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September 13, 2018

Bravo Mr Juncker for raising the issue of the euro’s international role. But what now?

As FAZ notes, Jean-Claude Juncker’s state of the union address was a sentimental good-bye, not an action plan. He focused on the international role of the euro more than on institutional reform, although pointing out that the two are linked. We note that the debate on institutional and policy reforms of the eurozone still rages on in academic circles, but has almost died at the policy level.

We think Juncker is right to reframe the debate in this way. The foreign policy aspect is the more important one - and the most promising avenue advocates of eurozone reform have right now. The case for a stronger international role of the euro is easy to make. Nobody wants to be dependent on Donald Trump. But for that to happen, the eurozone needs to work very differently from the way it works today.

Juncker did not go into any details. We doubt the European Commission has developed a strategy. The subject straddles two rather different departments - economics and foreign policy. We note that EU foreign policy wonks and macroeconomists have shown very little interest in the international role of the euro. But we also note that politicians are beginning to take an interest in this issue - Heiko Maas, the German foreign minister, talked about it recently, and Juncker did yesterday.

What the comments of Maas and Juncker have in common is that they both recognise the importance of the topic, but they have not thought it through. Maas’ focused on the Swift system, which is a payment information system. It constitutes an important institutional link in the global financial system, but America’s exorbitant privilege is not really the result of its de-facto influence over Swift but of the dominant role of US financial markets. Juncker’s comments also appeared a little off when he said that it was absurd for the EU to pay 80% of its energy import bill in dollars, or that EU airlines pay in dollars to buy EU-made planes. The invoicing currency is an issue but not the main issue. 

A stronger international role of the euro will require a single safe asset, by which we mean an asset with a sufficiently strong mutualised tranche. A CDO or similarly constructed cheating devices are not going to do the job. A stronger role for the euro also requires that the eurozone stops targeting competitiveness and reduces its structural current account surplus. We do not agree with the conventional view that the dollar’s dominance is due mainly to the US’ willingness to run large and permanent deficits. The story is more complicated. But large and permanent surpluses are not consistent with a dominant international role either. You can’t dump your savings surpluses on the rest of the world and expect your currency to be the international anchor.

But we are encouraged that top EU politicians are at last beginning to pick up this theme - one they ignored during the first twenty years of the euro. If you are serious about eurozone reforms, this is how you do it. European member states with their different historical experiences of economic policy will never agree sufficient institutional reforms. But the threat posed by the US and China is symmetric, and they all have an interest in making the EU more robust.

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September 13, 2018

Are the eurosceptics imploding?

There is something dishonest about the way newspapers use photos. Editors choose among a selection of hundreds and pick the one that matches their prejudices. Remember the one from the G7 meeting when Angela Merkel appeared to confront Donald Trump for one thousands of a second? Great photo, but does it reflect what happened, or what we all wanted to happen? Another example was yesterday’s picture of Boris Johnson and Jacob Rees-Mogg with a look of total despair. 

The story that needs telling is that the eurosceptics in the Conservative Party’s European Research Group have hit an impasse on the two issues that they have been plotting. As we reported yesterday, they have failed to agree on an alternative Brexit proposal. We are not surprised. We would have failed too. It is really hard to improve on the Chequers plan if you want to observe the various red lines.

The other plot is a leadership challenge. We noted two overlapping but diverging accounts - from George Parker in the FT and from Robert Peston in the Spectator. They both write that there was a meeting of 50 Tory MPs in the House of Commons, in the Thatcher room no less, to openly discuss whether and how to remove Theresa May from office. Peston came to the dramatic conclusion that something big is about to happen, quoting various participants who seemed really excited to be part of this plot. 

Parker’s version was more nuanced. He also made out an anti-May sentiment among some of the candidates, but noted this was not universal among the entire group. One said there was widespread unhappiness with Chequers, but not with the prime minister herself. Another observation was the uncomfortable silence when the anti-May zealots spoke. 

We agree with Tom Harris in the Daily Telegraph who writes that this does not smell like a true plot. It may even be useful for the PM because the plotting may induce the EU to be more forthcoming on Chequers. We agree with that observation. The EU wants to do a deal with May, not with the eurosceptics. There are technical problems with her proposal that will need to be addressed, but it is good enough as a basis for discussions. 

We thought the most fitting summary of the situation was provided by Daniel Finkelstein (@Dannythefink), a Conservative peer and Times columnist:

"The ERG wants to move against Mrs May now? Their chance of getting a majority against her now are slimish. And if they did and took the leadership, what then? They haven’t a majority in Parliament for their Brexit. They haven’t thought it through. It’s less a threat than a metaphor."

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