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January 06, 2020

A decade that started with a bang

Happy New Year to all our readers.  

The holiday period was dominated by news from other continents. The big development last night was Iran’s decision to withdraw from the nuclear deal. This directly affects the EU as it was the key broker of that agreement. 

The announcement was not really surprising after the killing of Qassem Soleimani, but this should not detract from its significance. Iran is, of course, not on the verge of building a nuclear bomb. But the prospect of an accelerated timetable for an Iranian nuclear capacity and a renewed arms race in the Middle East is troubling. The breakdown of what is formally known as the joint comprehensive plan of action also marks the defeat of the single biggest success of EU-level diplomacy in the previous decade. It poses a huge challenge for EU foreign policy right now. Germany has reacted with the usual prevarication, prompting a critical response from Mike Pompeo, the US secretary of state. France and the UK are diplomatically more aligned with the US. 

As we pointed out in the past, the EU’s weakness as a foreign policy power is entirely self-inflicted. It results from the failure to agree a stable framework for the eurozone and an explicit role of the euro as a weapon in international diplomacy, and also from the failure to develop a stronger and more independent defence policy. Starting from where we are now, the EU really has no option but to align itself with the US given the alternatives. 

We agree with Angelo Panebianco in Corriere della Sera this morning that any break with the US would drive the EU into the hands of Russia. That prospect is what should inform the EU’s actions. On this specific point we also note a comment by Niall Ferguson in the Sunday Times, who argued that the conflict in the Middle East is likely to strengthen Russia’s role in the region. We note that Iran will still continue its co-operation with the Atomic Energy Agency, which we think is a smart move directed at appeasing Russia. We conclude that the EU will need to tread very carefully. 

A related development which we wrote about in our final briefing of 2019 was the US/German conflict over NordStream 2. We heard that the US administration has threatened German officials with massive sanctions if Germany were to collude with Russia to circumvent the recently-passed sanctions law. This also explains Angela Merkel’s extremely cautious response to demands for EU counter-sanctions. The Russian government was considering using one of its own pipeline supply ships to fill the remaining gap in the North Sea, after the Swiss-based company Allseas pulled out under pressure from the US. But this offer has not met with much enthusiasm in Berlin. We think the project could be on hold for quite some time. This will also have significant effects on Germany’s future energy policy, given the dependence on Russian gas for the present government’s energy strategy.

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January 06, 2020

What to expect of Spain's next government

Pedro Sánchez failed to get an absolute majority of votes in favour of his appointment as PM yesterday in the Spanish parliament. But he got more votes for than against, so he is expected to carry the day at a second vote tomorrow, and to be able to form Spain's first coalition government between PSOE and Podemos. His majority will be razor-thin. Yesterday he got 166 votes for and 165 against, with 18 abstentions out of 350 MPs. One Podemos MP was absent from the vote. He received tacit support from Catalan and Basque left separatists, ERC and EH-Bildu, whose MPs abstained in the vote. The Catalan ERC has extracted the concession from Sánchez to enter a political negotiation between the Spanish national government and the Catalan regional government to defuse the separatism crisis.

La Vanguardia has a good analysis of the major features of the economic programme of a PSOE/Podemos coalition. These are the highlights:

  • A reversal of the labour market reforms of the first government led by Mariano Rajoy. The new government will aim to restore some of the lost power of collective bargaining, and to eliminate some of the flexibility the reform gave employers to change working conditions unilaterally or dismiss workers;
  • Measures to address a long-standing housing crisis, including the reversal of a law that gave local governments the ability to control rental prices;
  • Environmental policies include a target of 100% renewable energy by 2050, and commitment to ensure that the low marginal cost of renewable energy translates into reduced energy prices for end users, be it households or businesses; 
  • On fiscal policy, the government affirms its commitment to the EU fiscal rules. It proposes to raise income tax for those earning more than €130,000 a year, and to introduce both a Google tax and a Tobin tax. Critics argue that the government's spending commitments are not matched by planned revenue increases, so that the deficit will increase.
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January 06, 2020

Divide et impera: Macron's pension reform strategy

The French government is restarting pension-reform negotiations, after Emmanuel Macron made it clear in his New Year address that he will stay firm but called for a rapid compromise between trade unions and his government. Macron has zig-zagged by backing and then moving against the CFDT union, which opposes raising the full pension retirement age. Thus it is not clear how firm his offer of compromise will be. Macron will not want to follow in the footsteps of his predecessor François Hollande, who gave in to all demands by union leader Laurent Berger to save his own pension reform. But Berger has no interest in an escalation either if he wants to preserve negotiatng power at the national level.

So, negotiations will continue. Even the two more radical trade unions, on strike to demand a complete withdrawal of the pension reforms, will appear at the negotiation table to talk about end of career and hardship professions. And the government is reportedly prepared for concessions on the eligibility age for a full pension.

The government has already offered a number of concessions to a growing list of sectors, in an effort to woo workers and divide the unions. Police officers, gendarmes, firefighters and prison guards were among the first to secure guarantees that they would still be able to retire at 57, and in some cases at 52. Air traffic controllers, who are notoriously-hard bargainers, won the same rights; while air pilots and stewards obtained smaller concessions, as did truck drivers, fishermen and Paris Opera dancers, reports France24. As the list grows longer, opposition parties mock the reform saying that it becomes universal in name only. But Macron stays firm on ending the preference schemes in the transport sector, where strikes by the RATP in Paris and the SNCF nationally are entering into the second month. The early retirement schemes in the transport sector are the most emblematic ones that Macron's supporters, as well as those of the former Republican candidate François Fillon, would like to see gone. 

The large union CFDT is not prominent in those two transport companies and this is where the government will have to decide how far to go for a compromise. Berger signalled they are ready to talk about a balanced-budget rule for the medium-to-long term, which means probably not 2022 as suggested in Édouard Philippe's draft proposal. If the government wants to keep its reforms and insist on a balanced budget at the same time, something has to give. Transition periods may become longer or more sectors may be exempted from the universality of the pension reform, or contributions will have to be raised. 

Economists already warned in December that the two conflicting objectives risk to destroy the pension reform as such. Aiming for trade-union approval further complicates the game. But Macron is stuck between the determination he displayed in the first half of his presidency to move forward without the trade unions, and the new mantra of the second part of his presidency of including the intermediary sector and being on listening mode. Procrastination does not help. Instead, it is increasing the price for the reform.

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