Jamaica fails, Germany flounders

If you’re wondering what sway Jamaica has over Germany, you’ve missed one of the funniest coalition battles ever.

Germany’s election almost a month ago left no clear majority. The rise of the Alternative für Deutschland party tipped the balance away from the major parties. But that’s not really the source of the damage.

Chancellor Angela Merkel’s former coalition partner, the other mainstream party, disavowed forming a coalition with her. That’s the only other party with which Merkel would have a majority.

And so Jamaica entered the picture. Thanks to the colour coordination of the various parties, Merkel faced a Jamaican government. Her black Christian Democratic Union (CDU), the Green party in green and the mildly libertarian Free Democratic Party (FDP) with yellow. Comedians had a field day.

It must’ve been quite a sight to watch the negotiation too. The CDU and FDP have a history of coalition governments. But the CDU would’ve been battling to get the FDP to agree to the Greens’ terms. In the end, the FDP leader claims there was little agreement with the CDU either.

At the midnight hour on Sunday, the talks failed. The FDP leader abandoned talks and explained why: “Better not to govern than to govern badly.” The FDP and the Greens just can’t stand each other. Merkel now faces reapproaching the SPD, trying out a minority government with the FDP, or calling a new election.

This morning the euro fell 0.6% on the news, which is a big move in currency markets.

Why do you care? Because the centre of Europe is not holding together when it needs to most. With more elections to come, and past elections causing a steady stream of trouble for the establishment, it’s important to take note that even the EU heartland of Germany is in a mess.

The implications are a long list. It’s far from clear who Merkel’s successor would be if the whole drama costs her the top job, which is looking increasingly likely. Without Britain, the imbalance of power in the EU only worsens and the divide between France and Germany looks wider. Other mainstream parties around Europe will see what happened to Merkel and decide not to follow her path of compromise and globalism. They’ll shift right or left, creating divisions between them.

Put all this together and EU policy becomes even more uncertain.

Take Brexit policy, for example. The longer the negotiations go on, the weaker the EU becomes by splintering. On the one hand, that might make them more desperate. But, more likely, it pressures them into deals. As the EU loses its stability, a successful Brexit in defiance of the EU begins to look dangerously enticing for other nations.

This is especially true given the coming budget reckoning…

The coming budget reckoning

Brexit will put European and EU budgets under pressure. In fact, an almighty storm is brewing in the heart of the EU. Britain’s exit could create a 16% drop in revenue. EU bureaucrats are working out where the cutbacks might come. And their drafts are causing a stir already.

One option is to limit payments to countries unless their per capita income is below 90% of the EU average. That pretty much just leaves Greece and eastern Europe receiving funds. Ironically, those countries aren’t exactly pro-EU at the moment. The proposal has created panic in much of Spain, which stands to lose €37 billion.

The problem here is that some countries face a very sudden drop in financial support. The more reliant you are on EU funds, the more you’re in trouble when there are broad based cutbacks.

A rebalancing could mean countries go from net recipients of funds to net payees.

The maths is easy to politicise. Spanish papers are pointing out they stand to lose disproportionately to other nations. That’s because their support goes from something to nothing, a 100% decline. Parts of Italy and Belgium face the same cliff edge. Meanwhile, Greece and eastern Europe might lose only a proportion of their support. It’s unfair!

You can see how welfare maths is easy to manipulate. Losing disproportionately sounds unfair, even if the reason and calculation is sound. People feel entitled to welfare and transfer payments, making it extraordinarily difficult to wean them off, even when the welfare becomes inconsistent with its initial aims and justification.

If only the Spaniards put the same amount of thought and analysis into private sector work as they do EU budget analysis. They’re as bad as companies who spend more on lobbying than R&D.

There’s a heightened interest here because the funding lines of the EU expose the divisions inside nations, worsening the separatist surge in Europe. In Belgium, it’s the poorer French-speaking Walloons that are at risk of losing funding. In Italy the withdrawal of EU funds risk worsening the north-south divide which recently saw a pair of referendums.

Until now, the EU’s money spigot had papered over these problems by making them international rather than national. The Belgians aren’t subsidising the Walloons, Europe is. But now that the money won’t be there, it’s the EU that’s worsening the divides of its member states. Not good for PR.

Not that the transfer of funds between nations isn’t controversial too. Merkel’s fate in Germany comes back into the fray here. With Britain gone, the Germans and Dutch face becoming even bigger contributors. They’ve already made clear that’s not going to happen. If the EU pursues this, or implementing its own taxes, Europe will be irritating its paymasters.

So, the question is where to cut. It’s going to be a squabble all round, among increasingly unpopular politicians. How long before they start to stand against the EU?

Tax liberation days across Europe

Within each European nation, budget battles are on the menu too. Institut économique Molinari calculates each nation’s “tax liberation day”. The idea is that the tax revenue of a country pays for only part of the year’s government expenditures.

If you assume the tax dollars are spent first, then Europe’s government’s eventually reach a tax liberation day, where they have to borrow to spend. The earlier the day, the bigger the imbalance between spending and taxing.

France, Spain and Romania already passed their tax liberation day these past weeks. Italy, Poland and many more are due before the end of November. The UK’s tax liberation day is the beginning of December, while Cyprus, Germany, Malta and Sweden have surpluses.

The concept is a bit misleading, but it lays out the figures in a way people can understand. If they paid attention to the conclusions, there’d be a panic.

The interesting part is that the French are not only the worst in Europe, but getting worse too. Most of Europe is improving. It’s the growing divides that will pose a problem. Countries not improving their position will be vilified. Again, the French and German conflict emerges.

But it’s not just money that’s creating divisions. Eastern Europe is going rogue. The latest example is a tweet from one of your presidents, Donald Tusk. He accused the Polish government of implementing policy that amounted to a “Kremlin plan”. It’s ironic that Poland is turning from the EU while its former prime minister is one of the many presidents.

The question is whether countries can hold it together until Brexit is decided on. The longer it takes, the better Britain’s chances of a good deal.

Until next time,

Nick Hubble
Capital & Conflict

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Category: The End of Europe

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