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Germany is frustrating Emmanuel Macron’s grand ambitions

The reality is that Paris and Berlin are no longer natural allies

Wolfgang Münchau 
The message is clear: German chancellor Angela Merkel (right) is saying no to French president Emmanuel Macron (left) on eurozone reform © AFP



The Franco-German honeymoon has ended. At the beginning of the year, Angela Merkel, German chancellor, and Martin Schulz, the former leader of the Social Democratic party, agreed that Germany would enter into a meaningful dialogue with Emmanuel Macron, the French president, on reform of the eurozone.

As it turned out, the eurozone agenda was a personal project of Mr Schulz’s, not of the SPD. When he was ousted as leader in February, the party lost interest. The grand coalition is once again in power, but now without the only interesting project that would have justified its existence.

Olaf Scholz, the SPD finance minister and the party’s new strongman, is notably cool on the whole idea. On the important issue of a European deposit insurance scheme, he is as sceptical as his predecessor, Wolfgang Schäuble.

The opposition to eurozone reform from inside Ms Merkel’s party, the CDU, and its Bavarian sister party, CSU, is as strong as ever. The CDU/CSU group in the Bundestag rejects all but one of the items on Mr Macron’s reform agenda. They do not want an enlarged European Stability Mechanism, the rescue umbrella, nor a single eurozone budget. And like Mr Scholz they do not want a European deposit insurance scheme until the Italian banks have managed to get rid of most of the bad loans on their balance sheet.

They do not want debt relief for Greece, either. The only reform idea for which there is some lukewarm support is that of a fiscal backstop to the bank resolution fund, something that should have happened a long time ago.

The message is clear: Germany is saying no to Mr Macron on eurozone reform, at least in substance. There may still be some token deal, perhaps a tiny eurozone budget with no macroeconomic significance. To add insult to injury, Ms Merkel also preemptively ruled out German involvement in military action against the Syrian regime.

I wonder how those two unrelated messages from Germany will be received. France is now in exactly the position Marine Le Pen, leader of the far-right National Front, has warned about: in a monetary union in which the voice of France counts for little and a geopolitical situation in which the UK is the more reliable partner.

Mr Macron’s enthusiastic support for European integration contrasts with the unchanged political reality that France and Germany are no longer natural allies. Unlike in France, the pro-European parties in Germany are in retreat. Ms Merkel’s party lost 1m votes to the Free Democrats and the Alternative for Germany, both of which advocate policies that would lead to the destruction of the eurozone. Sixty CDU/CSU MPs voted against the Greek support programme in 2015. If faced with a similar rebellion today, the grand coalition would no longer have a majority.

Does this make eurozone reform impossible? I do not think so. The June deadline for eurozone reforms was chosen because Mr Macron needs something concrete to show before the European elections in May 2019.

As a longstanding advocate of eurozone reform, I am finding myself in the unusual position of favouring a tactical retreat. It would be better to wait for a better moment to push the two issues that really matter, neither of which is on the agenda right now: the creation of a single safe asset, or a eurozone bond; and the legal and political separation of national governments and their banks.

Reformers should exploit the fact that the large and persistent current account surpluses of the northern eurozone countries make them vulnerable to a sudden disruption of trade flows. Only an existential crisis that threatens the very survival of the eurozone has the potential to concentrate minds in the northern eurozone. A very large current account surplus makes you strong in good times, but weak in bad. Now is not the moment to extract concessions from Germany or the Netherlands.

The alternative is wasting scarce political capital on weak reforms. We would also have to accept conditions that might add to financial instability, like Germany’s demand for a semi-automatic debt restructuring or caps on bank holdings of sovereign bonds. If the alternative is a big leap in the wrong direction, standing still would constitute relative progress.

IMF shows poor track record at forecasting recessions

Economic predictions presented as precise numbers are far from that in reality

Valentina Romei and Keith Fray


Blowing hot and cold: The difficulty in getting forecasts right is not unique to the IMF


The IMF is set to release its twice yearly global outlook on Monday, providing economic growth forecasts for almost every country in the world.

However, a closer look at its record on reading the future suggests it is unlikely they will accurately predict even how many economies will expand or contract this year.

The FT looked at the number of countries that the IMF expected to be in recession for every year since 1991 and compared it with the number of economies that turned out to have actually contracted.

