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June 11, 2018

The end of the G7 - good riddance

We cannot recall ever so much huffing and puffing from our usual sources after Donald Trump's decision to pull the plug on the G7 communique. We think the decision is consistent with what we know about Trump. It tells us that the international order based on inter-governmental coordination is coming to end. It was the perfect system for the likes of Angela Merkel. It allowed her to leverage a maximum amount of power. But what the eurozone debacle has taught us over the years is that technically incomplete governance systems based on co-ordination are unsustainable. That means they end. The G7 lasted for a long time, but the reality is that it has long outlived its usefulness. It started as a way for governments to co-ordinate macroeconomic policy in the post-Bretton Woods era. Its biggest successes were the Plaza and Louvre accords of the 1980s. It later became a platform to co-ordinate the ground rules of globalisation. But it subjected states, especially non-member states, to the diktat of a self-appointed elite group. All it took to end the unsustainable was a single election in the US. 

Angela Merkel's message from the summit - from the publication of the now famous picture to her subsequent statements - is that the EU now needs to stand on its own feet. We agree with that message, but we don't see Merkel's actions as consistent with her words. 

She has made no efforts whatsoever to bring down Germany's large current account surplus, which is one of several deep causes behind the collapse of the rules-based global trading system and the persistence of the troubles in the eurozone.  The lack of robustness of the eurozone is due in large part to a German refusal to strengthen the eurozone governance system. The eurozone was created as a fair-weather construction and remains as vulnerable to an election shock as the G7.

Her proposals on security cooperation go further - but how can the EU have a credible security force if the Bundestag retains a veto on troop deployment, and if Germany does not spend its fair share on defence? Germany's problem with Trump over the Nato spending commitment would merely carry over into any EU-based security apparatus.

When Merkel talks about strengthening the EU, she does not mean a stronger European Commission, or a stronger European Parliament, but a stronger European Council, in other words a stronger role for herself. We fail to see what problems that would solve.

Among the many commentators this morning, we like to pick out Niall Ferguson in the Sunday Times who tells us what we don't want to hear: that Trump is succeeding. It was not the popular article among those whose comments on the EU and the world we usually monitor because it didn't pander to the sense of outrage a lot of people felt over the weekend. 

"The key to the Trump presidency is that it is probably the last opportunity America has to stop or at least slow China’s ascendancy. And while it may not be intellectually very satisfying, Trump’s approach to the problem, which is to assert US power in unpredictable and disruptive ways, may in fact be the only viable option left."

We agree with Zaki Laidi that the correct European response is to project our own power more effectively. He notes Germany's humiliation at the hand of Trump, and concludes that it would be in Germany's best interest to pool its power. But in his discussion on defence, we thought it was telling that he referred to the UK as the indispensable partner, even after Brexit.

The success of the EU, as it is currently constructed, depended in the past on the goodwill of the US its ultimate security guarantor and global financial anchor, and a law-based international economic order. All of these are now shifting.

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June 11, 2018

Macron needs allies for his European agenda

Emmanuel Macron needs to build alliances if he wants to get anywhere with his European agenda. On this point we agree with the speaker of the German Greens, Franziska Brantner, in her comment for Le Monde. In the council Macron does not have many allies. Angela Merkel agrees with Macron only in form but not in substance. Under the leadership of Mark Rutte, eight EU countries (Ireland, Lithuania, Estonia, Latvia, Finland, the Netherlands, Denmark and Sweden) now called the euro-realists have built a front against Macron advocating necessary rather than desirable reforms in their letter in March. And then there are the populist eurosceptics coming to power in Italy. Given these partners, Macron's agenda for Europe is doomed to fail.

Brantner advises Macron to look elsewhere for allies. What about the European Commission or the European Parliament? They may not have the last word in the negotiations, but they are effective as trouble-makers or as facilitators. And what about the European citizens? Macron may have taken France by storm, but at the European level he relies on the classic political classes. Many intermediary organisations, meanwhile, are promoting initiatives for Europe. As the European elections are getting closer each day, it is time to reach out to them in this fight for the future of Europe, so Brantner.

We see the German Greens as the only pro-European party in Germany that is compatible with the European agenda as outlined by Macron. Whether this will lead to anywhere with respect to a common list for the European elections, we have to see. Macron may be good to lay out a European vision, the question is, how committed is he to deliver? Given the relatively low priority Europe has in France, we are not very confident.

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June 11, 2018

Who is going to be the next director-general of the Italian treasury?

What we find shocking about the Italian euro debate is how defensive the pro-Europeans have become - very much like the pro-Remainers in the UK. The argument in favour of the eurozone is degenerating into scare-mongering and finger-pointing. This is particular worrying in view of the gigantic task of ensuring that Italy's membership of the eurozone can succeed. This task requires reforms of both the eurozone as well as Italian politics.

The worst pro-Europeans can do is what they are doing right now. Turn the question of Italy's eurozone membership into a belief system. We noted a comment by Francesco Giavazzi and Alberto Alesina to warn readers of Corriere della Sera of the pending appointment of Antonio Guglielmi, a financial analyst of Mediobanca in London, now considered a leading candidate for the job of director general of the Italian treasury. This is Mario Draghi's old job. Giavazzi and Alesina portray him as a eurosceptic and point to a much discussed study he published last year on whether it was possible to restructure Italian debt. The argument is that asking the question would cause panic among investors. 

We would caution against taking such an attitude. First of all Guglielmi's study came to the conclusion that the window to redenominate was closing fast - and is already closed now. Nor has he ever expressed a preference for an Italian euro exit. 

We would suggest that pro-Europeans stop the finger-pointing and shift the debate to what this new government - or the new opposition - need to do ensure Italy's sustainability in the eurozone. This cannot be a cheerleading effort. 

In our view, it would be perfectly sensible to say that Italy should make a genuine effort to lay the grounds for a sustainable membership of the eurozone. Eurozone reform, on the lines proposed by Emmanuel Macron, is a necessary but not sufficient condition for a sustainable membership. The discussion should be on the necessary and the sufficient, not about whether somebody belongs to this camp, or the other.

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