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Back to the euro zone!


Growth in the euro area had exceeded expectations in 2017 to stand at 2.5%, its highest level in ten years, under the combined effect of the dynamics of domestic demand and the robustness of net exports supported by the synchronized acceleration of world activity. This growth then experienced an unexpected slowdown in the second half of 2018 as a result of slower global growth.


Various “non-recurring” factors have also contributed to an even more severe feeling of slowdown: the implementation of new anti-pollution standards in the automobile industry and its consequences on automobile production in Germany, the “yellow vests” crisis in France came to curb private consumption and, finally, the tensions between Rome and Brussels around the Italian budget, with, as a result, a tightening of credit conditions. The year 2018 ended on a sluggish note, the time is for pessimism with regard to the euro zone in 2019, judging by the expectations of most observers and investors.


Now 2019 should be a pretty good vintage. Indeed, the negative contribution of net exports is stabilizing and domestic demand is strengthening, driven by notable increases in purchasing power. The positive figures for new orders for German manufacturing from the euro area reflect an underlying investment dynamic which remains stable and conducive to a recovery in industrial production in the coming months.


In January 2019, Japanese and Chinese exports to the region also remained buoyant, a sign of strong domestic demand. The rebound in household confidence in January, in Italy as in France, also goes in this direction, with renewed interest in major purchases throughout the Economic and Monetary Union.


The continued strength of the labor market, in terms of both net hires and wage growth, combined with the boost from lower energy prices, should also allow private domestic demand to accelerate in the first six months of the year compared to the second half of 2018. If we add to this a certain relaxation of budgetary policies with further tax cuts in Germany, an increase in the minimum wage in France and Spain, and the introduction of universal income in Italy, final demand within the Union could turn out to be significantly higher than current expectations. While EMU assets today include a risk of recession in their prices, such a positive macroeconomic shock could trigger a complete reversal of the risk premium.


In recent months, the sharp increase in inventories of finished goods has been accompanied by a decline in new orders worldwide, following a classic recessionary dynamic for the manufacturing sector. The ongoing correction in the manufacturing industry is a key marker of a lasting change in the world economic order. First, the decline in globalization, the decline of multilateralism and the slowdown in potential growth in China are all signs of a relative decline in manufacturing compared to services.


Second, in the current phase of the business cycle in the United States and Europe, household consumption is expected to be much higher in services than in manufactured goods. To corroborate the above, surveys also show that investments are more focused on technologies than on machine tools and traditional equipment. Globally, under the effect of this cyclical as well as structural dynamics, manufactured products are thus relegated to second place in the world economy. Such an evolution has significant consequences on the dynamics


relative economic between and within regions. The United States and the euro zone are relatively closed economies (trade accounts for only 16% and 21% of GDP, respectively) with a limited contribution from the manufacturing industry, still related to GDP (around 14 %). Conversely, the countries of Northeast Asia are very open economies, with a largely developed manufacturing sector. As a result, the United States and the eurozone should now outperform Asia.


In the EMU, the countries with the lowest manufacturing intensity should catch up with Germany, thus strengthening economic convergence in the region. The relative underperformance of Asia, combined with convergence in Europe, should thus fuel the outperformance of risky assets in the euro zone compared to those of Asian countries and emerging markets. Curiously, recent financial flows, current positioning and investor expectations are oriented in the opposite direction. This is another reason to anticipate a sudden and pronounced outperformance of the European markets.


On the political front, we should also probably expect, in 2019, a change in relative positioning between and within regions. The United States is slowly but surely entering the pre-campaign period for the presidential election of 2020. The prospect of a victory for a leftist Democratic candidate should pose a slight risk of domestic policy on American assets, increases tax tightening and tightening financial regulations are top priorities for Democrats. In China, President Xi Jinping finds himself in a political impasse, both internationally and nationally. The conclusion of a truce, whatever the form, in the trade war with the United States, inevitably has an aftertaste of humiliation for President Xi and for the "big Chinese dream" which he carries .


In addition, national policies, which local entrepreneurs and SMEs are calling for in order to restore confidence in the economy, are incompatible with the economic manifesto of the Chinese president, which brings national champions (mainly businesses) to the pinnacle. public) in the hope of seeing them conquer the world.

President Xi’s foreign policy as well as his domestic policy is the subject of growing contestation within the Communist Party, which bodes ill for the 30th anniversary of the Tiananmen Square protests.

If there is one region where political risk is likely to decline significantly in 2019, it is Europe.


First, there should be a clearer picture of Brexit around the middle of the year, with the European elections serving as the imperative deadline. A temporary postponement is possible within the limits of this deadline and the most likely outcome is that Theresa May's agreement, revoked on the question of the famous "backstop" (or safety net to avoid the return of a "hard" border in Ireland), will be adopted at the last minute, and by a very slight majority, by the British Parliament.


As things stand, and given the recent setbacks suffered by the Labor Party led by Jeremy Corbyn, who has experienced a drop in polls as well as the defections of some MPs, the early elections have a good chance of being won by the conservative Party. Excluding this persistent source of uncertainty, the peak of political risk in the rest of the EU is probably behind us. In Italy, the economic and political damage that the current populist coalition could cause has already been done. Italy is the only EMU country where credit conditions became more restrictive in the fourth quarter of 2018, a direct consequence of the political risk premium linked to the current coalition.