Over the last 27 years, the IMF has predicted every October that an average of five economies will contract the following year. In practice, an average of 26 have contracted. This suggests that the six countries that the IMF predict will be in recession for 2018 could rise to as many as 31.

The difficulty in getting forecasts right is not unique to the IMF. “All macroeconomic forecasters are poor at predicting downturns,” David Turner, head of the economics department at the OECD told the FT.



“Recessions are not rare,” echoed Prakash Loungani, a macro-economist at the IMF. “What is rare is a recession that is forecast in advance.” Despite an increased amount of economic data being available, “the ability to predict downturns remains dismal”, he told the FT.

“Extreme volatility during the global financial crisis complicated economic forecasting” said the OECD. In October 2008, after the collapse of Lehman Brothers, the IMF forecast that seven countries would be in recession in 2009 and it predicted global output would expand by 3 per cent. In reality, world GDP contracted by 0.1 per cent and 91 countries went into recession.

In that October, the IMF predicted an economic expansion for 2009 for both the US and Japan. Instead, the world’s largest economy contracted by nearly three percentage points and Japan’s economy shrank by 5.4 per cent, its worst annual performance since the second world war.Also, the IMF sometimes gets the countries wrong.



Greece, for example, is one of the eight countries that the IMF expected to be in recession in 2016, but it is not among the 25 countries that the IMF now considers to have been in recession in that year.

The fact that forecasts are “typically over-optimistic for horizons beyond the current year” is not necessarily the result of economist optimism. They “fail to forecast strong booms, just as they fail to predict recessions,” said Mr Loungani, suggesting that economic forecasts “are too rooted in thinking that things stay close to normal or will revert to normal soon”. Economic models are “not precise and they are based on lots of assumptions that may not turn out to be true, ” said Paul Donovan, the chief economist at UBS Wealth Management.



The problem is not only with models and assumptions, but also with hard data. Economic data are continuously revised, sometimes in a significant way, even in countries with usually reliable data.

In the last 24 years of UK quarterly GDP data, almost every final figure has been different from the initial release, sometimes by one full percentage point.

The US economy expanded by an annualised rate of 3.2 per cent or contracted by 0.7 per cent in the first quarter of 2015 according to different revisions of the same data. Similarly, in Q1 2011 the US economy was revised from registering a strong expansion to a strong contraction.




The IMF’s April outlook is often more accurate. This is because it is easier to get a forecast right for the current year than the following year. The April report is better able to signal a recession for the current year than the October publication, “but one that is much milder than what transpires”, says Mr Loungani, author of several studies.

Economic forecasts should provide “broad trends, not specific numbers” said Mr Donovan, they should assess whether an economy is growing about trend, below or above trend. “Specific forecasts create an illusion of precision,” he added. Having decimal points in forecasts is “purely to prove that economists have a sense of humour” said Mr Donovan.

Blow for blow

A trade war between America and China takes shape

The two countries threaten to descend into a sequence of tit-for-tat retaliations



TALK of tariffs is in danger of developing into cries of trade war. On April 3rd America published a list of some 1,300 Chinese products it proposes to hit with tariffs of 25%. Just a day later China produced its own list, covering 106 categories. “As the Chinese saying goes, it is only polite to reciprocate,” said the Chinese embassy in Washington, DC.

According to the Peterson Institute for International Economics, a think-tank, America’s list covers Chinese products worth $46bn in 2017 (9% of that year’s total goods exports to America; see graphic). China’s covers American goods worth around $50bn in 2017 (38% of exports). The sums were enough to move markets on April 4th, though the S&P 500 index soon made up lost ground.

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Preparing for War

by Jeff Thomas




The statesman who yields to war fever must realize that once the signal is given, he is no longer the master of policy, but the slave of unforeseeable and uncontrollable events.

                                                                                                                    —Winston Churchill


Recently, the US government announced the replacement of its National Security Advisor. The existing military man—a combat veteran Lieutenant General, was replaced by someone who was, amazing though it may seem, more hawkish.

This came as a shock to the world and Americans in particular, as the new advisor, John Bolton, is seen publicly as aggressive at best and a psychopath at worst.

The New York Times recently said, “There are few people more likely than Mr. Bolton is to lead the country into war.”

