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03 December 2021

Ciotti and Pécresse

Our main story is about what to make of the unexpected results in the first round of the primaries of the French centre-right; we also have stories on the metrics for the new German coalition's success or failure; on the divergence of the Italian and Spanish labour markets; on red lights flashing about the search for yields; on the exit of Kurz; and, below, on an EU regulation that is unexpectedly smart.

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Today's free story

Surprising twist for crypto in the EU

Decentralised finance happens to be one of the few high tech areas where the EU is doing quite well. Last week the Council adopted its position on proposed crypto market regulations for Defi products. They are very industry-friendly. 

As highlighted by BelgianPolitics, the proposed regulations are the most important to date for the European crypto industry because they establish rules for issuers, or the developers and companies behind tokens, as well as crypto-asset services providers, or exchanges and custodians.

Every entity operating in the EU will have to follow the regulations. The Brussels effect could see these standards become more internationalised in the future, provided countries that have moved to ban and restrict cryptocurrencies and Defi trading, including the US, China, and more recently, India, change their stance.

Happily for the EU industry, the new regulations do not apply to non-fungible tokens, NFTS. Nor do they apply to utility tokens, meaning any crypto asset that provides access to a good or service provided by the issuer. Crypto-assets that are offered for free, airdrops, are also exempt. Crypto assets automatically created as a reward for maintaining the blockchain on which they operate are also unregulated.

It’s a different story for stablecoins. The EU remains attached to the idea of launching its own central bank digital currency. Whether pegged to a fiat currency or basket of currency or assets, any form of stablecoin will be under strict regulation including a ban on earning interest, and a requirement for all issuers to be granted permission by the relevant national authority.

The European Securities and Markets Authority will also play a greater role in regulating standards and templates for white papers in the crypto industry. Another area to be strictly regulated is exchanges and custodians themselves, the centralised or semi-centralised ones. They will be required to apply for official authorisation from the relevant national government, meet minimum capital requirements, and have safeguards and insurance policies in place. Much like traditional finance, crypto exchanges will also be required to protect clients’ crypto assets, hold the crypto-assets of clients in separate accounts than the accounts belonging to the exchange, maintain effective complaint handling procedures, identify, disclose and prevent conflicts of interest, and maintain resilient trading systems with sufficient capacity to deal with peak order and message volumes.

Fully decentralised exchanges are not subject to these rules, most likely because, as we’ve been arguing, it would be impossible to enforce them.

In another pleasant surprise for the industry, self-custody software and hardware wallets do not fall under the new regulations either. Earlier announcements that the EU planned to ban anonymous wallets appear to have been premature: there seems to be a growing recognition in the EU of what is and is not possible in Defi and crypto.

As BelgianPolitics writes:

“This text has clearly been written by highly knowledge civil servants and has been endorsed by EU Ministers of Finance with a more open approach to blockchain and cryptocurrencies than their non-EU counterparts. The EU made the mistake of allowing the US/Asia to dominate the tech industry. They do not want to repeat that mistake with the cryptocurrency space.”

As usual, this regulation now goes to the European Parliament before it is approved. We will be watching that process with interest.

2 December 2021

EU and Poland at odds over migrants

The European Commission’s idea of helping migrants coming from Belarus is to extend the period in which they can claim asylum in the EU. The new temporary provisions, introduced yesterday, would allow Poland, Lithuania and Latvia to extend the period allowed for new asylum claims to be registered from 10 days to four weeks, and to extend to four months the time limit for ruling on an application. The Commission also foresees an improvement in reception conditions covering basic needs, and a simplified return procedure. The Polish government dismissed the move as counterproductive. They asked for a suspension of the asylum process, not an extension. They complained that they were not consulted in drawing up this new proposal. Amnesty International dismissed the proposal too, saying the current rules worked fine, and that this is a weakening of migrants protection for political purposes.

Euractiv cites Commission figures suggesting that nearly 8,000 migrants have arrived in the EU from Belarus this year: 4,285 in Lithuania, 3,255 in Poland and 426 in Latvia.

Poland took the toughest stance against the migrants at the border. It criminalised irregular border crossings, and used its state of emergency to prevent humanitarian organisations and the media from coming close to the border. They also are accused of pushing back migrants, so-called refoulement, which is prohibited by EU and international law.

The situation at the borders has seemed to de-escalate, though. Iraq and other countries stopped flights and took back migrants. At least 12 have died in these harsh winter conditions.

