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April 30, 2019

Labour's big day

We do not have the foggiest idea what the Labour Party's national executive committee will decide today. The NEC meets to agree the manifesto for the European elections. The big debating point is whether or not to support the second referendum.

We think the outcome is more open than widely predicted. Jeremy Corbyn has been resisting pressure from inside his party to accept a second referendum as the default position. The Guardian suggests that there could be compromise - a second referendum as a price for a Brexit supported by the Tory party or a no-deal Brexit - but leaving the door open to a Tory/Labour deal without a second referendum. As the Labour supporters of the single market and Norway options keep on pointing out, there can be no cross-party deal unless Labour drops the idea of a second referendum. A compromise would keep it alive, but it would clearly not satisfy the second referendum supporters. They want Brexit reversed. They don't want a compromise.

There have been reports that some NEC members, including trade unionists previously supportive of Corbyn, may be shifting their position. 100 MPs have written to the NEC in favour of a second referendum. A much smaller number of MPs are lobbying against it. 

No matter what Labour's NEC agrees, we see no majority for a second referendum in the current parliament. But today's debate is important as it sets the agenda for a potential early general election. There are strong electoral arguments for Labour to support a second referendum. It could regain some of the lost support in Scotland, but would stand to lose several marginal seats in pro-Brexit constituencies in the north of England. There is also a shift of views within Momentum, the left-wing group within Labour that supports Corbyn. The Labour leader will therefore tread carefully. This would point to a compromise, but the politics of Labour can never be taken for granted.

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April 30, 2019

Spain now turns to its next elections

The days of single-party majority rule may be over in Madrid, but coalition-building does not yet come naturally to Spain’s political parties. As the country contemplates the new political landscape emerging from Sunday’s vote, Ciudadanos has reiterated its hostility to a coalition agreement with the PSOE even if such a social-democratic/liberal alliance would command a clear majority in the lower house of parliament. To be fair, the antipathy is mutual given the sustained attacks against Pedro Sánchez by Albert Rivera, leader of Ciudadanos. Rivera has positioned his rising political force clearly to the right of the political centre, and is vying with the PP for the mantle of main opposition force. The political attention in Spain will now shift to the local, regional and European elections on May 26. Another massive defeat for the PP would further strengthen Ciudadanos’ relative position.

In the meantime, the new Spanish parliament will convene on May 21, with the election of the speaker the first important item on the agenda. Only after the speaker is elected will the king start formal consultations with the parties, so this should happen after the local, regional and European elections. There may be some exploratory contacts among the parties before that, but don’t expect the process of forming a government to start until June. An alliance between PSOE and Podemos remains the most likely outcome, with Podemos keen to enter the government. This would give post-Franco Spain its first government ministers from a political force to the left of the PSOE. But this is not the only option. The PSOE is tempted to try and form a minority government without Podemos' participation, counting on Spain's far left and the Catalan separatists to keep it in office so as to avoid new elections that would risk a possible right-wing majority.

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April 30, 2019

On the hypocrisy of the German debt debate

We profoundly disagree with the emerging consensus that the German constitutional debt brake was a good idea when it was conceived ten years ago, but that it is no longer the case. This sentiment was expressed recently and separately by two economists, Michael Hüther and Jean Pisani-Ferry. We think this reflects an astonishing degree of hypocrisy. The debt brake is not an example of something that fell foul to a shift in circumstance. It was unsustainable from the outset. The real problem is that it was included in Germany's constitution. Change now requires a two-thirds parliamentary majority. Similarly, the main problem with the eurozone's fiscal compact is that it forces member states to make a balanced-budget rule a permanent and preferably constitutional part of their legal systems. And the fiscal compact itself is an international treaty that can only be amended by unanimity.

The German debt brake was an unsustainable fiscal rule from the moment it was constructed. Back in 2009 Wolfgang Münchau wrote in the FT that a rule that would cap deficits at 0.35% of GDP at the bottom of the cycle, and required the government to run small surpluses through the cycle, would lead to the eventual elimination of all debt. Ten years later the FT quotes Marcel Fratzscher echoing this point about debt runoff as if it were a sudden realisation and not a timeless arithmetical conclusion. Münchau also made the point that, at the time it was adopted, the German rule was inconsistent with the European fiscal rules. This inconsistency was then fixed in the worst possible way, by Germany taking advantage of the eurozone government debt crisis to persuade other member states to follow suit.

The German economic debate on reforming the debt brake, as reported by the FT, makes for bizarre reading. At an expert meeting organised by Jakob von Weizsäcker, since this year chief economist at the German finance ministry, the question was whether there isn't a good deal to be had by investing money that is cost-free to borrow. Lars Feld, a member of the German council of economic expert, wonders why any investment cannot be financed through taxes - that is, preserving the fiscal balance. Feld even questions whether Germany has big investment needs at the moment: there isn't even a consensus among German economists that the country's infrastructure suffers from underinvestment. Feld, moreover, argues that German investment is low because of bureaucracy, not fiscal rules.  

A reform of the German debt brake would require constitutional change, but the numbers are not there. The AfD has about 15% of MPs, the FDP 10%. This means all the other parties needs to be on board, including the entire CDU and CSU. Even if a consensus were to emerge among German economists that the debt brake may not be as great an idea as they once thought, it would be very hard to undo it in the current fragmented state of the country's politics. And, on present political trends, it is likely to become more fragmented. It was politically easy to agree a constitutional change in 2009 when the grand coalition itself had more than a two-thirds majority. The current majority of the coalition is wafer-thin. Angela Merkel got elected with a majority of 10 votes in the Bundestag. Even though the Greens and the Left Party would support a constitutional change, they are certain to make demands the government is unlikely to fulfil. And we doubt very much that the consensus on the debt brake is shifting inside the CDU to such an extent that every CDU/CSU MP would support changing the constitution. Fiscal policy is part of a belief system in Germany. 

The lesson from this episode - and from the Maastricht Treaty before it - is: never put numbers into a treaty or constitution. Stick to broad principles.

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