In other comments, The New York Times has said:

Mr. Bolton, in particular, believes the United States can do what it wants without regard to international law, treaties or the political commitments of previous administrations… He has argued for attacking North Korea… which could set off a horrific war costing tens of thousands of lives… he has called for bombing Iran… He has also maligned the United Nations and other multilateral conventions… Mr. Bolton has largely disdained diplomacy and arms control in favor of military solutions.

Pretty scary stuff.

But then, the president’s cabinet is increasingly about scary stuff. From the beginning, it was loaded up primarily with generals, as well as central bankers. Since that time, the turnover of staff has leaned ever further in the direction of aggressive military men.

In learning of the latest appointment, an American associate complained to me, “Look who they’ve chosen to be in charge of National Security. Don’t they know that this guy is so hawkish that, no matter what the situation, he’ll push the US toward war?”

Well yes, that’s quite so. However, the question suggests that the US government is presently weighing the possibility of a major war. I doubt very much if this is the case.

I’m very much afraid that the logic in the question is, in fact, backwards.

The US made the decision to go to war some time ago. What they’re now doing is lining up the people they’ll need to assure that the wartime advisors are aggressive enough to see it through.

Any cabinet member who actually considers both war and peace to be equally viable must be removed and replaced with someone who’s committed to the decision that’s already been reached.

Another concern amongst Americans is that President Trump has reversed his campaign promise to “work with Putin and other world leaders,” and is now threatening warfare on multiple fronts. An increasing concern amongst Americans is that he must be made to see reason, or he’ll lead the US to war.

Again, I believe that the logic is the wrong way round. Mister Trump is irrelevant. The Deep State—that conglomerate of governmental agencies and corporations that rule the US—have long-since baked war into the cake. The current president will be expected to get into line.

This is evidenced by Mister Trump’s repeated claims in the morning that he intends to work with others, only to announce in the afternoon that he will do the exact opposite. Mister Trump has an exceptionally strong ego and does all he can to maintain his image of being in charge, but time after time, he’s had to reverse his public statements, often within the same day.

This is not the behaviour of a man who is truly in charge.

Looking back half a century, President Eisenhower’s final task in office was reputedly to advise the incoming President Kennedy that the recently formed CIA was rapidly becoming a monster and needed to be dismantled at all costs. Mister Kennedy agreed and attempted to do just that.

His effort did not end well. Since that time, the Deep State has grown far stronger. It remains faceless by design, yet it rules, in toto, from behind the scenes. Its leaders rise from within and are not subject to election or public acceptance. They’re independent of both the party system and the constitutional balance of the three branches of government.

Mister Bolton was not chosen in spite of his belief that the US should be an active aggressor in every instance—he was chosen because of it.

The US is going to war.

Historically, when political leaders decide to go to war, they do three things. First, they build up their military might. They explain this to the people as being “necessary for defense.” They then create a war council—a group of advisors who are not only willing to go to war, but are eager to do so. (This assures, as much as possible, that they will stay the course, often obsessively, when the going gets tough. But this is also the reason why leaders often fight to the bitter end, even when all hope is gone, costing excessive and pointless loss of life... after the writing is already on the wall.)

Finally, they create a justification for invasion. This is normally achieved either with a false-flag act of aggression, or a provoked attack by the intended opponent. It matters little which method is used, as the result is the same—a “justification” for invasion.

This was done by the US to justify the Spanish-American War, both World Wars, Viet Nam, and each of the American invasions into the Middle East.

In the war that is to come, the US is doing all it can to provoke attacks from other countries in both the Middle East and Asia, whilst providing the media with propaganda, claiming that the US is only invading and planning to invade foreign countries for reasons of “defense.”

In essence, the way this works is much like the behaviour of the schoolyard bully. He doesn’t strike his intended victim. He pushes him, again and again, until his victim can no longer tolerate the humiliation of being pushed and strikes back in some small way. This gives the bully the justification to claim that he’s been attacked, and then he follows with an immediate, full-force retaliation.

At present, the US is actively provoking a host of small countries and has already invaded quite a few of them in the last two decades.

The alarming factor in the US aggression is that these countries are all very far away from the US, yet right next door to Russia and China.

As the old saying goes, “The enemy of my enemy is my friend.” Therefore, this shoving match instigated by the US—which is taking place in the backyards of Russia and China—is almost certainly going to ally those two great powers in opposition to the US.

In addition, many other countries in the world have become tired of the ceaseless aggression by the US and have already formed alliances with Russia and/or China. (We cannot yet know to what degree they will take part once a major war breaks out.)

