations. It is economically destabilising, and politically unsustainable. 

In the same context, but going in a very different direction, we note a paper by Olivier Blanchard advocating that eurozone member states adopt German-style wage bargaining systems as a primary tool to deal with internal demand shocks, which he says are the major sources of business cycle fluctuations in the eurozone. We are not going to summarise his argument in detail, but note that in his view a long period of wage moderation is the only way to fix the continued and substantial unemployment problem in France.

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