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March 04, 2019

Macron's two-month sprint

Emmanuel Macron will kick-start the European election campaign tomorrow with an op-ed in all EU member states. Delayed by the gilets jaunes his team has now begun an intensive two-month campaign. Stéphane Séjourné, a former presidential adviser, is leading strategy meetings that include personalities across the political spectrum such as Daniel Cohn-Bendit and François Bayrou. Who will be leading Macron's candidate list? Health minister Agnès Buzyn is the most talked about. Will there be defections from Les Républicans? Jean-Pierre Raffarin is tempted to join the Macron camp according to l'Opinion. Other names have been suggested.

As for future alliances in the European Parliament, the team is very much counting on the implosion of the EPP over Viktor Orbán, while the prospective alliance with Ciudadanos from Spain is cooling off after Ciudadanos aligned itelf with the far-right in Andalusia. These will be tricky negotiations. What is needed is someone with political sensitivity and negotiation skills, a profile not always compatible with the image at home of the young candidates standing for the renewal of the party system.

What will be the message? Expect Macron's article to outline the roadmap.  It will pick up from his Sorbonne speech and promote the old French trope he has made his own, that of a Europe that protects. Pitting progressives versus nationalists will be part of the strategy, even if Macron has toned down this narrative earlier. 

For a more longer-term perspective we note that, while the relationship between France and Italy may not be so good at government level, it seems to be thriving on the far right. Vincenzo Sofo, the young intellectual who helped the Lega Nord to expand from a provincial to a national party, is the new boyfriend of Marion Maréchal Le Pen, according to Nouvel Observateur. Both are young and photogenic. They share the same ideas. Watch out for what will come from their alliance.

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March 04, 2019

May's numbers are not there yet

There is more optimism now that Theresa May could obtain a majority for her deal next week, but this is still a tall order. There is a hard-core group of European Research Group MPs who will not budge - maybe 20 or 30. That would require an almost-offsetting number of opposition MPs - from Labour mostly. It is possible that those Labour MPs might only end up abstaining, rather than voting in favour, in which case the deal would be rejected. The EU, meanwhile, says that it will make its decision to extend contingent on a concrete alternative plan. If all of those three development collide - ERG opposition, Labour abstention, no extension - the UK could end up with an accidental no-deal Brexit.

It is worth unscrambling the above information. The FT has the story that Theresa May will set out plans for a £1.6bn investment fund geared towards the deprived areas of the midlands and the north. Just on cue, Philip Hammond is expected to report a multi-billion-pound tax windfall that he is only too happy to spend as a Brexit deal dividend - that is, to make it contingent on the deal being approved. We heard one negative reaction from a fence-sitting Labour MP, arguing that one-off spending commitments would not be enough. 

May will need quite a few of those Labour MPs because she cannot rely on the core constituency of hard Brexiteers. A couple of them announced over the weekend that they will not be supporting the deal. We think that Jacob Ress-Mogg probably will. The Daily Telegraph reports this morning that Geoffrey Cox, the attorney general, has finally given up on a unilateral exit mechanism or a hard time limit for the backstop. He is now focusing on the arbitration mechanism. If Cox is able to shift his legal opinion, Brexiteers would have a pretext to support the deal now when they didn't before. 

But the more cynical the exercise becomes, the bigger the risk of a backlash. The Sunday Times reports that the ERG is now making three demands: a legally binding clause that overrides the withdrawal treaty, language that goes beyond the statement that the backstop can only be temporary, and a clear route to an exit if trade talks fail. Our own view is that, based on Art. 50, there needs to be some form of an exit procedure - but not a unilateral one. This is why the debate about the arbitration procedure, while very technical, is important. 

