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Sovereignty increases EU regulatory burden
- Macro economy
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Trade between European member states is less intensive than trade between the 50 American states. Consequently, the benefits of scale and specialization remain underutilized, resulting in lower productivity growth compared to the US. One reason for the disparity in trade intensity is the complex regulations that hinder the internal market. The complexity of European regulations is not primarily due to the inferiority of individual member states' regulations compared to those in the US, but rather the lack of harmonization among the member states. Simplifying rules, as the European Commission currently aims to do, does not necessarily resolve this issue. A truly unified, common market with low transaction costs becomes feasible when member states can no longer easily negotiate exemptions or establish additional rules. Therefore, member states will need to relinquish some sovereignty. Furthermore, new regulations should be consistently evaluated for effectiveness (do the rules achieve the intended outcomes?), efficiency (are these outcomes achieved at the lowest possible cost?), consistency (do the rules align with policies in other areas?), and enforceability (can compliance be effectively monitored?). This evaluation task was previously assigned to the European Commission. However, as the Commission's role has become more political, and compromises are often required to strike deals, it is less able to perform this task effectively. Consequently, this responsibility should be assigned to an independent body.
Global Monthly - Cracks emerge amid tectonic shifts
- Macro economy
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The fracturing of the transatlantic alliance is going to mean higher defence spending in Europe over time, though the immediate macro-economic implications of this are likely to be modest. The most imminent threat still comes from higher US trade tariffs, with a host of measures due as soon as next week. Last month, Trump blinked at the last moment on the biggest tariff rises, will souring confidence in the US make him do so again? Spotlights: 1) European defence spending: We summarise the available options for an increase and the macro implications; 2) German election: We look at the likely policy agenda of the new GroKo.
Global Monthly - Buckle up – this is just the beginning
- Macro economy
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The early days of the Trump administration have been predictably chaotic. Businesses and investors had better get used to the new environment of radical policy uncertainty. An earlier end to Fed rate cuts is likely to drive the euro below parity later this year. This will take the edge off of the tariff blow to European exports, but it won’t fully offset it. Still, Europe isn’t powerless: the EU has long prepared for negotiations with Trump, while the German election could free up much-needed investment to deal with structural competitiveness challenges. We preview the German elections in the first of a series of articles in this month’s Spotlight*. Regional updates: The consumer is finally waking up in the Eurozone, helped by ECB rate cuts, while in the Netherlands, stronger domestic demand is likely to partly offset looming headwinds for trade. In the US, the goldilocks economy is back for now, but Trump policies will likely put an end to Fed cuts. China is seeing tailwinds from Beijing’s policy pivot and trade frontloading, ahead of likely US tariffs.
Preview German elections: ‘Grand coalition’ most likely result
- Macro economy
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This is the first piece on the German elections in a series of pieces until the Bundestag elections in February. In the this first piece we will dive into the polls and possible coalitions outcomes. In the second piece we will discuss the state of the economy and the Bund Market. After the elections we will publish an analysis of the election results and its future implications.
Spotlight - German elections - ‘Grand coalition’ most likely result
- Macro economy
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On February 23, parliamentary elections will be held in Germany. Union leads the polls, with AfD in second place. However, a coalition between these parties is not feasible. Most parties, including CDU/CSU (Union), reject governing with AfD due to this party's extreme views. The most likely coalition is Union with SPD, as CSU does not want to partner with the Greens. Given the strained relationship between Union and SPD, the likelihood of significant reforms is low. Nevertheless, the chance of easing the so-called debt brake is high. Easing the debt brake would enable new investments by the government. These are urgently needed, as the German economic outlook hinges on improvements in physical and digital infrastructure.
Macro Watch - Tight labour market dampens economic growth potential
- Macro economy
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The active labour force has been growing steadily, but too slowly to meet all labour demand. Many vacancies are outstanding and business owners indicate in surveys that lack of staff is their biggest obstacle. The tightness in the labour market will continue for the time being, as the pool of people who can find work is small. The number of unemployed is low, the schedules of part-time workers who say they would like to work more hours do not necessarily match employers' work schedules, and those who are in the labour force but not in paid employment often have other commitments, such as study or informal care, or are kept from work by illness. The labour market is also at risk of remaining tight in the longer term due to an ageing population. With an increasingly weak increase in labour supply, the economy will grow more slowly and GDP growth per capita will weaken. This leaves less room to share the pain of social change. Where some citizens gain from a policy adjustment, others lose out. This will make it more difficult to implement reforms in the future.
US Elections – For every new regulation we’ll scrap two, no, ten!
- Macro economy
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Regulation and enforcement will be kept in place or strengthened under Harris, it will be weakened under Trump. The ability to change regulation will depend on congress’ makeup. Trump is better positioned to circumvent legislation and bypass congress.
Housing market is and remains very tense
- Macro economy
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We raise our 2024 price estimates from +7.5% to +8.5% and those for 2025 from +5% to +7%. Higher wages, lower interest rates, loosened lending conditions and lack of construction prop up prices. Continued price increases put further pressure on affordability. We also adjust transaction estimates for 2024, from +10% to +12%. The 2025 estimate remains +2.5%.
Macro Watch - Clear mission for new European Commission
- Macro economy
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Priority of new European Commission will be improving competitiveness. The guiding principles here come from Mario Draghi's recently published report. European member states must invest more in innovation, coordinate their policies and integrate knowledge, competition, trade, industrial and security policies.
US Elections – Spiraling debt is base case
- Macro economy
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The US debt-to-GDP ratio is on an explosive trajectory, fueled by healthcare and interest expenditures. Neither candidate has proposed policies sufficient to stabilize the ratio. With the exception of debt ceiling negotiations, the impact of large deficits will not be felt during this presidential term.
