The bit in the middle has what I was talking about with Germany keeping policy tight

 

German coalition collapses

Political turmoil couldn’t have come at a worse time. Emily Hohler reports

Scholz has “finally lanced the boil”

German chancellor Olaf Scholz has “just pulled the plug on his coalition and lost his parliamentary majority”, with polls implying that his Social Democrat party will be defeated in the snap election called for 23 February, says Guy Chazan in the Financial Times. The current government will be put to a confidence vote on 16 December, which it is expected to lose. 

Despite Scholz’s low approval ratings and the wish of some in the SPD that he be replaced by the popular defence minister Boris Pistorius as SPD leader, party leaders have “rallied round” and most expect Scholz to be the name on next year’s ballot. His standing among some colleagues has “paradoxically improved” since the government’s collapse – he has been hailed as a hero who “finally lanced the boil, ending a dysfunctional government riven by ideological conflict”. Last week, Scholz fired finance minister Christian Lindner, leader of the pro-business Free Democrats (FDP), for refusing to suspend the debt brake to allow more funding for Ukraine, effectively ejecting the party from the coalition.

Back to 2006

Donald Trump’s victory couldn’t have come at a worse time, says The Times. His plans to impose more tariffs on imported European goods are likely to be “particularly catastrophic for Germany” since America is its largest trading partner. Trump has suggested tariffs may be between 10% and 20%, possibly much higher for cars, Germany’s main export. The EU may respond in kind. The German Economic Institute estimates that a trade war could cost Germany €120bn-€180bn over Trump’s four-year term. Then there’s a possible Putin victory in Ukraine, “with all that this implies for the survival of the EU”, says Ambrose Evans-Pritchard in The Telegraph.

Last year, the US had a $170bn trade deficit with the EU; Germany accounted for half of that. This “touches on a deeper problem”. The country has relied on a current-account surplus of 6%-8% of GDP for much of the past 20 years, the result of a “tax and regulatory structure, allied to fiscal ideology, that suppresses internal consumption and wages to the benefit of the exporting elites”. A large surplus would normally partially self-correct via the exchange rate, but Germany “jammed the adjustment mechanism by launching the euro”, leading Washington to accuse Berlin of “gaming monetary union to lock in a stealth devaluation”.

Germany’s “original sin” was a collective refusal by elites to embrace modern technologies, says Wolfgang Munchau in The Times. As time went on, leaders “continued to double down”, with a heavy dependence on a few industries such as cars and chemicals and increasing reliance on Russia for gas and China for exports. The “neo-mercantalists in the government” turned a “bad bet by a single industry” – the car industry’s refusal to embrace the rise of EVs – into a “bad bet for the whole country”. Industrial production has fallen back to 2006 levels this year; the economy as a whole has seen virtually no growth since 2018. Unless Germany repeals its constitutional debt brake and starts to generate some domestic demand, it will “sink into atrophy”, says Evans-Pritchard. “The last chicken has come home to roost.”

Comparing our benefits payouts to other countries'

 

TOM CALVER | GO FIGURE

Have people stopped working because benefits are too generous?

Tom Calver

, Data Editor

Sunday November 17 2024, 12.01am, The Sunday Times

How tough is Britain’s benefits regime? Not tough enough, according to the British public, by a growing majority — or so we have told YouGov. Soaring economic inactivity plus attempts by successive governments to trim the welfare bill have hardened attitudes.

An extra 671,000 people have become “economically inactive” since the pandemic, costing the taxpayer an extra £12 billion in health-related working-age benefits. The bill could reach £63 billion by 2029, according to the IFS.

Labour, as well as clamping down on benefit fraud, made tackling worklessness a key manifesto pledge. But how well does it actually pay to be out of work in Britain?

In a word: poorly. Let’s start with unemployment benefits. If you’re a single person on an average wage and you lose your job, in most rich countries the state will help you keep most of your salary while you get back on your feet.

In Luxembourg this “replacement ratio” is a miraculous 86 per cent of the average salary. Portuguese workers keep 75 per cent of their pay, the French keep 68 per cent and the Germans keep 59 per cent.

Things are less rosy in the US, where median-wage workers keep 35 per cent of their working salary. But in Britain? A measly 12 per cent — the lowest in the developed world. Even if we include housing benefit, the UK still ranks 39th out of 42 rich countries, according to the OECD — ahead of only Australia, Romania and Russia.

Apart from being low, there are two main ways Britain’s unemployment pay differs from that of comparable nations.

First, our system offers universal welfare, with more assistance given to the neediest, funded through general taxes. Many European nations, by contrast, use social insurance models, in which workers pay into schemes while employed, and are given unemployment pay based on the salary they were on. High-earners get more benefits.

Second, generous though many of those European benefits systems appear, they are time-limited. Unemployed Italians enjoy 62 per cent of their wages immediately, but that falls to nothing after two years. In Britain, assuming none of your economic circumstances change, your (modest) universal credit allowance stays the same for ever.

So Britain’s unemployment pay lags behind most of the world. What about sick and disability benefits? In the UK health-related benefits fall into two categories: means-tested incapacity benefits — mostly via the health part of universal credit, which is designed to compensate for the fact that earning is harder when you have health problems — and disability benefits, given to disabled people regardless of income.

Recent international comparisons are hard to come by. But a 2020 paper by the OECD suggested that British claimants with the lowest level of incapacity get the equivalent of just over half the average wage — placing us roughly in the middle of the pack.

By international standards, then, Britain treats those on sickness benefits much better than the unemployed. This is the reverse of public opinion: people are more likely to think those with disabilities have too little support (48 per cent agree with that statement) than those who are out of work (26 per cent).

