Of the three parties to enter Germany’s traffic light coalition, the Greens came with the clearest agenda: putting Germany on a path to net zero. The targets the government has come up with have since been more ambitious: 65% emissions reduction compared to 1990 levels by 2030, and carbon neutrality by 2045. On current form, however, neither of these will be achieved, and they probably won’t be without resolving the political problems that knocked the Greens’ agenda off course in the first place.

On Tuesday, two separate reports came out, which demonstrated how far off the pace in Germany is. The first, from the ERK, a council of climate experts set up to advise the government on policy, said Germany would be between 152 and 226m tonnes off of the 2030 target. Transport emissions will be especially bad, falling 117-191m tonnes short of the government’s goal.

The second, from the UBA, the federal environmental agency, added that neither planned nor existed government policy would get Germany to the 2045 target either. That report claimed those policies would leave it 86% and 82% of the way there respectively.

The other problem is that the shortfall could see Germany fall afoul of its European commitments on climate too. As part of the rollout of carbon pricing to buildings and road transport, Germany committed to reducing its buildings and transport emissions by 50% compared to 2005 levels by 2030. This was part of a set of differentiated country-specific targets designed to cut emissions in these sectors, responsible for 60% of EU emissions, by 40% compared to 2005 levels by the same date.

But buildings and transport are the problem, and the reason why Germany will miss its internal 2030 target according to the aforementioned ERK report. As Nikolaus Kurmayer, writing for Euractiv, points out, that may mean Germany is 150m tonnes short by 2030. EU legislation stipulates that Germany would have to negotiate deals with countries that overshot their emissions targets to buy credits for their unused allowances. According to Kurmayer, that cost could be anywhere from €7.5-30bn if the credits are available at all.

These are, however, politically contentious areas, because of the more direct and obvious impact cutting emissions in these sectors can have on consumers. The government faced a backlash for its attempts to cut emissions in both, first in the form of political wrangling over the EU-level internal combustion engine ban, and then after its proposed 2024 boiler ban. What this meant is that the government decided to move towards an all-inclusive emissions reduction plan, rather than a sector-specific one.

All that does, however, is transfer the political ramifications of the plan somewhere else, and delay the inevitable for cars and heating, which will have to be decarbonised at some point. The chemicals and car industries are already angry because the EU will replace their current emissions allowances under the current carbon pricing regime with its new external carbon tariff. They are also upset about high energy prices, which they claim make them uncompetitive even without the green measures. At some point, Germany will need to choose between driving its cars or making them in order to hit their own targets.

The problem for Scholz’s government is that you end up in a position where you’re pleasing no-one. Germany’s slow de-industrialisation has very little to do with the costs of the green transition. It will continue regardless. Green-minded voters will now instead see headline after headline about missing climate targets, as they also see photos and videos of dried-up lakes, flooded houses, and burning forests.

The wildfires in Greece have spread with incredible speed over the past four days, leading to mass evacuations and 20 dead so far in the affected regions. Since last Saturday, the national weather service Meteo recorded 300 wild fire outbreaks. A first analysis via satellite photos show 400,000 acres burnt to ashes as a result of high heat and strong gusts of winds. The outbreaks cover various regions throughout Greece, including one on the outskirts of Athens. The coverage and intensity were unprecedented, as the press representative for the fire brigade calls it.

Greece is one of the Mediterranean countries most affected by the wildfires. Droughts and wildfires have been happening with greater intensity over the past couple of years all over Southern Europe. It often has a political cost attached to it once the blame game starts. In Greece, this is already happening as the opposition accuses the government of being complacent and unprepared since the start of the wildfire season.

Against this dramatic backdrop, Kyriakos Mitsotakis held his informal Balkan summit with the aim of talking about EU enlargement with leaders of the Western Balkans, Moldova and Ukraine. From the EU side, Ursula von der Leyen and Charles Michel were present too. But it was the surprise visit of Volodymyr Zelensky that got all the media attention. Zelensky secured from Mitsotakis an agreement to train Ukrainian pilots on Greek soil and to help secure Black Sea grain exports, as well as on Nato and EU membership. The Balkan states also put up a show of unified support for Ukraine against Russia, in front of a horizon of burning forests.

A cartoon in Kathimerini illustrated Zelensky's dialogue with Greek Prime Minister Mitsotakis:

Zelensky: “Half of our country is destroyed!

Mitsotakis: "Ours, fortunately, much less!”

