Economic Weekly

From Brexit to Berlin to Frankfurt

Belgium EU Brexit
Of course, we have a plan. Source: British Brexit secretary, David Davis, and the European Union’s chief negotiator, Michel Barnier.

Brexit Blues

Detailed talks began on Monday between the British Brexit secretary, David Davis, and the European Union’s chief negotiator, Michel Barnier. It was difficult to avoid the impression that the British side had entered the talks without much of a concept or strategy. Despite the already-apparent harm to business, the British are apparently hoping they will somehow be able to muddle through negotiations – naturally still to the advantage of Britain.

Show Me Your Platform

The German federal election is now in full swing. The center-right CDU and CSU parties, majority partners in the current coalition government, presented their election manifesto to the public on July 3. Now Martin Schulz, chairman of the Social Democratic Party (SPD) and its candidate to become chancellor, outlined his vision of a modern Germany under social democratic rule on July 16. The really innovative elements of his 10-point program were the idea of an “opportunities account” for adults and a proposal for a “debt brake” on state budgets to be supplemented by an obligation to invest.

The state-funded opportunities account would make up to €20,000 ($23,260) available over the long term to every young adult upon entering employment. The account is intended as a response to the digital transformation of the workplace. It can be used to finance further training, phases of part-time work, a sabbatical or the cost of setting up a business, for example. However, the idea would perhaps have been more appealing if more detailed information had been provided about how it would be financed.

The SPD did however receive some highly unaccustomed praise from Germany’s taxpayers’ association on Wednesday.

The debt brake, which has been enshrined in Germany’s constitution since 2009, strictly limits public-sector borrowing. Mr. Schulz proposes that the regulation, which is not uncontroversial among economists, should be supplemented by “an obligation by the state to invest, which is firmly anchored in medium-term financial planning.” This demand for a minimal level of investment by the SPD may appear sensible, in view of gaps in state infrastructure. However, we need to be aware that it would involve the introduction of a binding rule, just as with the debt brake. As every binding rule is based on mistrust of the discretionary political decision-making process, it has mostly been “conservative” politicians, economists and journalists who have advocated such rules to date. It is therefore surprising that the obligation to have a “minimum speed” has now been put forward by the “progressive” SPD. Moreover, the guideline that any funding surplus should be used for investment purposes is based on an assumption that higher investment is always more worthwhile in socioeconomic terms than additional consumptive government spending. That assumption is by no means compelling.

Better on Taxes

The SPD did however receive some highly unaccustomed praise from Germany’s taxpayers’ association on Wednesday. Once a year, the association works out an average “tax freedom day,” i.e. the date when taxpayers have earned enough annual salary to pay their taxes and can start to “line their own pockets.” To do this, it adds up all compulsory charges by the state (admittedly using questionable methods to put it politely) and compares these with total income. While total taxes in 2016 came to 52.9 percent of total income, this year they came to 54.6 percent. That pushed “tax freedom day” for Germans back from 2.44 p.m. on July 12, 2016 to 3.27 a.m. on Wednesday, July 19 this year. As was to be expected, the tax plans of the liberal Free Democratic Party (FDP) come closest to those of the taxpayers’ association, followed surprisingly by the SPD, in whose plans the world’s biggest taxpayers’ organization sees a “clear and correct response” to Germany’s high tax burden.

Don’t Trust Investors

Germany’s Center for European Economic Research (ZEW) announced on Tuesday that its closely-watched monthly indicator of medium-term economic prospects had fallen slightly for Germany, from 18.6 points in June to 17.5 points. Its assessment of the current situation is also reported to have deteriorated slightly from 88 points to 86.4 points. The picture for the euro zone is mixed: Economic prospects declined slightly, while the assessment of the current situation improved slightly.

As the ZEW indices are sentiment indicators calculated by financial analysts who have little to do with the real economy, the suitability of these indicators as a forecast of economic development should not be considered to be too high.

No Mini-Step

Our weekly recommendation: The ECB’s governing council convened for its regular meeting in Frankfurt on Thursday, to discuss further monetary policy. More than a few economists had expected this meeting to lead to a further mini-step towards tapering, or the beginning of the phase-out of ultra-loose monetary policy. However, nothing happened! The decline in the inflation rate in the euro zone to this year’s lowest level of 1.3 percent, which was announced on Monday, can be assumed to be one of the main reasons why the ECB has maintained its expansionary course.

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