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June 25, 2018

Trump's car tariff to come early

One of the main purpose of newspapers these days is to summarise what you can read on Twitter. The most important tweet of the last few days, and one of the most important news stories, was the de-facto announcement of car tariffs by Donald Trump:

"Based on the Tariffs and Trade Barriers long placed on the U.S. & its great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the U.S. Build them here!"

Politico tells us that the Commerce Department has scheduled two days of public comments in July in its investigation of the national security implications of imported cars and car parts. Wilbur Ross, the commerce secretary, said he wanted to wrap up the whole investigation by late July or August. This would suggest that the tariffs could be imposed as early as August. The paper quotes a research note by Evercore ISI, which said that a 25% import tariffs

"would pretty much destroy the business of importing cars from Europe/China".

There is a confusion between the 25% - threatened earlier by Trump - and the 20% mentioned in the tweet. We have no intelligence on whether Trump is wildly punching some numbers into his keyboard, or whether the new lower number is indeed what they are now targeting. Wolfgang Munchau makes the point that the reality of US car tariffs could have a profound impact on the Brexit discussions. The UK is the largest export market for German car makers, followed by the US. If the US imposed tariffs, and if the Brexit talks were to collapse, the German auto industry would have to face crippling tariffs in three of its four largest export markets. The third one is China which is due to to slap car tariffs on US-made cars, many of them by German companies, in retaliation for the tariffs imposed by the US on Chinese goods. The EU clearly has no interest in a hard Brexit in this situation.

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June 25, 2018

On the lack of a sharp focus in the eurozone debate

It is probably time to discard the 14 Franco-German economists as the main reference point in the discussion of the future of the eurozone. For starters, Angela Merkel and Emmanuel Macron did their own thing in Meseberg - in some respects going beyond the economists' recommendations while wisely leaving out the crazy stuff, such as the idea of a subprime-type safe asset with no mutualisation. But the fundamental problem with the economists' proposal was the sheer waste of political capital on something that was not going to do the heavy lifting. A giant reinsurance system with default clauses but without a mutualised safe asset would make financial and political instability more likely.

When it comes to eurozone reform, it is worthwhile spending time ranking preferences to avoid the intellectual muddle that comes with excessively long to-do lists. Of the many deficiencies of the eurozone's system of governance, none in our view is more important than the lack of a proper single safe asset. We could imagine a tranched structure with a mutualised component of sufficient size. If this is not attainable for political reasons, as it is not now, we would probably not want to waste the EU's fast-depleting political capital on lower-priority reforms. A single safe asset is not sufficient, but it is necessary. If it can't be done, then it can't be done.

There is, of course, a case for a discussion on second and third-order priorities, but not in terms of alternatives to the first best. What should those be? Fiscal union? Banking union? Changes in the mandate of the ECB? 

In our ranking of priorities two and three we are in broad agreement with the two issues raised by Miguel Otero-Iglesias and Raymond Torres - though not in the same order. They proposed an end to the fragmentation of banking systems and a politically more legitimate political decision process. We would list their points in reverse order - as priorities two and three, rather than one and two. So for us it is politics first, banking union second. 

We offer two reasons for this. First, without a reform of political decision-making processes at the eurozone level, you end up with bad macro policies. No rule or structure will insulate us from the disastrous fiscal policy errors that were made during the eurozone crisis. A different political decision-making process - one that can override static rules - constitutes a necessary prerequisite. 

Second, without political reform there can be no banking union. 

For example, if the ESM were simply turned into a backstop for the single resolution fund, the Bundestag would end up deciding on non-German bank rescues. That would be an intolerable and unsustainable situation. 

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