Location, location, relocation

Remember the EU Financial Transactions Tax (FTT)? Back in 2011, European Commission President Barroso presented a plan to make sure that financial institutions would “pay their fair share” following the bailouts which banks received in the wake of the financial crisis. Predictably, it led to an outcry with a small but vocal minority, led by the UK, intent on blocking its introduction. Having originally been intended to come into operation in 2014 it has yet to come into law – and probably now never will. Yet as recently as January, the EU Parliament suggested that a draft text could be ready by mid-2017. We are still waiting.

The irony is, of course, that many EU countries already had a form of FTT in place. Even the UK levies stamp duty on equity transactions, having done so since 1694. But with much of the evidence suggesting it would have an adverse effect on certain types of business, with derivatives transactions likely to be the worst hit, the push back was so great that it has been quietly kicked into the long grass. I have long held the suspicion that this would be the case, though when I made this point in a panel discussion in 2013, I was told I was wrong. Unfortunately, I will likely be proved right for the wrong reasons.

It is Brexit that has changed the nature of the debate. On the assumption that this will mean an end to financial services passporting, it is going to become a lot harder to conduct international financial services from London. With Paris and Frankfurt keen to attract business from the City, the chances of the FTT being introduced have gone below infinitesimally small. Although both the French and German governments continue to publicly support the principle of the FTT, it is hard to see either being very supportive at a time when they are scrabbling for London business. With Frankfurt apparently ahead in the business relocation race, the German government is unlikely to push the FTT high up the priority list. And without their support, the FTT is as good as dead in the water. This, of course, makes life rather more complicated for Britain, some of whose politicians assumed that the UK could continue to operate as a low-tax offshore haven.

Abandoning the FTT will certainly make it easier for firms to relocate to other EU locations. Indeed, some business lines simply might not have been profitable in the face of its introduction which could have resulted in them being cut altogether. Now, however, they may be able to continue operating elsewhere. However, abandoning the FTT alone is not going to be enough to persuade business to relocate. Given the pick of European cities to live, many bankers might opt for Paris. After all, it is sufficiently diverse to match the “charms” of London and is certainly one of Europe’s more beautiful large cities. But France is perceived as a more difficult place to do business than the UK and ranks 29th in the World Bank’s Ease of Doing Business index behind other EU members such as Poland and Portugal.

Anglophone bankers might have a preference for Dublin but Ireland may be reluctant to host some of the riskier parts of banking activity, following the problems which it has had to overcome in recent years. The Irish authorities would welcome asset managers, insurance companies and back office functions but may be more cautious about taking on big balance sheet risk given the relatively small size of the economy. It is thus partly due to the lack of alternatives elsewhere that Frankfurt has emerged as the front runner. Germany’s Ease of Doing Business ranking (17) is higher than Ireland (18) , although lower than the UK (7). Frankfurt is also home to the ECB and a well-defined financial cluster has been established in recent years.

One downside is that Frankfurt is relatively small compared to Paris and London, and is already operating at full capacity following the transfer of euro zone banking supervision to the ECB which has pushed up business and residential property prices. The latter in particular is not insurmountable. Anyone who travels 20 miles into central London on a daily basis will find they can do a longer commute rather faster and more cheaply than they can in south east England. Speaking from my own experience, I can testify that the quality of life is also rather better in the Rhein-Main region. If you like a beer, Germany is a good place to be, though if clubbing is your thing maybe you will find Frankfurt a bit tame.

From an industry perspective, however, the real concern is that the integrated European financial services sector will begin to fragment. London will remain the dominant player for some time to come but as business begins to relocate elsewhere it will be replicated on a smaller scale. It will be very difficult and highly costly to build the full infrastructure which the modern industry needs across a number of different European locations. Whilst Frankfurt will probably gain a lot of London business, my long-standing conviction remains that the centre of gravity will inexorably shift towards Asia. This trend may have happened anyway but will certainly be hastened by Brexit. Some politicians might cheer such an outcome for it will result in the de-risking of European financial services that the FTT was designed to achieve. But the British government may come to regret the dismantling of an industry which plays such a crucial role in the knowledge economy that it claims to support.