1 December 2021

Getting tough on China, or not

When Germany’s next government released its coalition agreement and the Greens named Annalena Baerbock foreign minister last week, China watchers were buzzing.

Baerbock has been a strong proponent of a foreign policy guided by human rights and values, and she has spoken out strongly against China’s human rights abuses. The 177-page coalition agreement contained the strongest language on China in recent memory. A tougher stance on human rights abuses in Xinjiang and Hong Kong is anticipated.

If Germany’s stance on China shifts, it will have profound implications for the EU as a whole. But we are not so sure things will change much in Germany – not only because the coalition agreement kept within the EU’s current framework of defining China as a partner, competitor and rival.

It’s true that China was mentioned multiple times in the agreement, as were human rights issues in Xinjiang, Taiwan, and Hong Kong. The Greens’ influence is evident.

But as we’ve argued previously, Germany’s foreign ministry does not hold a tremendous amount of power. Most foreign policy decision-making is done in the chancellery.

Olaf Scholz’ record on China does not exactly inspire confidence. As Noah Barkin, an EU-China expert at Rhodium Group, noted, Scholz did not say much about China during the election campaign. Scholz supported the now-frozen EU-China comprehensive agreement on investment, and has spoken out against decoupling, perhaps due to the fact that his home town of Hamburg is dependent on Sino-German trade.

We see Italy and Lithuania playing a much more prominent role in pushing back against China’s economic coercion and human rights abuses.

Mario Draghi, the Italian prime minister, made headlines again last week after blocking yet another Chinese takeover of an Italian company. Zhejiang Jingsheng Mechanical reported its planned joint venture with Applied Materials to buy the latter’s screen printing equipment business in Italy was blocked during a cabinet meeting in mid-November.

Draghi used the golden share, Italy’s anti-takeover protection, for the third time since taking office. Before to that, Italian governments only used it twice since 2012. Draghi previously blocked the sale of a vegetable seed producer and a semiconductor equipment manufacturer. Italy has recently complained to Chinese investors about an undisclosed purchase of a high-tech drone manufacturing company – viewed as a signal that the deal could also be cancelled.

This is significant for Italy because it signed on to the Belt and Road initiative in 2019, and faces economic consequences for shifting its position.

Lithuania, meanwhile, has drawn the ire of China by opening a de facto Taiwanese embassy in Vilnius amidst deepening relations with Taipei. China downgraded diplomatic ties with Lithuania in response. Gabrielius Landsbergis, the Lithuanian foreign minister, has since told media the country will adapt to embrace the short-term economic pain it faces. He also urged Europe to do more to push back against economic coercion.

There are already signs that the EU has recognised its own naiveté in dealing with China. Ursula von der Leyen’s state of the union address focused much more strongly on China’s rise, and the European Commission president recently announced plans to raise €300bn for the global gateway initiative, widely viewed as the EU’s version of China’s belt and road Initiative. In a phone call with Japanese prime minister Fumio Kishida yesterday, Charles Michel committed to working with Japan to uphold security in the Indo-Pacific.

Without German support EU pushback is unlikely to make much progress. And without significant devolution of powers from the chancellery, Baerbock won’t make much progress. German mercantilism won’t go away that easily. It remains the biggest obstacle to a cohesive and coherent EU China policy.

30 November 2021

Italy's recovery: what really matters

A crucial milestone in the EU’s recovery fund kicks off today, as Italy begins to disburse money from the plan, via the education ministry first. Italy is the biggest recipient of funds from the plan, 191bn, or 28% of the total. And, as the euro area’s second most-indebted economy, and by far the most indebted major economy, Italy’s success or failure really is the plan’s success or failure.

What we think is of more importance to whether Italy can get back on its feet is not the funding itself, but the structural reforms that will come with it. Italy’s problem with debt is a symptom of its moribund productivity growth, which has led, in turn, to poor overall economic growth, and therefore a higher debt-to-GDP ratio. Solving Italy’s problem will rely on unlocking productivity.

And beyond the issue of Italy’s solvency, boosting productivity growth is key to setting Italy up for the digital and green transitions. As Marcello Messori points out, across the EU, the private sector will need to front five times the contribution of national and EU money from 2022-26 to achieve these goals.

Italy suffers from underdeveloped capital markets, relative to the rest of the EU. With a paucity of non-bank financial intermediaries, it is easier, as a business, to get the capital you need if you are in Brabant than in Brescia. Changing this will, at least in part, mean administrative reforms, making Italy an easier place to do business.

