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June 18, 2018

Some thoughts on the future of Europe

Wolfgang Munchau notes in his FT column that what is happening in Germany right now constitutes the quintessential European political crisis of our time. It is about the unresolved collective-action problem in the EU. The creation of structures such as the eurozone or Schengen is not compatible with decentralised decision-making. They require a step towards federal structure. If that is not possible, and is permanently rejected, these structures are bound to fail. What disguises itself as Angela Merkel's pragmatic style of political management is in reality merely a way of avoiding a solution to this fundamental conflict. The EU has been kicking several cans down the road - on Greece, reform of eurozone governance, and immigration. In all of these we have now reached the end of the road. Horst Seehofer wants a functioning system to deal with asylum seekers. Emmanuel Macron is seeking reforms of eurozone governance. Alexis Tsipras demands debt relief. And they all want it now. Munchau's conclusion is that the age of Merkel is drawing to an end - and with that the age of procrastination and non-solutions.

Thomas Klau offers a detailed and personal account of a very different German leader - Helmut Kohl, whose political style could not have been more different than Merkel's. He was derided for his provincialism, which stood very much in contrast to Merkel's urbane appeal. 

"In his 16 years as Chancellor and 25 years as party leader, Kohl unobtrusively but efficiently defanged German conservatism. Crucially, he did this without opening up a politically risky vacuum on the far right."

Klau defines Kohl's theory of Europe as one of a gradually federalising construction. Germany would always be too weak to enforce a Pax Germanica, and too strong to get up the nose of its neighbours. A Europe of nation states could never achieve balance, and as a result power would gradually shift to the centre. Klau maintains that Kohl knew about the structural weaknesses of the eurozone, but believed that its first crisis would lead to the creation of a federal state. That was not possible to do in 1999. A delay in the introduction of the euro would have made a united Germany too powerful, and European union impossible. 

We agree with Klau's characterisation of Kohl's thinking, but note that the same imbalance has now occurred with the euro as well, and in a way that ended up leveraging Germany's weight in the EU. This is the very opposite of what Kohl had wanted. We think that Kohl's error was not to have foreseen the inability of his successors to tread the fine line between an appeal to German conservatism and support for the next steps of European integration. 

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June 18, 2018

The end of Spanish income moderation?

As the new Spanish government begins to outline its policy agenda, it appears the long period of wage and pension moderation may be coming to an end. Negotiations about pensions are well advanced in the direction of restoring price indexing of pensions, though disagreements remain on whether that should be extended to the highest pensions, too. In addition, employers and unions are close to agreeing a 2% general wage rise for workers under collective bargaining agreements, as well as a raise of the minimum wage to 14,000 a year, of 1,000 a month in the customary 14 payments. Some sectors may see a 3% increase. In what may herald an important fiscal policy shift, Magdalena Valerio, the new minister for labour and social security, has signalled a willingness to fund pensions out of the general budget. She also indicated that the socialist government will not try to repeal the labour reform passed during the crisis years, because there isn't a left parliamentary majority for it.

We have noted how, already in the previous government's budget, pensions were agreed to increase by CPI inflation in 2018 and 2019. This was a concession extracted by the Basque nationalists to support Mariano Rajoy's budget, but it responded to a widespread mobilisation of pensioners in the first months of the year. This already represented a reversal of a pension reform by the previous Rajoy government, which had introduced a pension sustainability factor that would have resulted in an increase of just 0.25% in pensions because the social security has a deficit. 

This is how we interpret Valerio's statement about the need to inject new revenue into the pensions system, reported by Europa Press. The Spanish public pension system is essentially a redistribution, not a saving system. But not only current pensions are funded by current income and not by past savings, but the social security budget is ring-fenced from the rest of the government's budget, into a single social security fund ("caja única"). However, Rajoy's previous government incentivised job creation to get out of the crisis largely through cuts to social security contributions, which caused the social security fund to go into what looks like a permanent deficit. A modest cash buffer that had been accumulated during the pre-crisis years is all but depleted. There are two solutions to this. One is to encourage people to take private pensions, which the PP government was preparing to do in earnest. The other is to give up the principle of a ring-fenced social security fund, to be able to fund pensions from the general government revenue without making special arrangements for it every year. Breaking the single fund has long been a taboo in the debate about pensions.

And, in other news related to the Pedro Sánchez' approach to the policies inherited from the Rajoy administrations, the government has indicated that they don't intend to repeal the labour market reform passed during the crisis years. This was a key demand of left-wing parties including the PSOE. However, there isn't a left majority in the parliament. The no-confidence motion against Rajoy required the support of the centre-right Basque and Catalan nationalists. Valerio hopes to be able to reach a consensus with employers, unions and political parties to make potentially significant changes in the areas of temporary employment, fraudulent part-time work, or collective bargaining. But the 2012 labour reform won't be repealed.

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