Paying in cash is becoming rarer, a trend that has accelerated since the pandemic. Some small retailers or cafés do not even have a tilt for coins anymore and only accept payments by card and phones. There are social consequences too. Less tech-savvy people will find themselves disadvantaged, people selling magazines or beggars no longer can count on people carrying spare coins. Cash has advantages for the holder, allowing private payments, and being a tangible measure for how much money one has left to spend. With virtual money, this overview can get confusing: passports have to be remembered and changed, while online fraudsters and technical glitches add an additional anxiety unknown in the world of cash.

The ECB data confirms the trend away from cash. In 2016 and 2019 cash dominated in sales points like shops and restaurants, representing 79% and 72% of transactions respectively. In 2022, this share has come down to 59%. Public health measures during lockdowns turned contactless payments into a safer choice. This trend continued as people got used to effortless payment by just tapping their card or phone onto the cash point machine.

In an ongoing survey, the ECB found that cash is still the preferred medium of payment for 22%, while 60% appreciate having cash as one of their payment choices. The ECB is working on a digital euro itself and counts to offer this as another choice of central bank payment.

There are huge differences amongst member states, however. In Finland and the Netherlands, cash represents only 20% of transactions for small amounts, whilst in Italy 69% of transactions are in cash and for more significant amounts.

Amid this new trend, banks have adapted their cash access strategies. In the UK, where we live, many local bank branches closed down, especially in rural and suburban areas. Supermarket ATMs became the go-to for cash, while getting help with banking matters not covered in online Q&A help pages becomes an odyssey. In France, several banks agreed to offer joint cash access points and to more than half those by 2025. Financial regulators have to call retailers and banks to order repeatedly for their obligation to continue to offer access to cash and acceptance of cash payments.

The market momentum out of cash is unstoppable. It will be up to central banks and the regulators to preserve cash as one form of payment. With digitalisation, the social contract behind money is changing. Fiat paper money was already a matter of trust in a society rather than value. It had a certain reach in society, but not beyond its currency domain. Taking money completely digital takes trust to another level. It propels money into a global playing field where everyone could access their euros wherever they are without any physical landmark of trust, such as one bank’s ATM machine.

Going digital has not yet seen any major crises emerge, except for those who fell for online fraudsters. Making money safe and secure requires a constant vigilance that is far more demanding than the occasional money printing machines discovered in somebody’s cellar. And it adds responsibility to banks and account holders that comes with its own anxieties. At the moment people still enjoy the comfort of effortless payments. Until the first crisis of trust emerges.

Our accelerated demand for climate-friendly energy, including electric cars, has massive consequences for Africa. Africa has 19% of global metal reserves that are required for a standard battery-powered electric vehicles and at least a fifth of 12 raw materials necessary for the energy transition.

Yet in the past, Africa has not benefited from its raw material wealth, and instead witnessed a history of exploitation. Raw materials were directly exported outside the country from mines owned by international investors, while the local population stayed trapped in poverty and had to live with the consequences of the mines’ deforestation and pollution.

This time it better be different. Current mines need to be de-polluted and new mines need more locals to be involved, not only in the mines itself but also in the value chains using the minerals. Their own energy needs will have to be addressed and not ignored as in the past.

Time is short to achieve climate change targets ahead of 2050. It takes on average 17 years from discovery to the start of a mine. It also needs good infrastructures and governance for a partnership to prosper. But there is hesitation amongst investors as the political landscape is changing fast in Africa.

As former colonisers, Western countries would do well to acknowledge historic errors to make a common partnership work in search for green and secure energy. France, for example, has major stakes in the economy in Niger, Burkina Farso and Mali, its former colonies. Its CFA franc are two currencies used by 14 African countries. France is deeply implicated institutionally, economically and politically. There are deep-rooted resentments in the population that have not been properly acknowledged. As a result, an anti-French and anti-Western sentiment has been thriving in the Sahel region. And it is showing its first manifest results.

The first sequence of rupture with France have appeared at the level of military cooperation. The junta which took over power in Niger ended military agreements with France, accusing it of meddling in its affairs. Burkina Farso and Mali acted similarly earlier. But this rupture will not stop with the military question. Economically too, the French will have to rethink their role. Why should Africa not adopt a currency of their own? Reports of stopping raw material exports like uranium or gold have been circulating through social media, but so far nothing has been enacted. These rumours are a sign, however, that the new regimes are flexing their muscles as Africa is courted by many countries, including China and Russia, for its raw material riches.

African countries have seen one coup d’état after another since 2020 in Mali, Chad, Guinea, Burkina Faso, and now Niger. Ibrahim Traoré, the young and charismatic military officer who took over Burkina Faso, is igniting the hearts and minds of many Africans when he calls for Africa to be self-reliant, resilient, and recognised for its role with a plea for a federation of African countries. How far this will go no one can tell at the moment.