Still talking at cross-purposes

Twelve months ago, in the immediate wake of the EU referendum, those of us who continued to point out that the UK had made a major policy mistake were derided as “Remoaners” bent on subverting “the will of the people” and that we should all pull together to make the best Brexit possible. I make no apologies for opposing Brexit and disagreeing with its proponents. The known economic costs are too high relative to the unknown economic benefits (if any) whilst the UK’s negotiating position is hopelessly naïve. But as I have pointed out in the past couple of weeks, there are increasing signs that people are beginning to realise the magnitude of the task involved and the voices arguing for a change of tactics are getting louder.

One of the more thoughtful interventions was from former PM Tony Blair (here) who went so far as to suggest that “European leaders, certainly from my discussions, are willing to consider changes to accommodate Britain, including around freedom of movement.” Blair also pointed out that because the opposition Labour Party’s position on leaving the single market is similar to that of the government’s, those wishing for a Labour government to change the terms of the Brexit debate may be disappointed. Indeed, he argued that the combination of the economic policy programme advocated by Labour, coupled with the fallout from Brexit, would be a disastrous combination leaving Britain “flat on our back and … out for a long count.” The problem is that whilst Blair is perhaps the most successful UK retail politician of the last two decades, his legacy has been tarnished by his association with the Iraq War to the point that people within his own party no longer listen to him.

Blair is not alone in his position. An op-ed piece in The Times on Friday by Philip Collins pointed out that “we can’t leave Brexit to the Tory wreckers” (here if you can get past the paywall). He makes the point that whilst it is tempting to ask those who got us into this mess to get us out, “they don’t know what they are doing. Their view of the EU is too ideologically narrow.” That latter point hits the nail on the head. It harks back to my point on homophilous sorting, in which like-minded people talk only to each other without hearing the arguments of the other side.

During the course of the referendum campaign, the simple message peddled by the Leavers resonated with an electorate which wanted to believe that leaving the EU was easy. As Tim Harford notes in his latest piece “last year’s Brexit campaign was based on a simple piece of wishful thinking: Boris Johnson’s idea that the UK could have its cake and eat it. How, exactly, was never quite clear, but desirability bias gave a foolish idea more credibility than it deserved. Voters hoped that Mr Johnson was right, and so they began to believe him: it is so much easier to believe what we already wish is true.”

But for all the evident difficulties in negotiating Brexit and the fact that the collapse in sterling is already making people poorer, there is not a lot of evidence to suggest that many people who voted for Brexit are ready to change their view. A radio phone-in discussion (here), in which a journalist skewered all of the arguments put forward by a Leave supporter who refused to change his view in spite of all of the evidence, is a classic example of all that was – and is – wrong with the debate. I must confess that I was not sure whether to laugh or cry having heard it.

More sober proponents of Brexit, such as Daniel Hannan, remain as resolute as ever. The fact that Hannan is one of the more rational proponents of Brexit should be taken with a pinch of salt:  He was once described by a cabinet minister as an “arsonist.” In an article published in the Telegraph, Hannan calls Remainers “childish” and argues that “there is no prospect of Article 50 being reversed.” This is where I have difficulties with the likes of Hannan: saying something which is unproven as if it were a fact. Lawyers disagree on whether the government can rescind the Article 50 notice, but I am sure the EU27 would be delighted were it to happen (although it is unlikely). Where Hannan is right is that “staying in the customs union would be the worst of all worlds: it would mean that Brussels continued to dictate our trade policy without our having any input into that policy.” Indeed, I made this point a year ago – but what he fails to point out is that leaving is even more damaging. Hannan further stretches the boundary between fact and fiction by arguing that “the majority of the 48 per cent [of remainers] … now want Brexit to succeed. Publicly undermining our negotiators can have only one effect, namely to encourage Brussels to offer harsher terms.” 

