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July 15, 2019

No queues in Berlin for von der Leyen’s succession

There is a highly revealing article in FAZ this morning, which speculates on the political crisis that would result from a No vote on von der Leyen tomorrow. The author was referring to the crisis in the grand coalition, not the crisis in the EU. Peter Cartens, the author of the article, says that von der Leyen is unlikely to return to her job in the defence ministry in Bonn. Von der Leyen’s departure will open a whole can of worms for the grand coalition’s future defence policy. 

We recall that the defence ministry used to be a springboard for future leaders - like Franz-Josef Strauss and Helmut Schmidt. The political status of the ministry has gradually declined over the decades. Tagesschau raises the possibility that either Jens Spahn or Peter Altmaier could take over from von der Leyen - but there seems to be no queue of candidates for this job. Carstens notes that the job will consist of reversing the spending cuts earmarked for 2021.

There are a number of big decisions to be taken. One is the acquisition of four multi-purpose battleships, new Eurofighters for the Luftwaffe, drones, the overhaul of the domestic air defence system, and the acquisition of a new assault rifle. These come in addition to two European projects - a future fighter aircraft and a Franco-German co-operation to build a new tank.

Internally the defence ministry needs to reform its procurement policies following a series of scandals. Carstens concludes by noting the defence budget went up by a third between 2009 and 2020. We assume that this number is nominal - and thus vastly exaggerates the true picture. This is why we are sticking with the GDP ratios, which give us a more sober picture, and which reflect the totally dilapidated state of the Bundeswehr, the German federal armed forces. 

We agree with the assessment in the Tagesschau article that the Bundeswehr is managing to fulfil its obligations under Nato, but that this is coming at the expense of what is left domestically. We agree with Ulrike Franke (@RikeFranke) from the ECFR that Germany is no longer taken serious by its allies in the field of security policy. This is also why we are not sure that the big beast in Merkel’s government - like Altmaier - will be lining up for the defence job.

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July 15, 2019

Mitsotakis moves fast with tax bill

Kyriakos Mitsotakis may have come into office with less fanfare than previous governments: there is no big style programme of quick fixes for the economy such as the Thessaloniki programme, and the prime minister's tone is more measured. But in substance Mitsotakis did promise quite a lot, especially when it comes to tax cuts. Macropolis listed all cuts promised on the campaign trail, some of which are likely to be included in the budget bill the government promised to deliver before the summer break in August: 

  • reduction of the income tax rate from 22% to 9% for low incomes up to €10,000;
  • corporate tax cut from 28% to 24% next year and from 24% to 20% in 2021;
  • dividend tax reduced from 10% to 5% next year;
  • ENFIA property tax lowered by 30% across the board over two years 2020/2021;
  • solidarity tax on incomes to be scrapped;
  • trade tax to be reduced by 50% and then scrapped;
  • VAT charged on the sale/transfer of newly built properties suspended for three years;
  • capital gains tax on property also suspended for three years;
  • better payment terms for anyone owing up to €3,000 to the tax office;
  • reduction of VAT from 24% to 22% and from 13% to 11%; and
  • main pension contributions to drop from 20% to 15%.

A long list indeed. He also promised handouts in the form of premiums for newborn children, higher minimum wages, or hiring 1500 more police officers.  

How is New Democracy planning to finance this and fulfil the primary surplus target of 3.5% of GDP? The €1.5bn they found in savings may not be so easy to realise. Or does the government count on getting a lower primary surplus target negotiated any time soon? 

The main problem with Mitsotakis' economic programme is timing. The new prime minister believes that, by cutting taxes and encouraging investments, growth, jobs and tax revenues will return. In New Democracy's programme published just days before the elections, the party sees private sector investment reaching €65bn, or one third of GDP. Together with the construction sector this could deliver about 80.000 jobs and economic growth would reach 4% once again. 

Mitsotakis chose as spending minister Theodoros Skylakakis, a centrist politician who was ousted from New Democracy in 2010 after he disputed the assertion by Antonis Samaras, ND prime minister at the time, that the Greek budget deficit of 11.2% of GDP would be eliminated in just one year. The current plans are much more modest. But the creditors are not convinced that they are compatible with the primary surplus goal. And this alone suggests troubles ahead. 

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July 15, 2019

The feel-good factor in the pre-Brexit days

Most of our readers from outside the UK would probably not even know, or care, that England won the world championship in cricket last night. The reason we mention this here is that big sporting successes sometimes have a political impact. We think this may be one of those times. We recall the importance of the 1990 World Cup victory in football for Germany; the 1998 victory for France; or the 2004 European Cup victory for Greece. Boris Johnson’s main campaign message is based on cheer-leading optimism about the country’s post-Brexit future. A big sporting success plays well into that story line.

Another factor that helps him is the decline of the Brexit Party in the polls. As we have pointed out, the Brexit Party's success or failure is related directly to perceptions in the country on whether Brexit will take place as promised, or not. The latest BMG poll has the Tories at 28%, Labour at 27%, and the Brexit Party at 14%. What we are seeing here is the Johnson effect. Even the news media have given up the pretence of a contest. In polling terms Johnson and Nigel Farage are the perfect yo-yo. Their combined support is stable. If Johnson delivers Brexit by October, Farage is finished. He and his hordes of MEPs will leave Brussels unmourned. And there will be nothing for them to fight for in the UK in that case. 

But if Johnson were to ask for another Brexit extension and were forced into an election before delivering Brexit, we would take the threat from Farage very seriously indeed.

Farage's effect on an early Brexit-delivery election, in either September or October, would be less clear. We suspect that Brexit supporters will line up behind Johnson, rather than risk a split of the pro-Brexit vote. But that depends very much on the prevailing perceptions at the time.

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