Further, unknown to most Americans, many of its former allies are becoming increasingly disenchanted with US sanctions that threaten their trade with those other powers. When they’re asked to join together in warfare against them, they’re very likely to refuse—or worse, change sides.

The world, if not America, sees the US government as the aggressor… and the war to come is not likely to end well for the US.

Trade Wars in a Winner-Take-All World

Daniel Gros



BRUSSELS – With President Donald Trump’s new trade tariffs, the United States has been transformed from the global multilateral trading system’s leading champion and defender to its nemesis. But it would be very difficult for an erratic politician suddenly to overturn long-established structures and mechanisms, were it not for a more fundamental economic shift.

The first formal manifestation of today’s trade tensions occurred in the steel sector – an “old economy” industry par excellence, one that is plagued, especially in China, by enormous excess capacity.

Excess capacity is a recurrent phenomenon in the steel sector, and has always produced friction. Back in 2002, President George W. Bush’s administration imposed steep tariffs on steel imports, but relented when a World Trade Organization dispute-resolution panel ruled against the US. Although Trump administration trade hawks remember this ruling as a loss, most economists agree that it was ultimately good for the US economy, which does not gain from taxing a major input for many other industries.

In any case, today’s tariffs differ from Bush’s in a crucial way: they specifically target China. Under section 301 of the US Trade Act of 1974 – which empowers the president to act if US industry has been damaged by a foreign government’s unjustified actions – Trump has imposed steep tariffs on some $50 billion worth of Chinese imports. And China has already hit back, introducing steep tariffs on imports of 128 US-made products.

So why is Trump risking a trade war? His administration’s main complaint is that China requires foreign companies to reveal their intellectual property (IP) as a condition of access to the domestic market. And it is true that this requirement can do serious damage to US tech companies – as long as those companies are dominant in their industries.

For a major player in social networks or search engines, for example, the cost of entering a new market is essentially zero. Since the existing software can easily serve many more millions of users, they just need to translate their interface into the local language, meaning that entering a new market mostly means more profits. But if such companies are forced to reveal their IP, their business models are destroyed, as local players can then compete effectively in that market – and potentially in others.

This is not the case for companies operating in competitive industries. For them, producing and selling more abroad costs much more, limiting the marginal profits that can be reaped. In other words, in the more competitive “old” economy, the gains of opening new markets are much smaller. That is why lobbying by potential exporters for better access to markets with high tariffs has usually been muted – hence the lack of resistance to India’s protectionism.

This is changing in the new “winner-take-all” tech economy: with IP-owning winners missing out on massive profits when a big market like China is protected or closed, trade conflicts become more acute. Meanwhile, trade policy becomes focused primarily on re-distributing rents, with employment and consumer interests viewed as secondary. (Under competitive conditions, policymakers place a higher priority on maximizing trade’s potential to boost productivity and create high-quality employment.)

Monopoly rents translate into high market valuations. And, indeed, the new economy giants have a much higher stock-market value than their “old economy” equivalents. The three largest US tech companies are worth over 50 times more than the three largest US steel producers.

The looming trade war promises to be asymmetric. The US – home to all the dominant tech firms – will struggle to find allies against China. After all, in Europe and Japan, IP-owning companies operate mostly in more competitive industries, meaning that China’s demand for that IP will have less of an impact.

Making European support even harder to come by, some European governments are eager to secure their share of rents from US firms. This is the ultimate aim of European efforts to raise taxes on the profits of digital multinationals, though such a tax is unlikely to do the job.

Proponents of that tax argue that profits should be taxed where they are earned, with the implicit argument being that they are earned where the consumers are. But this is an arbitrary criterion. US firms can legitimately claim that their “European” profits are just a return on their IP, which can formally be localized anywhere, preferably in a low-tax jurisdiction. A European tax on these companies is thus unlikely to yield substantial revenues.

In the old competitive economy, trade wars might be easy to win for a country with a large trade deficit. But in the emerging winner-take-all economy, a trade war launched with the goal of forcing the rest of the world to open up, thereby allowing the aggressor’s own winning firms to earn higher rents, is an altogether different proposition.

So the US government is essentially arranging its diplomatic guns behind its Internet giants, while Europe and China are baying for their monopoly profits. This is more destructive than a zero-sum game: it will do serious damage to the global trading system, leaving everyone worse off.


Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.