On that thought, we want to highlight two points we think are worth keeping in mind as this process unfolds. The first is that, to tell whether things are going well, we have to assess outcomes rather than deliverables. Checking boxes is one thing; whether your policies will translate into the results you want is another.

The second is that reforms will need a consistent amount of political will going forward, not only in the short term but in the medium-to-long run. That, we think, will be one of the most difficult aspects of Italy’s recovery. Draghi cannot stay in forever, and the process of reforming Italy’s civil service and judiciary will not happen overnight.

Making a success of the recovery will not only be a matter of funding, planning, or technical nous. It will also be about political culture. Successive governments across a time window spanning beyond parliamentary terms will need to commit to reforming Italy’s institutions, and follow through. While Draghi can set the plan in motion, making it stick will mean transcending the institution of emergency that put him in the premiership in the first place.

29 November 2021

France and the UK: old rivals, new problems

France and the UK have a long history of rivalries and misunderstandings. We are currently witnessing another low point in diplomatic relations between the two nations. After Brexit there have been plenty of conflicts between the two about vaccination, the British role in the Aukus military deal with the US and Australia, fishing rights around Jersey island, and now migrants crossing the Channel from France to Britain. The latter is about to turn toxic.

Firstly, this is about style of communication. The UK decided to issue a five-point plan via Twitter and publish Boris Johnson’s letter to Macron as a tweet in time for the front pages of UK newspapers. Macron said he cannot take this form of communication seriously. The French government followed up on this and withdrew an invitation to Priti Patel, the UK's interior minister, to attend a meeting of all ministers with Channel coasts.

Secondly, it is about substance. In the letter, Johnson suggested that France takes back all those migrants that are caught after reaching UK soil. Johnson wrote that taking people back would significantly reduce, if not stop, the crossings, saving thousands of lives by fundamentally breaking the business model of the criminal gangs behind the trafficking. Johnson’s letter also set out areas for greater cooperation with France, proposing joint border patrols, aerial surveillance and intelligence sharing. It was, though, the send the migrants back proposal that infuriated the French most. Making the letter public made this diplomatic row even worse.

There is plenty of emotional drama on the French side. Interior minister Geralds Darmanien replied to this saying the UK of not doing enough to prevent migrants from crossing. He blames UK NGOs for hindering French police from doing their work, and the UK’s lax labour market regulations that attract migrants in the first place. From the French perspective, they are picking up the pieces of a UK internal problem. The unfortunate Le Touquet agreement pushed the borders of the UK back to France when it comes to migrants. This may have worked before Brexit, when the UK was still bound by the Dublin agreement. Not anymore.

What next? If France were to tear up the Le Touquet agreement unilaterally, it would be a serious escalation in their relationship. Just like the UK unilaterally triggering Art. 16 of the Northern Ireland protocol could provoke a serious response from the EU. In France, there are already voices coming forth, suggesting that they could effectively wave migrants and refugees through to the UK, stopping to guard crossings via the tunnel. One of the proponents is Michel Barnier, Brexit negotiator and one of the hopeful candidates to get the nomination from Les Républicains. The drowning of 27 migrants in the Channel opened up old wounds. This is a highly emotionally charged atmosphere, as France is going into presidential election campaign mode.

There are more moderate ways forward. More common border controls is good. And the UK could, for example, process asylum claims in France. One thing is sure: a blame game won’t solve any of the conflicts. But it might win votes.

26 November 2021

A tragedy, not an invasion

31 migrants lost their lives in their attempt to cross the Channel in a dinghy rubber boat to reach the UK. The first thing Boris Johnson did is blame France for it. The tragedy is already no longer about the victims, but who is to blame. British tabloids dish out headlines that France did not stop them, or even encouraged a wave of new immigrants towards the UK. John Lichfield had a go on debunking this nonsense, and put it into context.

Migrants took to the dangerous crossing via the channel after France stopped other entry routes to the UK three years ago. The numbers of migrants arriving at British shores in small rubber boats did increase, but more attempts were prevented. The Channel was and still is considered a dangerous crossing. Those who did it anyways, with the help of reckless smugglers, did so because they were desperate, speak little French or have family connections in the UK.

The jungle of Calais is not a French problem, but a European one. It highlights all the failings in migration policies. There is no easy solution, the camps have existed for the past 30 years. But some facts may help to put things in perspective. France took three times and Germany ten times as many migrants as the UK. Still, people keep arriving at the shores to make their way towards the UK. This will not change just because the UK government tightens its immigration rules.

