2018 – Strong expectations in a world that has changed

The year ahead gives us a number of reasons to be optimistic that I would like to share with you. World trade has taken an upturn, oil prices remain reasonable, and business leaders worldwide have a positive take on their environment. So the starting point for 2018 is solid.

Growth, along with the ensuing employment, will provide an opportunity for all citizens to regain a foothold in a complex and difficult world. Economic policymakers will be responsible for adopting the right reforms to set the stage for a recovery that provides enhanced job creation and reduces uncertainty for each and every member of society. In this respect, France has high hopes on the reforms that will be debated in 2018: the reform to vocational training and job skills lies at the heart of the French government’s roadmap and the policies the authorities adopt in this area will provide the key counterpart to the labor law decrees in making the job market more efficient. Continue reading

German risks for Europe

After the failure to form a coalition the first thing to notice is that Merkel is no longer at the center of the game. She has been replaced by the German president, Frank-Walter Steinmeier, who will decide what will be the next steps.

These steps can be threefold
1 – A coalition between the CDU-CSU and the social democrats of the SPD but the SPD is reluctant to participate.
2 – A minority government but with the risk of doing nothing while important issues have to be managed (the current negotiation failed on the refugees’ question, on carbon emissions, on taxes and on education) These are important issues that cannot be postponed.
3 – New elections at the beginning of next year

I favor the third possibility but my guess is that in this type of situation domestic questions are at the center of the discussion or of the campaign.
European questions were not at the center in recents days but with Merkel’s recent point of view was a kind of guarantee that Europe would not be forgotten.
It could be the case in a foreseeable future if Merkel is no longer the leader. Europe could then be erased from discussions

The recent improvement in the perception of Europe is twofold.
1- GDP growth is stronger and employment is improving rapidly
2- The commitment between Merkel and Macron to improve the way institutions are working at the European level

If Merkel is weaker and focused on internal issues then European reforms will no longer be on the agenda
This would create an uncertainty that could reduce the economic horizon then limiting investment and the possibility to improve the potential growth. Therefore it can have a negative impact on growth and could  be damaging.

Another point on reforms is that with stronger growth it limits the risk of populism. If, because Merkel is no longer at the center of the picture, reforms are not done then we will see the convergence to a lower growth trend rate and more that the come back of populism with the risk of weaker institutions. Some nationalists want to exit from the EU.
The political process in Germany is at risk not only for the Germans but also for Europeans as the current momentum would become more fragile opening the door to populism

The impact on Brexit negotiators will depend on the result of the current political process. A bias positive to populism would a piece of cake for the UK government as populists do not like Europe. It would be the worst situation for a European citizen.

Is the strong euro set to last?

Trading at 1.18/1.19 to the dollar, the euro has become a pricey currency. But the European currency has also gained against all other currencies as its effective exchange rate has returned to levels unseen since the end of 2014. So we can no longer count on the euro losing value. This makes the ECB’s job harder as a strong euro allows for importing disinflation, thereby pushing back the chances that inflation in the euro area will swiftly converge towards the 2% target set by the central bank.

We can make three initial remarks on this situation.
The first is that the euro’s swift rise looks like a monetary restriction. Monetary policy has become more restrictive and the ECB’s stance must confirm its aim for accommodation in the long term so as not to increase potential expectations on a change in course. The second remark is that a strong euro is coherent with the euro area’s very high external surplus. The decline in the euro was not compatible with this surplus. The last remark is that the dollar is weak. Its effective exchange rate is at its lowest since the end of 2016: America is not doing well.

Following on from these three remarks, we can derive three explanations to understand this currency movement. Continue reading