May 26, 2020

EUROPE: CEE PULSE

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( 5 mins)

As the Covid-19 curve gradually flattens, the Russian government is restarting preparations for the postponed Victory Day parade and the vote on constitutional amendments. Meanwhile, although Hungary is gearing up to end the government’s rule by decree, controversial appointment of a new Supreme Court president in Poland, and attempts to weaken civic groups and redistribute public funding to media in Slovenia are raising rule of law concerns. Finally, Lithuania‘s government is using Covid-19 as a pretext to roll out populist spending measures ahead of the general poll in October.

Hungary

Today, 26 May, the government is expected to submit for parliament’s consideration a bill on eliminating its emergency powers. These have allowed the executive to rule by decree without effective parliamentary oversight since late March. The ruling Fidesz party has framed these controversial emergency powers as essential to respond to the pandemic effectively. However, even without the extensive emergency powers, Fidesz will retain control over all the key state institutions and have few checks on its political dominance. In the meantime, the government has swiftly complied with the European Court of Justice (ECJ) ruling last week to close the infamous “transit zones” for asylum seekers on the Serbian border while maintaining a confrontational political rhetoric towards the European institutions at home. This suggests that domestic political communication – often focused on alleged political adversaries and threats abroad – is just as crucial for Fidesz as the content of its policies.

Lithuania

The parliament is considering President Gitanas Nauseda’s (independent) proposal to lower personal income tax for employees. In exchange, several employer associations are pledging to keep the salary levels stable during the period. While this could boost household incomes in the aftermath of the Covid-19 crisis, the coalition government led by the Lithuanian Farmers and Greens Union (LVZS) is skeptical of the measure. The proposal would cost the budget an estimated EUR 500mn and disproportionately benefit higher-paid employees, according to finance minister Vilius Sapoka (independent). Instead, the LVZS-led coalition government will likely increase the non-taxable income threshold and raise spending for families raising children. Earlier this month, the LVZS-led government allocated cash handouts to all senior citizens, which is a popular move ahead of the October parliamentary election. The economic slump and generous spending policies could result in a double-digit budget deficit in 2020 and raise the public sector debt by around 14-15% of GDP, according to the national audit office.

Poland

The appointment of Malgorzata Manowska as the new First President of the Supreme Court may expand the ruling Law and Justice (PiS) party’s influence over the judiciary. The opposition is challenging Manowska’s appointment over the alleged procedural violations as well as ties with the ruling party, as Manowska served as deputy justice minister under Zbigniew Ziobro (current justice minister and chief prosecutor) in the PiS-led government back in 2007. The postponed presidential election remains surrounded in legal uncertainty, too, as the opposition-controlled upper house of parliament postponed the consideration of new electoral rules until next week. The opposition may be playing for time as incumbent Andrzej Duda (supported by PiS) is continuing to lose public support and the main opposition party’s candidate Rafal Trzaskowski (Civic Platform) – yet to be officially registered in the upcoming poll – is rapidly gaining popularity. A potential deterioration of the electoral process – which has generally been considered as transparent and fair until now – would mark a further weakening of democratic institutions and the rule of law in Poland.

Russia

With the Covid-19 curve gradually flattening, President Vladimir Putin instructed the defense ministry to start preparations for the postponed Victory Day parade on 24 June, while the “Immortal Regiment” march should take place on 26 July. The date of the put off “all Russian vote” on constitutional amendments should be announced soon too, with the head of the central electoral body suggesting that some regions – most notably Moscow – may vote remotely. Meanwhile, the need to stimulate economic growth after the Covid-19 crisis is forcing the government to reconsider some business restrictions. A draft law submitted for parliament’s consideration on 20 May proposes removing an import ban on scarce goods or raw materials that are not produced domestically – imposed as a countermeasure to the 2018 US sanctions. The cabinet is also reportedly considering postponing new data storage capacity requirements for telecommunications companies foreseen in the so-called “Yarovaya law.” Finally, in early June, the government is expected to present its long-term economic recovery plan, which should boost the country’s relatively modest fiscal response to Covid-19 to date.

Slovenia

Despite the effective handling of the Covid-19 pandemic by the government, political tensions are running high. The four-party coalition led by Prime Minister Janez Jansa (Slovenian Democratic Party, SDS) is seeking to limit the role of environmental civil society organizations in the legislative process and introduce changes to media funding rules, potentially in favor of the SDS-related media outlets. These government’s actions – together with allegations of corruption – have triggered regular anti-government protests across the country. At the same time, attempts to weaken democratic institutions raise concerns considering the democratic backsliding in Hungary and Poland in recent years. However, the position of Jansa’s government is relatively weak as his diverse four-party coalition now holds a one-seat majority in parliament. While there is no immediate risk of political instability, public pressures may further weaken support for the Jansa’s cabinet in parliament.