One of the real difficulties in the Brexit process is that two sides in the domestic debate cannot agree on how to proceed. We are thus wasting far too much time debating the issue at home when what is required is the presentation of a coherent set of arguments in Brussels. Unfortunately, what we have been presented with over the past year is neither realistic nor sensible, and many people who voted Remain cannot buy into these plans because they represent ideas which are clearly not in the national economic interest. Brexiteers do not seem to understand the damage which a hard Brexit will cause to the UK economy. What is worse, they do not seem to care.

In their book Democracy for Realists, Christopher Achen and Larry Bartels describe a new phenomenon in US politics whereby voters imagine that one party holds a position which fits their view of the world when it clearly does not. This helps explain why those voting for Brexit listen only to the anti-EU part of the Brexit message without hearing the discussion about costs. It may also explain why people voted for Jeremy Corbyn’s Labour Party, as a protest against the hard Brexit Conservatives but without hearing the anti-EU part of Labour's policy.  If this hypothesis is true – and I suspect it is – we have moved beyond rational debate and into the world of dog-whistle politics (though I guess that is not really news). However, it does not mean we should stop making a rational case as to why Brexit is an act of economic self-harm. One day, someone might just listen.

Mr Phillips is resting

Markets are increasingly concerned that central bankers may be about to take away the punch bowl rather earlier than they had previously anticipated. The Bank of Canada was the latest central bank to tighten policy, raising rates by 25 bps this week for the first time since 2010. There is also increased nervousness regarding the policy intentions of the ECB and BoE. But whilst there are good reasons for taking away some of the emergency easing put in place in the wake of the financial crash of 2008-09, it is proving much harder to justify tightening on the basis of inflation than most had expected.

This is a particular problem for the Fed which has nudged up the funds rate in four steps of 25 bps over the past 18 months, but is reliant on signs of higher inflation to justify ongoing policy normalisation. US core CPI inflation, which was running above the Fed’s 2% target rate last year, slipped back to 1.7% in May and June and is thus at the bottom end of the range in place since 2011. Wage inflation has also picked up, but here too the acceleration has been modest, with hourly earnings running at an annual rate of 2.8% in June which is only 0.5 percentage points higher than the average of the last three years.

For an economy which is running close to what appears to be full employment, this might appear rather surprising. But the headline unemployment rate, currently 4.4%, understates the degree of slack in the US labour market. The so-called U6 rate which adds in “marginally attached” workers – defined as “those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months” – is still at 8.6%. This is slightly higher than the previous cyclical trough in 2007 when it reached 8.0%, and significantly above the low of 6.8% recorded in October 2000. Arguably, therefore, the jobless rate can still fall a little further before wage and price inflation starts to become more of an issue.

The UK shows a similar – indeed, perhaps more extreme – picture with the unemployment rate in the three months to May at its lowest since 1975 whereas the rate of wage inflation, at 1.8%, is a full percentage point below that recorded last November. As in the US, there is a significant amount of spare capacity in the labour market. Currently, 12% of those working in part-time employment are doing so because they cannot find full-time employment. Whilst this is down from a peak of 18.5% in 2013, it is still higher than the 8-9% range recorded before the recession of 2008-09 and points to a certain degree of involuntary underemployment. This in turn suggests that there have been structural changes in the labour market which have impacted on the traditional relationship between headline unemployment and wage inflation.

For many decades, economists have focused on the negative relationship between wage inflation and unemployment first postulated by Bill Phillips in the 1950s. In its simplest form, this suggests that policymakers face a trade-off between unemployment and inflation. In practice, the relationship holds only in the short-term, if at all. What is notable, however, is that in the UK and US there has been a flattening of the curve in recent years, suggesting that any negative relationship between wages and unemployment is even weaker today than in the past. 