For the past three years the government has been trying to work out why so many more people are claiming disability benefits. It cannot all be down to the pandemic. Virtually every country in the rich world has seen a rise in sickness since 2019, yet Britain is, with Denmark, one of the only rich countries to see a rise in health-related benefits.

A recent report by three Institute for Fiscal Studies economists ends with this compelling suggestion. Because the level of basic unemployment support is so low, they say, it’s possible that “following a shock to real incomes, more people with health conditions in the UK apply for health-related benefits than in other countries”. In other words, as inflation starts to bite and budgets are stretched, some people with conditions who did not claim health benefits previously are now choosing to do so.

Since the pandemic, the number of people claiming incapacity or disability benefit has jumped from 2.8 million to 3.9 million. But it is not true that many of those extra 1.1 million claimants came from the workforce; in fact, nearly two thirds left their last job more than two years ago or had never had one.

Furthermore, the option to fill out health-related claims forms online has made it easier for those who start an assessment form to finish it — completion rates have gone from 72 per cent to 86 per cent.

Rising ill health did not begin with the pandemic: Britain was getting sicker throughout the 2010s. But to understand why so many more people are claiming sickness benefits now, we must look at the wider welfare safety net — which, if you fall on hard economic times, can be surprisingly porous.

Currency intervention options for Trump:

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Finance & economics | Breaking the greenback

Donald Trump wants a weaker dollar. What are his options?

All come with their own drawbacks

Illustration: Travis Constantine

Jul 25th 2024|Washington, DC

Listen to this story.

In September 1985, eight months after Ronald Reagan, America’s 40th president, began his second term, finance ministers and central bankers from America, Britain, France, Japan and West Germany met at the Plaza Hotel in New York. They discussed ways to bring down the value of the dollar, which had risen by nearly 50% on a trade-weighted basis between 1980 and Reagan’s second inauguration. Other countries had expressed alarm; the American trade deficit had ballooned. After the group announced that “orderly appreciation of the non-dollar currencies is desirable” and that they were ready to “co-operate more closely to encourage this”, the dollar plummeted. By the late 1980s, it was back where it traded in 1980.

Despite the seeming success of the “Plaza Accords”, currency intervention fell out of favour. Desire for control over monetary policy, as a way to keep inflation low, took precedence. It is infeasible for a country to have an independent monetary policy, an open capital account and a fixed exchange rate; even going for two of the three, and influence over the third, is not much easier. Currency markets are vast, deep and liquid. Time and again foreign-exchange traders have beaten into submission policymakers who have dared try to push them around, in either direction.

Chart: The Economist

Yet this may not stop a second Trump administration from trying. Donald Trump likes most strong things—strongmen, strong borders, strong China policy—but not a strong currency. “One would think that I would be thrilled with our very strong dollar,” he said in 2019, “I am not!”, explaining he thought it undermined American industry. He is joined in this dislike by J.D. Vance, his new running-mate. “When I survey the American economy...I see our mass consumption of mostly useless imports on the one hand and our hollowed-out industrial base on the other hand,” he told a Senate hearing last year, before asking Jerome Powell, chair of the Federal Reserve, if there were downsides to having the world’s reserve currency.

What tactics could a Trump-Vance White House use to bring down the dollar? A repeat of the Plaza Accords—surely this time at the Trump International Hotel, on the other side of Central Park—is unlikely. They were agreed, in part, as an alternative to levying tariffs or other trade-protection measures on allies, which were desired by Congress. America’s trading partners are far more varied, numerous and hostile than in the 1980s. Fewer would be willing to help America out this time round.

Made in China

The Treasury could instead act of its own accord, selling dollars to buy foreign currency. But this might be expensive. From 2014 to 2017 China, which has robust capital controls and a thinner foreign-exchange market, spent $1trn, or 3% of GDP, a year trying to support the value of its currency. America is running a large budget deficit. Borrowing vast sums only to buy up foreign currency might not appeal, especially if funds are restricted by the debt ceiling and could finance tax cuts.

Perhaps Messrs Trump and Vance will try to coerce the Fed into action. Independent monetary policy is not something Mr Trump has ever cared much about. In his first term he often took to social media to chastise Mr Powell for being slow to cut interest rates, criticising him for having “no guts, no sense, no vision”. If the central bank could be nudged into printing dollars or lowering rates, that would probably help bring down the value of the dollar. Yet it is unlikely Mr Powell could be bullied into doing this, not least because it would almost certainly cause inflation, which he is required to keep low and stable. Firing Mr Powell, and replacing him with a more pliable chairman, might not be legal.

Some kind of capital control is the only other tool. It is unthinkable that America would implement the kind of restrictions that China has in place, but it could make flows of capital a little less free, such as by imposing a tax on foreign purchases of American financial assets. This idea has been floated by Robert Lighthizer, Mr Trump’s trade representative during his first term, as a tool to bring down the trade deficit. It, too, might have unwelcome consequences, including pushing up government-bond yields or pushing down stock prices. Given that Mr Trump likes issuing government debt and takes pride in a strong stockmarket, this could put him off.

If a second Trump administration simply does nothing, it might even get lucky. The jury has long been out on whether it really was the Plaza Accords that drove down the dollar. The currency’s strength in the early 1980s was encouraged by the Fed’s war on inflation, which it fought with eye-watering interest rates of almost 20%. By the end of the decade the battle was won, and rates had been cut sharply. A similar story seems to be playing out in America now. After more than two years of tight monetary policy, inflation at last appears to be subsiding. Rate cuts—and currency weakness—may soon follow. ■