Biden’s nominees would bring diversity to the Fed—if they’re confirmed

( 6 mins) President Biden has announced his roster to fill key vacancies on the Federal Reserve’s 7-seat Board of Governors. If confirmed by the Senate, Biden’s nominees would advance his economic agenda at the central bank. They would diversify the ranks of economic policymakers and likely tighten supervision of Wall Street.

Sarah A. Binder

Senior Fellow – Governance Studies

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Mark Spindel

Chief Investment Officer, Potomac River Capital LLC

These nominations follow in the wake of Biden’s decisions late last year to reappoint Jerome Powell to a second term as Fed chair and to elevate Lael Brainard as second in command. Powell and Brainard already serve as confirmed governors, but the Senate will also need to approve their four-year leadership posts. If the Senate confirms all five, Biden’s Fed appointees would reverse the heavy GOP-tilt of the Board engineered by the Trump administration.  
Here’s what you need to know.
Diversity counts
Biden has nominated two Black economists, Michigan State’s Lisa Cook and Davidson College’s Phillip Jefferson, to seats on the Board. He has also named former Fed governor and Treasury official, Sarah Bloom Raskin, as the Fed’s vice chair of supervision, a position Congress created in the wake of the global financial crisis as the Fed’s top banking cop.
These appointments help to diversify the Fed’s almost exclusively white ranks. Since Congress revamped the Federal Reserve Act in 1935, creating the 7-seat Board of Governors, 82 people have served on the Board. Just three of them were Black men, and ten of them were white women. And while Biden’s nominations augment the Fed’s racial diversity, confirming Cook, Brainard, and Raskin would expand the number of women governors by just one, since both Raskin and Brainard already have Board service under their belts. Notably though, this would be the first Board with a majority (four) of seven seats filled by women governors.
Rough waters ahead?
Observers expect a broad swath of Senate Republicans to vote to confirm Powell, a Republican, to a second term as chair. However, it remains to be seen how many, if any, Republicans will vote to confirm the other four nominees. Of course, Senate Democrats—if they stick together—can confirm all four without any GOP support, since Democrats banned nomination filibusters back in 2013.
Like most Congressional decisions, Fed confirmation votes are more contentious today than they were even 15 years ago, before the global financial crisis. The figure below shows shrinking Senate support on final confirmation votes for Fed nominations since the Reagan administration. Of those nominees considered on the Senate floor between 1982 and 2011, only one, Alice Rivlin, received less than 94% of the vote. The most dramatic contests came in 2020: The GOP-led Senate rejected Trump’s nominee, Judy Shelton, by a vote of 47-50, and just barely confirmed another Trump nominee, Christopher Waller. Four other Trump picks never even made it to a floor vote.

Nor can Biden count on filling the Board swiftly. Prior to the financial crisis, nominees waited about three months on average for confirmation. After the crisis, the wait time ballooned closer to eight months. The Senate took nearly ten months to confirm Waller, a record delay for the contemporary Senate’s handling of Fed nominees. Even with Democrats in control this year, Republicans have found ways to slow down the Senate.
Beware partisan crosshairs
Decades of rising partisanship are seeping into senators’ views of the Fed, often turning otherwise low profile Board nominations into politically charged votes. At the same time, public attention to the Fed has grown with its expanding imprint on the economy.   
The central bank has played an outsized role in stemming the economic damage caused by the global financial crisis in 2007-08 and the global Coronavirus pandemic in 2020-21. And with interest rates near zero, central bankers need to use more creative and often contentious tools to manage the US economy. Critics from both sides of the partisan aisle blame the Fed for either doing too much—or too little—to stem an array of old and new problems.
Add in rising expectations that the Fed will hike interest rates early this year to combat inflation and a hot economy, these nominees will face questions at the core of central banking—how fast and how soon to take away the punchbowl. Raising the price of money is never easy, but this Board could find tightening especially difficult given the addition of Biden’s governors committed to the Fed’s goal of a stronger and more racially inclusive labor market. 
The parties also disagree about whether the Fed can or should do more to combat climate change, especially in light of Congress’s own tentative steps. Democrats want the Fed to use its supervisory powers to force banks to address climate risk in their lending decisions; Republicans think such policies fall outside the Fed’s mandate. Partisans also contest whether the Fed should do more to redress racial economic inequities.
Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are “independent.” But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.

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