This is illustrated for the UK in the chart below, based on an idea presented in Andy Haldane’s recent speech entitled “Work, Wages and Monetary Policy.” The chart shows the trend derived from a linear regression of wage inflation on the unemployment rate over various periods. Two features are evident: Most obviously, the line has moved down reflecting the fact that over time inflation in the UK has fallen. But it is also notable that the slope of the line has become shallower. In other words, UK wage inflation has become less sensitive to changes in the unemployment rate. To illustrate the implications of this, we assess the wage inflation rate consistent with an unemployment rate of 5.5% and how this would change if unemployment fell to 4.5% (current levels).

The results are shown in the table (below). Simply put, an unemployment rate of 5.5% would be associated with wage inflation of 14% on the basis of the relationship over the period 1971-1997, falling to 4.1% between 1998-2012 and just 2.1% on the basis of the data for 2013-2016. But what is also interesting is a one percentage point fall in the jobless rate to 4.5% has a much smaller impact based on recent years’ data than in the pre-recession period. For example, this might have been expected to produce a 0.9 percentage point rise in wage inflation over the 1997-2012 period compared to a 0.5pp rise based on recent data.

Space considerations preclude a look at the reasons for the weaker sensitivity of wage inflation to labour market conditions. It may be the result of factors such as a lower degree of unionisation; the more widespread use of zero hours contracts and the rise of the gig economy, all of which have raised the degree of slack which the headline unemployment rate does not capture. But what the analysis does suggest is that policymakers can afford to spend less time worrying about the impact of low unemployment on wage inflation. There may be a case for higher interest rates but it is not to be found in the labour market.

As a final thought, I am struck by certain parallels with Japan. Following the bursting of the bubble economy, the Japanese authorities failed to spot the structural factors which led the economy to the brink of deflation, notably an ageing demographic profile which prompted a switch towards saving rather than consumption. The one factor we might be missing today is the impact of automation, which threatens a significant substitution of capital for labour and which could put downward pressure on the relative price of labour. I would thus not be in a hurry to raise interest rates to counter a wage inflation threat which has so far failed to materialise.

Time is running out

I noted three days ago how pro-Brexit campaigners appear to be distancing themselves from the whole idea. Since then, more evidence has come to light suggesting that British businesses are not being listened to by government. This matters. Many people might see businesses as insatiable users of human resources, chewing people up and spitting them out at a whim. But they are the providers of jobs and income for the vast majority of us. If businesses are not going to get a Brexit which works for them, in whose name are we doing this? A Brexit which does not work for business will not work for the UK economy.

Only last week, the CBI called for the UK to remain within the single market and customs union until such times as the shape of the final deal was clear. But British government officials torpedoed that option because, according to observers present, Brexit Secretary David Davis fears a political backlash if the UK is seen to be backtracking on its commitment to leave. He is concerned that politicians would be judged harshly if it opts for what can best be described as the Hotel California option – having checked out it, it can never leave. In my view this is to misread the domestic political runes. And it would not be the first time this year that the Conservatives have done so. Indeed, Davis is said to have been instrumental in persuading Theresa May to call the spring election, so I am not sure I would necessarily trust his political judgement. Moreover, surveys suggest that the electorate is not in favour of a hard Brexit. The election was a warning shot across the bows of a party which campaigned on the basis of “no deal is better than a bad deal” and was punished at the ballot box. And if “taking back control” was so important to the electorate, why did UKIP – the party which pushed so hard for it – take such an electoral hammering?

This morning’s story from The Observer warning that the UK cannot expect any help from German business in securing a favourable Brexit deal is further evidence of the delusions under which too many UK politicians are operating. Senior representatives of German industry bodies have repeated what I (and many others) have said all along, namely that the main objective for the EU is to maintain the integrity of the single market. A few months back I had a meeting with a group of senior German politicians, some of whom told me very firmly that Germany would not go out of its way to help the UK if it meant sacrificing relationships with other EU members. I am sure they have said the same things to their British counterparts, but too many British politicians appear to have selective hearing (or should that be understanding) when it comes to Brexit issues.

