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July 21, 2017

Day of truth in EU-Turkey relationship coming closer

What can possibly happen to endanger Angela Merkel’s election victory? The policy of kicking cans down the road will come unstuck at the moment when the unsustainable is no longer sustained, and trouble will invariably arise when this is suddenly noticeable to a sufficiently large number of voters. There will be no eurozone shock ahead of the elections. Germany’s over-reliance on the diesel technology as the singular engine of the country’s industrial strategy (see below) will also not collapse before September. But the situation in Turkey is very dangerous, especially now after the imprisonment of the German human rights activist Peter Steudtner on trumped-up charges of aiding terrorists.

Merkel is lucky for now because of the SPD’s almost tragicomic lack of courage. Instead of seeking an open disagreement with Merkel on a point which would have popular support, the SPD’s main preoccupation is to avoid an open confrontation with Recep Tayyip Erdogan, the Turkish president. The fact that many Turks have German passports and can vote in the elections is presumably a factor.

Sigmar Gabriel, the German foreign minister, yesterday called Merkel to seek a coalition agreement to warn German travellers to be careful when travelling to Turkey. This is not an official travel warning, which would have significant consequences. It would, for example, have allowed people to cancel existing travel bookings for the summer holiday without penalty. It would have allowed travel insurance providers to exclude Turkey from the list of insured countries. It would have had severe implications for German investment in Turkey. This policy of issuing a de facto but not de jure travel warning is a rather weak response. The strongest response by Gabriel is the announcement that Germany would review whether it will be able to issue export guarantees for German companies in Turkey. We are still in the not-amused phased of diplomatic relations. 

In an excellent political analysis of the situation in FAZ, Majid Sattar reminds us that there is one difference. Martin Schulz let it be known that he would no longer be prepared to discuss a further extension of the customs union with Turkey at a time when German citizens are under arrest. 

To distant observers it must sound shocking to learn that the EU’s relations with Turkey have been almost business-as-usual. Merkel and the EU seem willing to do anything to ensure that the refugee deal with Turkey won’t collapse. The response to Turkey’s persistent human right abuses shows us how weak Germany, and the EU in general, have become after accepting the morally questionable refugee deal with President Erdogan in 2016. The EU has abandoned any pretence of having an interest in human rights, and regards the introduction of the death penalty as the only red line in EU-Turkey relations. The EU thus remains committed to maintaining the façade of a political process that could eventually lead to Turkish EU membership. We would presume that the Turkish leader regards the feeble response from Berlin and Brussels as encouragement to continue to wield the leverage he has over the EU.

What does this tell us about the German elections? The SPD’s has so far failed to extricate itself from the Grand Coalition, having missed one opportunity after another. The SPD might be more inclined temperamentally to reform the eurozone or emphasise human rights, but in reality the differences are too small to have any practical effect. 

The only caveat to this observation is that there are still two months until the election, and an escalation of the crisis with Turkey could lead to situation where complacency turns into panic.

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July 21, 2017

Germany’s over-dependence on diesel technology

As we have noted time and again it is very hard for people to separate their expectations of the future from their fundamental beliefs. One of the unshakable beliefs in Germany is the virtue of the diesel car. It gives the German motor industry a competitive advantage that cannot be reversed.

Except, of course, through new technologies and shifting social trends. 

We noted this tendency to wishful thinking again when we read a story in FAZ this week on the future of the diesel car in Germany, and the importance of the technology for the German economy. One of the statistics quoted is that one tenth of the jobs in German industry directly depend on the production of car engines. And so, the car-obsessed media reporters and German economists have a tendency to downplay technological, social, and political trends by insisting that diesel still has a future.

The Ifo institute has done the math on the impact of a diesel bans on the industry. It shows that 620,000 jobs in Germany directly and indirectly depend on the production of fuel engines for cars - about 1.5pp of the labour force. This is about 10% of all jobs in German industry. These numbers would include suppliers, but presumably do not take account of any multiplier effects one would observe if those jobs were to disappear. 

The Ifo institute made another important observation, according to FAZ. If fuel-driven engines were made illegal from 2030, Germany could reduce its carbon dioxide emission by one-third. But the study does not advocate such a strategy. Indeed the headline says that banning combustion engines is the wrong path to take. The Ifo institute favours free-market solutions to the problem. Ifo chief Clemens Fuest, who presented the study, argued that it would be a mistake to overregulate the industry because this would waste resources, which in turn would be bad for the goal of climate protection.

We also note confirmation bias among diesel advocates in that they only ever focus on carbon dioxide emissions, rather than the high levels of nitrogen oxides and other substances that are believed to be responsible for tens of thousands of death each year in Europe. This is the main reason why cities are now considering diesel bans.

The study also tried to correct the impression that German car makers are inactive when it comes to alternative technologies. According to the Ifo study Germany registers around one third of all global patents in the area of alternative engines - hybrid and electrical. We do not doubt that the German car giants are actively researching alternatives. But the point is that the competitive advantage of German motor manufacturing is predominantly based on its fuel-based engine technologies - an advantage that is bound to decline over time. They are not ahead of the game in the fields of hybrid and electric engines. There is an illusion in Germany that appears to equate the number of registered patents with future commercial success. 

In the meantime, expect to see an increase in costs to maintain the diesel technology, and a fall in revenues. Diesel registrations in Germany are falling at a dramatic pace. And car companies are now paying for expensive recall operations, like Mercedes did this week, to upgrade existing cars with the latest software to optimise engines to reduce fuel emissions.

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