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June 07, 2018

How long will EU unity against Trump's trade policies hold?

The European Commission agreed that the tariffs on selected US goods would come into force in July. This is in response to Donald Trump's decision to impose tariffs on EU steel and aluminium. The Commission also activated the blocking statute in response to secondary sanctions by the US against European companies doing business in Iran. A letter, signed by EU foreign and economics ministers and addressed to Mike Pompeo and Steven Mnuchin, is calling on the US to exempt EU companies and individuals from those secondary sanctions. The letters was also signed by the German ministers, an indication that Germany remains supportive of the EU's position, at least outwardly, for now.

FAZ notes that Trump's trade policies are also under attack in the US, and that Republicans are considering legislation to curtail the president's powers in this area. But Trump has the right to veto any such legislation, and it would require an unusual degree of cross-party consensus to override such a presidential veto, not very likely to happen in an election year. 

The previously announced list of goods targeted for tariffs by the EU include whiskey, jeans, and Harley-Davidson motorbikes. The total value of the trade is tiny - about €6bn - with the tariffs to be phased in in two steps.

The trigger of the blocking statute is a largely symbolic act. It prevents, in theory, EU companies from complying with US sanctions. The Commission also widened the mandate of the European Investment Bank to allow it to extend credits to Iran. But FAZ notes that the EIB is not all that keen on such a role. The EIB would also be subject to US secondary sanctions as it is an active user of US financial markets. 

While the EU remains unified in its response to Trump so far, we expect to see growing divisions surfacing once Trump sets his eyes on the German car industry, which we expect to happen next year. We get a hint of the upcoming debate within the EU by Daniel Gros, who argues that the EU should not only not retaliate against US tariffs, but even accept voluntary export restrictions as Korea did. He says that EU steel producers should have formed a cartel and raise the prices of their US exports by the amount of the proposed US tariffs. This would have led to increased profits for EU producers on their US sales, and freed up capacity to sell elsewhere. Instead, the EU will now engage in retaliatory tariffs which are net negative for the EU itself. In its retaliatory measures, the EU is applying tariffs on finished products, not on intermediate inputs as the US is doing, so the EU isn't damaging itself as much as the US.

We strongly disagree with Gros who seems to mix up the interest of Germany with those of the EU. The EU has a strategic interests to preserve the multilateral trading system, and to stand up to Trump. Germany has a strategic interest to preserve its preposterous current-account surplus. As for now, the political differences are hidden to the outside world as the EU maintains a facade of unity. But if Trump decides to slap tariffs on German cars, we would expect to see the gloves come off, and Germany to defend its national interests more forcefully.

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June 07, 2018

Macron on the French social model - just a quest for savings after all?

The French finance ministry is looking into how to reduce social spending, Marianne reports. According to the Canard Enchaîné the prime minister and president agreed to cut €7bn in two years. This would be massive. To get a sense of proportion, a controversial reduction in housing aid by €5 in housing aid yielded €390m only. If this €7bn cut is confirmed, it would destroy the illusion that Macron will deliver on reinventing social policies, and cement the government's right-wing reputation. 

Insee just published its study on the rise of income inequality. It shows how strongly households, the poorest ones in particular, depend on social aid. The state spends €59bn on social services that are neither unemployment insurance nor pensions. About 40% of all French households benefit. Insee writes that this aid represents 5.8% of disposable income overall, but 47.6% of the income of the poorest in the French society and 0.5% of that of the most comfortable households.

Cécile Cornudet looks at Macron's campaign pledges and the reality of his social policies so far. The transformation remains in a state of eternal promise: a rethink of the efficiency of the social model turns into cuts in social spending. Instead of his promise to relaunch social housing, the policy is to cut access for the handicapped. A plan for the urban outskirts has no funds to draw from. Instead of reinventing emergency housing, financing for hotel accommodation has been cut with no alternative provisions for the affected families. 

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June 07, 2018

Weidmann's game plan

We cannot quite be sure whether Jens Weidmann has already concluded that he has no chance to succeeding Mario Draghi as president of the European Central Bank. But, if he still considered himself a candidate, it would be very odd for him to intervene in the eurozone reform debate at such a critical moment, as he did yesterday according to this report. Specifically, he came out fully against any notion of fiscal risk-sharing or the transfer of national fiscal sovereignty to Brussels. There is nothing really new in the speech itself. We know his views on the matter. He has always rejected notions of a fiscal union, emphasising the need for each country to get its own house in order. He noted, for good measure, that it would be tragic if European governments were to roll back reforms made in recent years. No prizes for guessing whom he had in mind. 

We can only presume that Weidmann must have concluded that he stands no chance of being nominated as ECB president, or of being accepted if nominated, given the recent political changes in Rome and Madrid. Why else would he seek to intervene in the debate at this time? Our reading of his intervention is therefore that he is seeking to consolidate the German position against any compromises Angela Merkel may be willing to concede. In this context, his critical intervention is highly relevant.

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