It is this attitude which brought to mind the Bagehot column in The Economist a couple of weeks ago. The article criticised the government for dealing with the needs of business in an amateur way and highlighted that the only realist is Chancellor Philip Hammond, who “is a grown-up in a political playpen that is stuffed with children. The chief claimant to the throne, Boris Johnson, is the most childish of all. Bumptious and bungling, he wants to grab the shiniest prize for himself for no other reason than that it is shiny. Other claimants also have problems with maturity. David Davis, the Brexit secretary, is a vainglorious contrarian who … habitually underestimates the damage a bad Brexit might cause ... On the other side, Mr Corbyn is an extreme case of arrested development. He is a man-child leading an army of disgruntled youths, a professional protester who has reached his late 60s without ever having to make adult decisions about allocating limited resources, let alone creating them in the first place.”

As it happens, I am pretty sure that the government will be forced to cave in on its Brexit negotiating position. Despite the position espoused by Davis earlier this week, The Observer reports that the government is warming to the idea of a transition deal. Perhaps they are waiting for the EU27 to offer some form of olive branch which will allow them to change course. Perhaps the EU27 is prepared to face down the UK in order for it to change of its own free will. But in an economy where real incomes are falling thanks to the rise in inflation triggered by a fall in the pound, and where consumer sentiment has fallen sharply back to immediate post-referendum lows, I suspect the electorate is in no mood to pay the economic price for the government’s shenanigans. Politicians need to get real – and fast – because in effect they have a year to finalise the arrangements before the EU’s deadline of autumn 2018.  The sound you hear is the clock ticking …

The great Brexit backtrack

There is an increasing sense that many of those people who promoted the Brexit cause last year are beginning to back away from their position. Two days ago I reported the comments by the director of the Vote Leave campaign who suggested that leaving the EU might turn out to be an “error.” One of the few economists to support Brexit, Andrew Lilico, noted yesterday on Twitter that “I'm much more pessimistic about Brexit myself since the General Election.It's the Election that changed that.” My response to that is that the election only changes the tactics of the negotiations but the strategy of Brexit itself was – and is – misguided. Finally, Treasury officials are said to have written an unpublished paper challenging the Department for International Trade to prove it can line up free-trade agreements with non-EU countries that can outweigh the loss of European trade associated with leaving the customs union.

Frankly, it is all beginning to look like the car crash which I warned it would be all along. Far too many of those responsible for setting the Brexit bonfire alight in the first place departed the scene pretty quickly when they realised the magnitude of the task ahead. Nigel Farage has resorted to his role as a sniper from the sidelines; Boris Johnson and Michael Gove backed out of their prime ministerial challenges when it became evident that neither of them was likely to win and David Cameron (at whose door much of the blame should be laid) lectures the government about austerity from his well-paid position on the international lecture circuit. The fact that apart from David Davis, nobody in government appears willing to take ownership of Brexit, speaks volumes. It is hard to believe that nobody in government did not see any of this coming – the economics profession warned long and loud – but given the apparent level of disorganisation within government and the civil service, you do have to wonder.

With the Article 50 clock ticking and no indication of progress on the things which matter to business, they are increasingly having to make their own arrangements. The financial services industry in particular is not going to wait around for government to make a decision. It looks increasingly likely that the passporting arrangements which allow EU banks to conduct cross border business, will be a casualty of the UK decision to withdraw from the Single Market. Foreign banks operating in London will in effect be treated as third country institutions and thus have to apply for a banking licence to continue operations.

It takes up to 12 months to go through the application  process for a banking licence, and around six months to conduct the preparatory work. The head of the Financial Conduct Authority today called on the government to clarify before year-end what form of transitional arrangements will be put in place to allow financial services to continue operating. But it really does need to act fast: On the basis that the UK will leave the EU in March 2019, as things currently stand this means that banks will have to begin their preparations this autumn.