For Europe, the energy transition constitutes an opportunity to reboot relations with Africa. In 2019, the richest 10% of the population living in Western countries and Southeast Asia accounted for 48% of global CO2 emissions, while the bottom 50% of the world’s population only accounted for 12%.

The climate change agenda could bring together Europeans and Africans as partners. But to reconcile, they will have to acknowledge their terms, which may not be acceptable by Western democratic standards. Something needs to give. There are risks on our side too. Western politicians and investors could push things too fast and too far for African countries. And there are old habits to kick. The US and France contemplated intervention in Niger, while being warned by neighbouring countries that they would see this as a declaration of war against them. Another conflict in Africa is the last thing France or the EU needs at the moment.

The surge for green energy resources in Africa and a revolutionary sweep against the reminiscence of colonising powers amongst African countries are two forces that could work against each other or for each other. At the moment it is not yet clear where this is heading, as the potential for a major blunder is big, both in the West and in Africa itself.

What is a political promise worth? When circumstances change, so does the value of a promise. Eternal values is only for a moment, and moments are short in politics. And when a threat can no longer be ignored, change is required.

Ever since his election, Emmanuel Macron and his finance minister Bruno Le Maire have been promising no rise in taxes. Yet amid fiscal and ecological pressures, Bercy, the French finance ministry, is now preparing to raise some. According to Les Echos, those rises do not concern the main taxes, but focus on polluting transportation. The political challenge for Bercy will be to marry the image of a business friendly administration with an ecologically conscientious one that is doing its bit to green its own budget and shift incentives for its citizens towards less CO2 emitting transport. Lifting other taxes on companies is part of this balancing act.

Polluting cars will be the main target in the 2023 budget as are flights. Those projects, if implemented, will raise costs for motorists as motorway fees are likely to go up as a result of a higher tax on its operators. People will also have to pay higher taxes for heavy cars. Airplane tickets would see an increase in the eco-tax, more for business than economy tickets. And companies are incentivised to renew their car park towards electrical vehicles.

Those higher taxes do affect businesses, in particular the construction sector and delivery services. The current malus system taxes cars above 1.8 tonnes more on the grounds that heavy cars pollute more. This bar is planned to be lowered to 1.6t, which includes some of the vans including the Peugeot 5008 or the new Espace SUV from Renault. New car purchase subsidies are to linked to six criteria including one that excludes cars made in China. And brown subsidies such as the one for diesel used in construction and agriculture sector are also on the table for a potential chop.

Will the French be ready to accept a tax increase for the sake of the ecological transition this time after they rejected a small tax increase on diesel with the same aim in 2018 resulting in the gilets jaunes movement? This time taxes are more focussed on heavy cars and motorway charges rather than a general diesel tax hike that affects all cars. The measures also do not come out of the blue. A report by Jean Pisany Ferry on the macro-economic consequences of climate change raised the alarm bells. Consultations with various sectors are ongoing. Climate change is more visible today than it was in 2018. A tax hike for the ecological transition will probably be accepted. The bigger question is whether this collection of small measures will be enough to significantly shift incentives.

Can Marine Le Pen win any presidential election without the upper bourgeoisie class? This is an interesting question l’Opinion had a closer look at. In her 2017 and 2022 election campaign, Le Pen was running as the candidate of the people against the candidate of the elites. Le Pen is never seen with industrialists or one of those rich French patriarchs. She was always defending the small income earners but unlike the left she did not attack the rich. In 2022 she made her campaign in small towns and villages, more out of financial necessity than by design. This was in stark contrast to the other candidate on the far right, Eric Zemmour, who performed at mega rallies, backed and financed by rich donors from the right. Those oligarchs saw in him the saviour of a catholic France, an electorate Le Pen stayed far away from. The first round of the presidential elections eliminated Zemmour. Le Pen also succeeded in the subsequent legislative elections.

Will 2027 be any different? Le Pen believes that she can win the elections without relying on the rich and powerful. Her strategy towards capturing the Elysee palace is bottom-up.

But to win the presidency, she cannot completely ignore the rich and the bourgeoisie. It does not seem to be a class conflict for her. Le Pen and her party are not anti-rich like the left. Their programme even has some measures on donation and inheritance tax. They do take issue with some of the powerful elites, such as multinational companies she accuses of not paying enough in taxes and contributing to French society. And in her rhetoric she targets Medef, the employers organisation, as the ones who advocate immigration at the detriment of French employees.