The battle with Brussels over the 2019 budget has also already taken place, the Italian government eventually conceding a more acceptable deficit target. The Italian economy paid a heavy price for this showdown with the European Commission before the European elections in May 2019. Now, the situation can only improve on almost everything. Fiscal policy should help, and new elections in Italy should lead to positive political developments. The upcoming elections look less problematic than expected.


"Populist parties", combined with a 5% increase in centrist parties, should not, in fact, significantly modify the majority held by europhiles in the Strasbourg Parliament.


Risky European assets are benefiting from an alignment of the planets that has rarely been as favorable, except, perhaps, in the late 1990s. Their valuations are at extreme levels. The market positioning is incredibly bearish, and expectations regarding political and economic risks are reaching new heights.

More importantly, they have almost disappeared from the radar screens of most market operators. Their poor performance over the past year has been so damaging to long-term investors that general disappointment has turned into collective aversion. Beyond all the obvious good reasons already mentioned, such collective aversion to these assets is probably the most convincing argument in their favor.


This is why their yields are likely to be as explosive as they were in the late 1998 and 1999. The warning signs are indeed very similar.



Withholding tax and land deficit, a real headache

As we have seen in the previous news, the transition to the withholding tax will be made in 2019 by the implementation of a tax credit for the modernization of collection (CIMR) for the 2018 tax. The latter will remove taxation on usual income, such as property income.

The land deficit, represented by works, is deducted from property income and then from overall income up to a limit of € 10,700 if the latter exceed rents.


The establishment of the CIMR cancels the taxation of property income for 2018. One must therefore ask oneself whether it is still worthwhile to carry out work during the establishment of the withholding tax.


Processing of works:

In 2019 the deduction of works will be equal to the average of the amounts for the years 2018 and 2019 (i.e. 50% of each year).


Year of completion of work Deduction

2018 100% of the works deducted in 2018 + 50% of the same works in 2019.


Total deductibility: 1.5 times their amount.


2019 Single deduction of 50% in 2019.


Based on this observation, we should ask ourselves which year is the most favorable for carrying out work? From what amount the realization of works becomes interesting?


First of all, there is no point in doing work in 2019 if it is not urgent.

In fact, whatever their amount, only 50% of their total amount will be deductible. While they will be deductible over 2 years in 2018 and in full in 2020.


And in 2018?

Again, if the amount of the work is lower than the amount of the rents, there is not really any point in realizing these in 2018. Why?

Land income is considered ordinary income and therefore the taxation of the latter will be eliminated by the CIMR.


For the deduction of the 2018 works to be of real interest, the latter must be of a sufficiently large amount.


How much should the work be?


Since the introduction of the withholding tax, the advice given seems to be in favor of work whose amount should be at least twice that of the rents + 2 times 10,700 €.


Why these amounts? Is this advice relevant?


We must keep in mind the deduction of work at 150% on 2018 and 2019.


During the 2018 deduction: 100% of the deductible work

The cost of the work will first be deducted from the rents. This deduction has no impact because it is deleted by the CIMR.

Then, the part of the work higher than the rents will be deducted from the total revenues within the limit of € 10,700.

In the presence of usual income: There is no effect because the CIMR reduces the taxation to 0 in all cases.

In the presence of exceptional income: The share attributable to overall income will have the effect of reducing the tax base of exceptional income and thus the corresponding tax.

The remaining surplus will, as conventionally, be carried over to property income for the next 10 years, thus providing additional leverage over 2019 as we will see.


When deducting 2019: 50% of 2018 work deductible


This deduction will be useful since the CIMR only applies to 2018, so it will have no effect in 2019.


50% of the total amount of the works will be able to be deducted from the taxable rents.

The land deficit generated by this work will reduce overall income to a maximum of € 10,700.


Synthesis 2018 and 2019: Let us take again the council envisaged previously in an example where:

M.X declares € 10,000 of taxable property income. In 2018, it is therefore carrying out work of € 41,400, i.e. 2x the rents + 2 x € 10,700.


Summary of useful deductions

2018: amount of deductible work = € 41,400

0 € only in the presence of usual income (this is the case here)

€ 10,700 if there had been exceptional income

Deferral of € 20,700 (41,400 - 10,000 - 10,700) on property income for the following 10 years

2019: amount of deductible work = 50% of € 41,400 = € 20,700

€ 10,000 on rents

€ 10,700 on total income

2020 and following:

Use of the carry-over of € 20,700 on land profits that would be recognized



Useless deduction because taken into account by the CIMR

Useful deduction actually reducing the amount of the tax.


We note that the total of useful deductions represents the total amount of work carried out, therefore a beginning of optimization of the implementation of the withholding tax which could be improved by more important work.

Indeed, if M.X had carried out € 50,000 of work, the amount of the total useful deductions would have been € 54,300 (€ 29,300 carried forward + € 25,000 deductible in 2019).



A card to play certainly to optimize the amount, and the time of completion of the work. The larger the amount of work, the more attractive the tax deduction becomes. However, be careful not to constitute a deferral amount that could not be absorbed by the land profits of the following 10 years.


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