Papers like Le Monde now wonder why France should stop migrants for the British. There have been errors on the French side for sure. The brutal clearings of camps, and some incidences of police standing by while migrants board those dinghies need to be investigated. But this is a long coast to defend, and it is France that puts the money into doing so. The UK promised to contribute 20% of this, but so far failed to honour the full payment this year.

The 2002 Treaty of Le Touquet moved the English southern border to Calais for the first time since the 16th century. As a result, some argue that France shields Britain from its international obligation to consider asylum requests, and allows Britain to evade a moral obligation to accept a reasonable proportion of the tens of thousands of migrants reaching Europe.

If France were to lift the barrier it would be considered by Britain as an act of war. It may attract more migrants to Calais. What is lacking in the UK is a recognition that France has not creating this crisis but, in the past, has been protecting the UK from it.

France and the UK are moving fast from a row over fishing licenses to a much more serious conflict.

25 November 2021

Poland's independence from ECHR

Poland took the row over the independence of judges to a new level. In a new ruling, the constitutional court argues that parts of the European Convention on Human Rights were incompatible with the Polish constitution. Art. 6 of the European Convention on Human Rights states that:

“everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”

The convention was signed by the 47 members of the Council of Europe in 1993, Poland amongst them. The Polish constitutional court now argues that it is not a court in the sense of Art. 6 of the convention, and therefore does not have to apply the rulings of the European Court of Human Rights (ECHR), which are legally binding.

This ruling came after an ECHR judgment in May questioned the legality of the appointment of three judges to the constitutional court. The ECHR made it clear that all judgments of the Polish constitutional court are invalid if the panel includes political appointees of the PiS. Zbigniew Ziobro, Poland's Prosecutor General, argues that as a tribunal, it stands above the criteria of being independent and impartial.

Last month, Poland’s Constitutional Court ruled against the primacy of EU law with respect to three articles. The EU has held up the approval of EU recovery funds since. Last month the Court of Justice ordered Poland to pay a daily fine until it shuts down its disciplinary chamber, a mechanism installed in 2018 to penalise judges that don't toe the government line. The government has said it will shut it down, but has not done anything yet. This conflict is about to get worse.

24 November 2021

Covid and election campaigning

The fifth Covid wave is rolling over Europe, starting in the east and likely spreading to the west. With French elections only 5 months away, how does it impact the election campaign if Covid-related topics dominate the 24-hour news channels? How does it affect the relative positions of the candidates? L’Opinion had a go on this. We do not know yet how this wave will affect France. This analysis is based on a more severe scenario, where hospitals are stretched and management of the crisis becomes the main focus in the public debate.

Emmanuel Macron will dominate on Covid related policies. There is hardly anyone else to challenge him with an alternative plan on how to manage the crisis. So Macron will be the pacemaker and the crisis manager of last resort. Depending on how good he is at that, and how appreciative the public is, this could be an easy campaign ride for him.

Marine Le Pen is just about to get a grip on her campaign. She is ahead of Eric Zemmour in the polls again, after rolling out her social and economic policies, and touring small rural venues. Her team reassures that plan A was to run a pre-campaign now and a full campaign under another Covid wave, focussing on the lessons learned from 18 months of pandemic management.

A Covid dominant debate would not be great for Zemmour, who will announce his candidacy any time soon. He lost ground slightly in the polls recently, but he could still cost Le Pen qualification for the second round against Macron. That is, unless Zemmour himself deflates during the campaign. He already finds it difficult to express himself on anything other than security and immigration. If Covid is to dominate the news cycle, his pitch will be that this is not about Covid, but saving France. Can he link the two, or will his theme on immigration drop into the background? This is to watch out for.

Then there are the five candidates for the nomination of Les Républicains. Philippe Juvin, head of the emergency services, emerged as a contender thanks to the Covid crisis. Another pro on the subject is Eric Ciotti, who was responsible for the parliamentary commission that supervised the Covid management of the executive. Xavier Bertrand, as ex health minister and regional premier, has often expressed himself on the subject, as did Valérie Pécresse. The one candidate with poor credibility on the subject is Michel Barnier, who has more to say about the fishing row with the UK than Covid management. The nominee will be selected in a two-round election in early December. So, the timing of the fifth wave and its foreshadowing debates until then could reshuffle the cards.

Then there is the unlucky Yannick Jadot. The candidate already sent out some trial balloons with some ecological proposals, just to be completely overrun by Macron’s nuclear energy plan. Another Covid wave is likely to push his climate change agenda further out of the public discourse.