To be seen representative as a president for all, it may well be enough for her to do what Francois Mitterrand did in 1981, lining up one or two who represent wealth and the bourgeoisie, who then make the case for Le Pen in the media.

How much is this image of being a candidate of the people worth without Emmanuel Macron as the counterpart? Her success is also the result of a rejection of Macron and what the elites stands for. A different presidential candidate who comes across less elitist may well succeed next time. Economic circumstances may change. Macron may achieve full employment by 2027. There would be less reason for people to be scornful at elites. Geopolitics may be such that people may only trust a candidate who is at home with the powerful in the world, rather than one who is focused on small-town politics.

What role the powerful are to play in society is an eternal theme at least since Aristotle. Le Pen is at least clear about where she stands. It’s a bet. The outcome is not a foregone conclusion.

The big problem with the way European fiscal deficit targets act in practice is that they often end up killing public-sector investment. The one laudable aspect of the Next Generation EU programme is that it provides a pot of money for investment. For Germany, the fund is a macroeconomic irrelevance. It is there where we see the full impact of the reversion to fiscal targets in the 2024 budget. As Spiegel reports, the German government is now massively cutting the budget for digitalisation. This has been one of the coalition's flagship projects - to make up for lost investments over the last 20 years. This year the government is spending €377m on the digitalisation of the public sector. Next year, this budget has been cut to €3m. This is millions, not billions. What happened is that Christian Lindner has been scrambling for savings to meet the balanced-budget goal of the German constitution.

The FDP's hypocrisy on this issue is mind-boggling. Hardly a day passes by without Marco Buschmann, the justice minister, complaining about bureaucracy. Along with Lindner, he is the most visible face of the FDP in the German government. How can you cut bureaucracy without digitalisation? Faster fax machines? 

The government claims that it still has money left over from previous years for digitalisation investment. This may be true, but the cuts will reduce federal co-investments into the digitalisation projects of the states where most of antediluvian bureaucracy resides. It will also cut the funds available for federal-level investment in future years. We have to remember that Germany's legendary lack of digitalisation is not an oversight, but the consequences of a political choice made by SPD, FDP and CDU/CSU in their support for the constitutional debt brake. 

Poland is heading for elections on October 15. The ruling Law and Justice party is leading the polls and is using all tricks in the books to cash in on anti-EU and anti-German sentiments. Stirring up anti-German sentiment ahead of Polish elections is nothing new, but the frequency and intensity of the anti-German rhetoric increased since last autumn and goes beyond the usual World War II references. Polish politicians now regularly accuse Germany of instrumentalising Donald Tusk to interfere in Polish affairs. Tusk, a former Polish prime minister and president of the European Council, is leader of Civic Platform, the main adversary for PiS.

As part of its electioneering the PiS plans to hold a referendum on the EU’s migration pact proposal at the same time as parliamentary elections. The referendum itself has not been called yet. Parliament still has to consider the issue later this month. But the PiS is moving ahead anyway and published a video featuring its chairman Jaroslaw Kaczynski unveiling the first of four questions in the referendum which is completely unrelated to the migration pact. One question the PiS wants to ask is: Do you support the sale of state-owned enterprises?

In the video Kaczynski said it would be up to ordinary Poles to decide what happens, not German politicians, who were trying to instal opposition leader Donald Tusk in power and to sell all of Poland's property to Germans. It is the old narrative of Poland being ransacked by Germany. The Polish government has actually sold state assets to foreign companies. A few months ago they sold a 30% state in the Polish refinery to a Saudi Arabia’s Aramco and MOL from Hungary without even a tender, according to Notes from Poland.

The PiS is ahead in the polls with 36%, even if they stand to loose compared to the 43.6% in the last elections. Their lead over a coalition led by Tusk's Civic Platform is 6pp, according to Politico’s poll of the polls.

Exiting from the EU or the euro area used to be a top priority of far right parties in Europe. Not anymore. Today, hardly any of those far-right parties campaign for an explicit exit from the EU, using immigration instead as their main project fear. Some dropped their references quietly or relegated it at the back of their pamphlets amongst some other lofty long term goals. Others, like Giorgia Meloni, did a U-turn in full sight once in power as Italy’s prime minister. Marine Le Pen dropped the ball even before Meloni, finding it much easier to talk about immigration and cost of living instead.