Many banks are simply not going to wait around. Deutsche Bank is reported to be ready to relocate many of the banking books currently operated out of London back to Frankfurt, and they are not alone. Three Japanese institutions, Daiwa, Nomura and Sumitomo, are applying for licences to operate businesses in Frankfurt and some big US institutions are reported to be raising their German headcount. This is the business end of Brexit – jobs which might otherwise have remained in London will be transferred elsewhere. Banks, in particular, could find themselves on Brexit day unable to conduct business in the EU if they do not make plans now.

Whilst at present the numbers discussed publicly are small, the concern is that this could mark the thin end of a bigger wedge. The City of London contributed 11.5% of total government tax receipts in fiscal 2015-16, and business not conducted in London and jobs transferred elsewhere represents tax revenue which does not flow into the UK government’s coffers. In Philip Hammond’s words, voters did not vote to make themselves poorer by backing Brexit. But at a time when the government is under pressure to ease  back on austerity, allowing high value added business to slip away because government cannot get its act together will end up doing just that.

Getting our facts right

A few weeks ago I was involved in a debate with a young analyst who refused to believe that exchange rates are driven by factors other than trade deficits (not current accounts, simply the flow of trade in goods). After fruitless attempts to try and engage in some form of intellectual debate, only to be met each time with the stock response “I disagree,” I simply shut down the conversation. This is not my preferred mode of interaction – far from it. We learn from discourse and I like to think I am open to changing my mind on various issues if the facts prove I was wrong.

It was in this vein that I read with interest a blog piece by Noah Smith entitled “Is economics a science?” "Real" scientists would treat the question with contempt and indeed I never try to claim that it is. But what economics tries to do is measure and draw inference from observation. In that respect it employs scientific methods even if it does not always result in scientific conclusions. One reason why the theory and practice differ so much is that the logical economic answer is not always politically acceptable. Economics also has deep philosophical roots which colour the prior beliefs of many practitioners. Indeed, one of Adam Smith’s noted works - admired by many on the political right - was a Theory of Moral Sentiments published 17 years before the Wealth of Nations. It is perhaps these philosophical underpinnings which explain why adherents to the Austrian school of economic thought, which also derives from a branch of philosophy, eschew empiricism in favour of a priori deduction in order to reach a conclusion.

I could not help thinking during the Brexit debate last year that many of the leading Brexiteers were adherents of free market economics of the kind espoused by the Austrian school. It therefore does not surprise me that many of their arguments were not backed up by empirical analysis. I have also been struck by the apparent shift in tone of those who 12 months ago supported Brexit. Only today, the campaign director of Vote Leave, Dominic Cummings, admitted that “in some possible branches of the future leaving will be an error”  (let me correct you there, Dominic. In pretty much all branches of the future leaving will be an error). Cummings appears to be directing much of the blame for this on the way it has been handled by Downing Street. Personally, I prefer the explanation that those responsible for promoting the cause did not do their homework and failed to think through the implications of their actions.  In other words, they adopted a very unscientific approach.

However, we also have to be very careful when making arguments based on data alone. One of the issues which the academic world is currently very concerned about is the accuracy and replicability of much (non-economic) scientific work. Only last week, the president of the Royal Statistical Society, Professor Sir David Spiegelhalter, pointed out that public trust in scientific conclusions is being undermined by a “failure to adhere to good scientific practice and the desperation to publish or perish.” As Spiegelhalter points out, most scientists do not overtly falsify their data, but they sometimes play fast and loose with statistical inference (credit should also go to The Economist for having made this point repeatedly in recent years).

Aside from problems arising from the accuracy of results, economics suffers from another problem due to the quality of the underlying data. Although I do believe that economic statisticians are free from political bias, economic data often suffer from sample bias due to the fact that it is constructed by drawing population inferences from a relatively small sample. It is often an approximation to reality at best. A case in point is UK labour force data, where a tightening of the criteria for benefit eligibility means that many people whose fitness for work is questionable, have been reclassified as part of the labour force. UK immigration data are also not fit for purpose either, despite the fact that they form a key element in the government’s Brexit strategy (amongst other reasons, because the UK does not require migrants to register after arrival, the figures are compiled from the International Passenger Survey, which has numerous methodological shortcomings).

