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September 04, 2018

Is the dollar losing its international role?

We are happy to have made our own modest contribution to trigger a wider debate on the international role of the euro, for which we noted two interesting entries. The first is by Jeffrey Sachs who argues that the US dollar has been gradually losing its preeminent global role as a result of a series of policy blunders: President Nixon’s decision to renounce the right of foreign central banks to convert their gold holdings into dollars in 1971, followed by the handling of the Asian crisis in 1997. The two events led respectively to the creation of the euro in Europe, and China’s strategy to internationalise the renminbi. Donald Trump’s trade war against China and his "America First" policy now mark the third stage in the dollar’s global decline. It will strengthen China’s determination to become less reliant on the US for finance and trade, and will ultimately lead to a renminbi-based global payments system as an alternative to the dollar system.

Mark Schieritz picks up on the impact of US sanctions against Iran in a column in Die Zeit. He notes that one way of circumventing the secondary sanctions against German companies is to use the Bundesbank. In compliance with the US sanctions, the Bundesbank recently made it harder for Iran to reclaim €300bn which the country has in various accounts in Germany. The German government could pass a law to force the Bundesbank to keep up the payment stream. In that case, the Bundesbank would no longer comply with US sanctions, and could technically itself become subject to secondary sanctions. But would the US go that far? The Bundesbank is a state-owned institution of a large EU country. Subjecting the Bundesbank to sanctions would be the equivalent to declaring economic war. In that case, the EU could hit back and confiscate the properties of the Trump family in Europe, Schiertz proposes. 

His broader point is that the US are masters in getting others to comply with their policy, but the EU also has tools available for its defence. The experience with Trump so far has shown that he is ready to compromise if confronted with pressure.

What intrudes into both arguments above is the natural tendency by China and the EU to prioritise the competitiveness over the international role of their respective currencies. Both China and the eurozone run large and persistent current account surpluses. The savings surplus makes them buyers of third-country - i.e. US - assets, which is what sustains the dollar’s international dominance. For as long as the business model of the EU and China consists of gaining manufacturing competitiveness, it will be hard for the respective authorities to use the financial system as a prime-grade tool in foreign policy.

Sachs is right about the impact of the Bretton Woods breakdown on the debate in Europe. This has given the euro the current minor-celebrity role it enjoys as an international currency. But with policy as it is, the international role of the euro remains a residual.

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September 04, 2018

Support for the extremists still rising

The 2019 European elections are going to be critical for the future of the EU. As we argued before, the issue is not whether the nationalists will get a majority. They won’t. Nobody ever does. The issue is whether they will be large enough to forge an anti-immigrant coalition.

For now, their support is still rising. One German poll, by Insa, has the AfD ahead of the SPD. This is all within the error margins, and the other polls show the position of the two parties reversed, again by a small margin. What is clear is that support for either party seems to have stabilised in the 15-20% range. 

One of the factors that strengthens support for the AfD are reported incidents of murders by asylum seekers. There were a number of cases in the last couple of years that made the headlines - despite the best attempts by some news organisations like Tagesschau not to report them. The latest case is an eight-year prison sentence for a young man who murdered a 15-year old girl. Because of legal reporting restrictions, the German media does not provide details other than to hint that the young man might be below the age of 18. There is now a predictable outrage at the leniency of the sentence. Just as the UK constitution was not prepared for Brexit, German police and the judicial system are wholly unprepared, too. This is one of the factors driving support for the AfD.

In Italy, support for the Lega also continues to rise. As in the case of the German poll, we should resist the temptation to get excited about tiny movements. But in the latest SWG, the Lega is now four points ahead of Five Star. This is a significant gap. Please also note the virtual collapse in the support for Forza Italia, which now polls under 7%. The era of Silvio Berlusconi is truly over.

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September 04, 2018

Will the surge in populism strengthen the Franco-German alliance?

One consequence of the challenge posed by Victor Orbán, Matteo Salvini and other right-wing populists in government is a paradoxical strengthening of the Franco-German couple as the dominant duo of mainstream European politics. In the recent flurry of speculation about the allocation of EU leadership positions after next year’s European elections, the assumption is that Germany and France would more-or-less call the shots and help themselves to the top jobs if they so wished. We find it significant that this assumption went largely unchallenged.

There is a parallel at work here between the Orban-Salvini effect and the impact of Donald Trump and Vladimir Putin on EU policy.

On the one hand, the right-wing populist international fuels instability. On the other, it pushes mainstream EU leaders to play down differences among themselves, a development we have noted during Emmanuel Macron’s current diplomatic tour through smaller EU member states. Lars Lokke Rasmussen of Denmark and Sauli Niinistö of Finland explicitly pointed to the threat of growing disruption as a driver of political cohesion with their French visitor last week. We expect similar messaging when Macron meets the three Benelux leaders this coming Thursday in Luxembourg, with Mark Rutte of the Netherlands a possible exception.

The most tangible consequence to date of the push to greater EU cohesion has been the stronger dynamic at work in the build-up of EU security policy. This regards both a military intervention capacity and the policing of borders. The option of transforming the EU into a nuclear power is now entering the Europe policy debate for the first time in decades, which is a sign of how far and fast the goalposts have shifted.

It is far more uncertain whether other policy areas, and in particular eurozone reform, will benefit from the growing awareness among mainstream leaders of the need for more cohesion. We have already noted that the latest signals coming from Berlin are hardly encouraging, with Italy and the Netherlands as the main disruptors of any possible Franco-German consensus. Further indications of the degree of Franco-German cohesion in the coming months should emerge when Macron hosts Merkel for a working visit in Marseille on Friday. 

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