This agenda U-turn has various reasons. Voters were less keen on a formal exit from the euro or the EU than its politicians. Then the parties hardly had thought about the practical implications and those who did, concluded it was not worth the effort. Brexit did not help. Brexit was first heralded as a role model for exiting from the EU. But it soon emerged that independence is no good if politicians have no clue what they want to do with it. Far right parties in Europe have no concrete ideas of how to exit a currency union, what national sovereignty can give them and how to redefine relations with the EU after that. Brexit also showed us how slow and painful the disentanglement can be. The costs are high and the benefits not clear.

Most far right parties prefer to focus on defining what they are against. This can be done even better inside the EU. Rebelling against Brussels or the EU’s reach into national politics can get the public attention in the public discourse. They can emerge as the defender of national sovereignty and, if played skilfully, become a source a continuous vote winners.

The war in Ukraine was another turning point for the far-right. All of the sudden there was agency in the EU as a global actor and as an insurer against the land grab from Russia. A new raison d-être for the EU as seen from the far right, as the lesser of the two evils. Jussi Halla-aho, the Finn’s party’s freshly nominated presidential candidate who in 2019 wrote his party’s Fixit strategy, told Reuters ahead of his nomination that European unity a priority for now, though Fixit will remain a long term goal of his party. This view seems to be widely shared across the party.

So no Fixit, Frexit, Nexit or Italexit. At least for now.

This is our last briefing before our summer holiday. We will be back on Monday, August 14.

Our main story today is a sceptical note following Christine Lagarde's press conference yesterday. What became clear to us is that the ECB is still reliant on its forecasting model to determine whether it is on a trajectory to reach the 2% inflation target. This is not a technical issue, but rather it is critical for the assessment of what to expect. Since this model is biassed in favour of forecasting the target, we conclude that the potential for a policy error is growing. 

The big problem with data dependence is that it does not tell you what you need to know. You may know that inflation is coming down, but you don't know whether or not it is coming down to 2%. Lagarde told us yesterday that the ECB was using the forecast, or projection as they call it these days, to make that determination. That alone tells us that the ECB will from now on tread more cautiously, because the forecast is hard-wired to predict outcomes in the vicinity of the inflation-target. In particular, it makes the assumption that the sheer announcement of an inflation target anchors people's expectations. We know this is not true, but it forms an essential element without which the framework would not work.

We reported the other day on an informal data policy rule, advocated by a highly placed central banker, that says that the ECB should pause if core inflation falls for three consecutive periods. Core inflation was up again in June, so the earliest period for a stop would be October, if core rates came down in July, August and September respectively. That would suggest one more 25bp rate rise in September, and that's it. Even we expect inflation to fall over the next six months. The problem with this policy rule is that it would give you the same answer regardless of whether your target is 2% or 3%. 

Whether you are model-dependent or data-dependent, you somehow need to include the target into the model. This is the reason why the Taylor Rule had such a long and successful run. It split the difference between the deviation from actual to potential output, and the gap between existing and targeted inflation. If you plugged actual numbers into this model, as opposed to perennially optimistic expectations, the level of interest rates would be closer to 6% rather than 4%. There are problems with the Taylor rule, as we gladly acknowledge, but not nearly as many problems as with a biassed forecasting model. 

It is interesting that central banks have never subjected their forecast performance to outside evaluation. The ECB's model has been giving wrong forecasts for the last ten years. It is not the forecast error that is the problem, but the forecast bias. The model is biased in favour of the actual target. It does not tell you what you need to know. It tells what you want to hear. If your benchmark is biased in favour of the target, then it is biased in favour of a lower interest rate. The reason we are focused so heavily on discussions of the model here at Eurointelligence is because it is the main source of policy errors.

If this happened in finance or in political polling, these models would have been kicked out a long time ago, along with the staff that produce them. That is not happening in central banks, whose economists are attached to what they like to call their workhorse models.

Going forward we see a range of tilted outcomes, ranging from the scenario where the ECB is lucky and gets it just right to one where inflation gets stuck at 4%. That would put 3% in the mid-range. 

In its update of its World Economic Outlook, the IMF also warned about the asymmetry of inflation. So did several economists like Olivier Blanchard, Kenneth Rogoff. Some of them may be open to the idea of a higher inflation target.

The argument is that it will become very costly to push inflation down to 2%. We don't want to spin out this scenario any further, but we would remind readers that a permanent inflation overshoot would have asymmetric economic effects. 

We conclude therefore that the risk of a permanent inflation overshoot at the ECB is high. We are not investors ourselves. But we would not be surprised to see people starting to place strategic bets on the ECB missing its inflation target. This is not a forecast of what will happen. What it is, however, is a shift in the bias of our expectations, which reflects the bias of the method.