With the fifth wave, we expect Covid to dominate the news cycle. It just depends on the intensity and urgency in this next stage of the crisis. If the public debate once again reduces to the question whether or not exemptions are granted from lockdowns, it will impact the campaign in multiple ways.

23 November 2021

Storm from overseas

France may not yet have to talk about further restrictions, but insurrection is developing its own momentum on the Caribbean island of Guadeloupe, a French overseas territory of roughly 400,000 people. Protests in Guadeloupe kicked off after the announcement that Covid jabs would be mandatory for all healthcare workers. A mix of old grievances and distrust against Covid rules makes this protest particularly toxic, with only 5 months to go until French elections.

Trade unions in Guadeloupe started protests last week against the mandatory rules, amid fury over a lack of consultation and suspension without pay in the case of non vaccination. People are also angry about the obligatory green pass, and what they see as a colonialisation of their health system. Over the past days, clashes, burned out cars and looting brought normal life to a standstill. Schools also shut down. In response, Emmanuel Macron sent in his his elite police and counter terrorism officials, warning of an explosive situation, and not to mix health concerns with political aims.

Looking at the numbers, mandatory vaccination for health care workers hardly seems controversial, 90% of the health care workers agreed to get vaccinated, according to France24. Then again, without wages they hardly seem to have a choice. Suspicion of public health policies is particularly high on the island, after decades of use of the highly toxic pesticide chlordecone on banana plantations, authorised by the government despite repeated health warnings.

How will this play out in French politics? Politicians on the left jumped on the bandwagon. They are now saying they saw it all coming on an island struck by poverty, social exclusion, and economic dependency on the French state. On the right, Macron’s move to send in security forces was welcomed by the candidates of Les Républicains ahead of their nomination congress in early December. For the right, it is about controlling the situation, while for the left it is a matter of social fairness. A big question is whether Macron will bridge, or enhance, the divide.

His team is watching the events with some unease. Is Guadeloupe the trigger of a political storm in French politics? What if it ignites another gilets jaunes movement on the mainland? What if more restrictions need to be imposed amid the fifth wave?

The executive reacted immediately by imposing night curfew, dispatching security forces, and holding a dialogue at the highest level. Macron took politics by storm out of nowhere. Now he wants to make sure that he is not uprooted by the same momentum.

22 November 2021

Stages of mourning: crypto edition

It is fortunate that the debate about crypto-currencies among central bankers and economists is starting to get a bit more mature. In the stages of mourning for the gradual passing of the old monopolistic world of fractional reserve banking, we have reached the level where denial and anger are still the dominant emotional responses, but where bargaining, depression and acceptance are becoming frequently heard.

The biggest delusion in the central banking debate on the future of money is the idea that central bank digital currencies will drive crypto-currencies out of the market. That notion misunderstands not only why people want to hold crypto and transact in it, but also why people want to hold physical cash. On this issue we agree with Peter Bofinger, the German economist, who compared digital money to wine without alcohol. We would add to this observation: the kind of people who want to hold digital money are not the alcohol-free crowd, but those who want to transact outside the control of the authorities. Bitcoin was designed not to replace money, but to act as an alternative transaction currency.

A much more important debate is how central banks and financial regulators are interacting with the world of crypto-currencies, the real digital money, and their most important derivative product, the stablecoin. The Europeans are not engaged in this debate to the extent that they should be. We still think of it as funny money.

Chris Waller, a member of the Fed’s board of governors, argued this week that stablecoins should be allowed to become full competitors to banks as payment providers. Stablecoins are crypto derivates that are backed by a reserve asset, like the US dollar. Waller crititised the prevailing attitude in the US to force the new world into the old world, and only to allow banks to issue stablecoins. He said there is a case for competition. Stablecoin providers should be regulated, but not as full-blown banks, since they don’t offer savings deposits. The Biden administration is proposing that only banks should be allowed to issue them.

This is the conflict that is also going to play out everywhere in the west. The fledgling crypto world brings competition to an oligopolistic world, a competition that has some characteristics reminiscent of how social media affects traditional media companies. There is value in banking that the crypto-world is unlikely to challenge or replace. Just as there is value in pockets of the old media. Finance, like the media, are not a fixed-sized cake. There is no reason to think that the new world of crypto and that of traditional banks cannot co-exist, just as internet media companies have not fully destroyed the traditional media. What happened in the media industry is that the new world eliminated the monopoly profits of the old world. The fabled licence to print money is no more. It is best to think of crypto in those terms.

In the long run, we expect the view of central bankers like Waller to prevail, but that the line from here to there won’t be a straight one.