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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Jun 1

RIP Stan Fischer, a wonderful mentor, thinker, leader. Incorruptible, wise, and influential until the end. Unforgettable to all who had the honour of interacting with him.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Apr 18

Yesterday, we published a short paper with a Q&A on the EDM, inspired by questions and objections such as yours. You can find it here. Comments very welcome. www.bruegel.org/analysis/pro...

The proposed European Defence Mechanism: questions and answers

Answering ten questions on the proposed EDM

www.bruegel.org

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Apr 18

Of course, agreeing to the EDM will require political will. This is one reason we are trying to make it attractive in ways that go beyond just creating a defence industry single market (for example, via its capacity to fund common defence assets without raising national debts).

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Apr 18

Sorry I initially missed this exchange, Lucas (and Guntram). Our response is that in order to overcome procurement nationalism -- and create a single market -- we need a legal commitment device. Creating this within the EU requires unanimity. So we need an intergovernmental treaty, the EDM.

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Reposted by Jeromin Zettelmeyer

Adrien Fabre @adrien-fabre.bsky.social · Mar 17

In this excellent Comment in Nature, @patrickbolton.bsky.social, O. Edenhofer, A. Kleinnijenhuis, J. Rockström & @jzettelmeyer.bsky.social argue that it's in HICs' interest that they provide 0.3% of GDP in grants, conditional on decarbonization in the Global South.
www.nature.com/articles/d41...

Why coalitions of wealthy nations should fund others to decarbonize

Failure to agree on global grants to help low- and middle-income countries to achieve net-zero emissions cannot be the end of the story. An urgent solution is needed.

www.nature.com

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

I completely agree that we need to massively ramp our defence spending- and that is indeed the intention of the incoming government. Furthermore, we should use part of that money to fund common European procurements, along with our EU allies and the UK and Norway

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(9/9). The inconsistency between the proposal and EU fiscal rules cannot be addressed just by invoking an escape clause. Addressing it will require more fundamental changes, such as increase in the 60% of GDP debt reference value, and/or a less generous parametrisation of the new debt brake.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(8/9). Running 94 or even 114 percent of GDP in debt in perpetuity is nothing that would cause the Bund to lose its safe asset status. But it cannot be reconciled with the EU’s requirement that debt of all members fall to less than 60% of GDP.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(7/9). Now x is expected to be perhaps 2% of GDP (3% in military spending minus 1% financed inside the debt brake). This means that steady state debt would be 2.35/0.025 = 94% of GDP. And if military spending ends up at 3.5% of GDP, steady state debt would land at 114% of GDP

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(6/9). In the current debt brake, x = 0. With g approximately 2.5%, this implied that debt was converging to a ridiculously low 14% of GDP.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(5/9). However, for plausible growth rates, the steady state debt level is much higher both than the old steady state level and than current debt. It is approximately given by the formula: d=(x+0.35)/g, where x is military expenditure financed outside the debt brake and g is the nominal growth rate.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(4/9). On (1): the amended rule inherits a key property of the old rule: debt must converge to a fixed ratio. This is because although some spending could now be financed outside the debt brake, all interest payments must be financed inside the debt brake. So, debt cannot explode.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(3/9). Specifically, the note answers two questions. (1) will the amendment lead to debt rising to unsustainably high levels? (2) is the proposal consistent with the EU fiscal rules? The answers are no and no.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

(2/9). Many in Germany worry that the amendment is designed in a way that will raise not just infrastructure and defence spending but all sorts of spending. I agree with that concern. But the point of my note is different: I explain the consequences of the amendment for the level of debt in Germany.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Mar 12

I published a short note on the implications of a proposed constitutional amendment in Germany, which includes an 11% of GDP fund for infrastructure and permission to fund most military spending outside the debt brake’s maximum deficit of 0.35% of GDP (Thread, 1/9): www.bruegel.org/analysis/can...

Can Germany afford to take most defence spending out of its debt brake?

Higher German defence spending would be fiscally sustainable, but would require cuts elsewhere and would breach EU fiscal rules

www.bruegel.org

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(11/11). Conclusion: by offering coordination of state aid as a substitute for common funding, the Commission is giving up the fight for an EU-wide investment and industrial policy too easily.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(10/11). And even if it did, this would not solve the problem that state aid for creates for the single market. Even a German industrial policy that operates in line with agreed EU-wide priorities Commission would still only finance German firms.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(9/11). Seeking stronger coordination and governance over member state's industrial policies makes a lot of sense. But it is unclear if the mechanism could exercise sufficient control, or offer sufficient financial incentives, to actually achieve the desired alignment.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(8/11). To deal with the second problem, the Commission proposes a new coordination process, the ‘Competitiveness Coordination Tool, in which the Commission and member states would seek to align national industrial policies in “specific sectors” with the European optimum.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(7/11). In addition, the attempt to implement Draghi without (much) extra money at the EU level will likely run into two problems. First, the EU will likely not close its investment gaps. Second, industrial policy at the member state level may not be good for the EU as a whole.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(6/11). On the downside, the Commission’s proposal inherits some of the unanswered questions that can be asked of the Draghi report – particularly how to avoid the unintended consequences of expansive industrial policy.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(5/11). On the upside, it is good that the Commission is promising to push the aspects of Draghi’s proposals that do not cost much money: regulatory streamlining and single market reforms, including capital markets union.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(4/11). So, where is the public money for Draghi’s investment and industrial policy supposed to come from? The implicit assumption is that it will come from member states — via a loosening of the application of state aid rules (“a flexible and supportive state aid framework”).

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(3/11). The Commission is taking Draghi seriously. The Competitiveness Compass is an attempt to achieve “maximum Draghi” subject to two constraints: (1) staying within WTO rules; (2) the assumption that not much extra money will be forthcoming at the EU level. Draghi on a shoestring.

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Jeromin Zettelmeyer @jzettelmeyer.bsky.social · Feb 4

(2/11)… and a shorter analysis focused on the Commissions economic manifesto, the “Competitiveness Compass” (www.bruegel.org/analysis/dra...). The rest of this thread summarises the latter.

Draghi on a shoestring: the European Commission’s Competitiveness Compass

The proposed EU Competitiveness Compass would set up a conflict between industrial policy and the single market

www.bruegel.org

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