And finally, there has been another unicorn sighting. You might recall our astonishment about the idea that the UK could "sue" the EU for a Brexit extension, an expression we keep on hearing with puzzlement. Was this perhaps just a turn of phrase or a metaphor? But no. Gina Miller is preparing a legal case, according to Matthew D’Ancona in the Guardian. We thought Art. 50 is pretty clear on this point - extension has to be mutually agreed and approved unanimously by the European Council. Miller got herself a UK lawyer who wants to argue that the EU itself can unilaterally extend Art. 50 on the grounds that not doing so would materially damage the interests of members states. This is a unicorn for quite a number of reasons. We think it is very unlikely that the EU would even want to extend if the UK does not. The EU is not a member of the second referendum campaign. And we would be surprised if the European Court of Justice were to re-interpret one of the more clearly-written bits in Art. 50. We should recall that the court's ruling on Brexit revocation happened because Art. 50 left a gap. There is no gap when it comes to extension.

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March 04, 2019

Greening QE

When central banks started their quantitative programmes many critics attacked not the policy itself, but its distributional aspects. There were campaigns such as "QE for the people" and also for "green QE", meaning using central bank money to purchase green assets. The European Greens have been active campaigners in this area since the ECB started its asset purchase programmes in 2015, and have been critical of the fact that the corporate sector purchase programme, while being market-neutral, actually favours carbon-intensive firms. But over the years climate concerns have become increasingly important. We now have the national commitments under the Paris agreement and the sustainable development goals, and there is a concern that the pace of investment is not sufficient to meet the policy targets in these areas.

In this context we note two recent contributions by Paul de Grauwe in his blog, and by Dirk Schoenmaker for Bruegel, arguing for a greening of the ECB's monetary policy. In fact, Philip Lane mentioned Schoenmaker's paper at his recent hearing in the European Parliament. Lane picked up on Schoenmaker's estimate that a green tilting of the ECB's collateral frameworks would reduce funding costs for green investments by only 4bp, and drew the conclusion that green monetary policy would for the time being be a sideshow compared with more pressing financial stability and bank supervision concerns. 

De Grauwe argues that the ECB can purchase any and all financial assets, so long as the resulting base-money creation does not cause inflation to raise above the 2% target. He suggests that the ECB could steer its QE reinvestment policy towards purchasing environmental bonds. One objection to this is that it would force the ECB to prioritise various environmental investments, which should be a political decision, not a monetary decision. One way out of this could be for the EU to mandate the European Investment Bank to fund a large expansion of green investment with bonds that the ECB would then buy. There is no restriction to the ECB reinvesting its QE proceeds into EIB bonds.

Miguel Carrión writes: I would read Schoenmaker's estimates in the opposite direction to Lane - the smallness of the funding impact (less than 4bp) indicates that the effect of a greening of monetary policy on the price stability mandate would be negligible. But as Schoenmaker illustrates just a modest tilting policy can have a substantial effect on the carbon intensity of the ECB's portfolio. On a cost-benefit analysis, such policies should be enacted.

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March 04, 2019

On the "hope" of a rate raise

If you read the German papers, as we do, we keep noting articles expressing that the ECB is likely to dash "hopes" of a rise in interest rates. The articles themselves are not worth summarising, but we would like to make an observation on language. Brexit was preceded by two decades of verbal abuse. In the UK "bureaucrat" has become a word associated with "Brussels". Every cartoon in the UK press - Remain- or Brexit-supporting alike - depicts Jean-Claude Juncker with a glass of red wine. The reason why Remain lost the Brexit battle is because they didn't know how to make a positive case for the EU - because no one did since the 1990s. The same is now happening in Germany in respect of the ECB. The notion of a central bank that fails to protect the German savers is the German version of the Brussels bureaucrat. The distortion of language started around the time when Mario Draghi became president of the ECB - just under eight years ago. If this developments continues for another eight years, we would expect Germany's alienation from the monetary union to reach a critical level. It is true, of course, that Germany has been a beneficiary of the monetary union, and that its behaviour is irrational. But, then again, the UK also benefited from EU membership.

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