But for all that, a debate based on some form of data is always more informed than one based purely on belief and supposition. As the Canadian academic Marshall McLuhan pointed out, “a point of view can be a dangerous luxury when substituted for insight and understanding.” A year on from the Brexit referendum, that rings all the more true.

Helmut Kohl's legacy

A memorial service was held in Strasbourg yesterday for former German Chancellor Helmut Kohl, who died on 16 June. Whilst his death briefly made headlines in the British press, coverage of what was in effect a European state funeral barely made a splash on this side of the channel. That says a lot about the way the British media thinks of European issues. Kohl was, after all, praised across the continent for being the lead architect in the construction of the EU – an institution which the British electorate rejected 12 short months ago.

Politically, Kohl was a unifier: In addition to his role on the European stage, he will forever be remembered as the Chancellor who reunited Germany. But as the German media has highlighted, one of the great ironies is that he never managed to unify his family: Even in death, he remained estranged from his two sons. Nor, despite the eulogies, did he share Angela Merkel’s vision, particularly with regard to the handling of the euro crisis. Kohl was a historian with no interest in economics. His was the politics of the grand vision, regardless of the cost. Very few politicians of the post-war era would have attempted a project as ambitious as German reunification. But no reputable economist agreed with the decision to convert the Ostmark to the Deutschmark at a rate of 1:1 which gave East Germans a short-lived income boost but which later wiped out the eastern economy.

Many German economists also believe that his push to introduce the euro was badly handled. The decision to introduce a pan-European currency without the appropriate leadership structure in the EU, and without a body to direct common political and economic policies for the euro zone, means that the single currency effectively remains little more than a glorified fixed income mechanism. It was created on the basis of the competitive situation which prevailed in the 1990s, and the pain associated with maintaining competitiveness was always going to require significant domestic adjustment: Even the European Commission was clear about this in the mid-1990s.  As Die Zeit put it, “a currency union was created that only worked when the sun shone.  And when a storm, in the form of a financial crisis, came along, Mr. Kohl’s peace project became the nucleus of the largest European crisis since the war.”

Undoubtedly, Kohl’s solution to the Greek debt crisis would have been to dip deeper into German pockets to find a financial solution. It might even have worked – for a while. But it does not detract from the fact that there are significant faults in the construction of monetary union which need to be fixed. Although Kohl was not honest with his own electorate about the costs of monetary union – living in Germany at the time, I was acutely aware of that – we cannot pin all the blame for the euro zone’s ills on his shoulders. Politicians in other countries signed up willingly to the euro without realising that their own economies would have to bear a far greater share of the adjustment burden than Germany.

The election of Emmanuel Macron as French President has been hailed across the continent as a chance to rebuild the Franco-German axis that drove the European project forward during the 1980s and 1990s. Macron has proposed a common fiscal policy, a joint finance minister and the completion of banking union, and surprisingly he has been given a sympathetic hearing in Berlin. But we cannot so easily turn back the clock to the halcyon days of Kohl and Mitterrand. The world has changed, with the rise of Asia having permanently altered the global economic landscape. Nor is it so certain that the people of Europe today share the vision for their continent which Kohl espoused. His was a vision rooted in the past, designed to ensure that the horrors of the first half of the twentieth century could not be repeated. That was, and is, a laudable goal. But the survey evidence suggests that European electorates remain sceptical of the need for further integration.

Europe in early 1995, after Kohl’s fourth election victory, felt like a good place to be. The EU was a smaller, more manageable institution with just 15 members. It was moving towards convergence at a pace which felt comfortable and although progress towards a single currency was ongoing, there were widespread doubts that it would be operational by 1999. It felt more like a warm and fuzzy aspiration which made the federalists feel good yet was far enough away not to worry the sceptics too much. In my view, that was Kohl’s real achievement: He led the horse to water. It is unfortunate that the purity of the water did not match up to expectations.