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14 June 2021

How to revive the G7

Our main story is on the G7, why it is stuck, and what it would take to reinvigorate it. We have a seperate story on the G7's strategy towards China, and why the EU is unlikely to deliver; in other stories, we write how Omtzigt's decision to leave the CDA could impact the Dutch coalition talks; on the rising chances of Le Pen in the French regional elections; and, below, on the EU's naivety about Northern Ireland.

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Today's free story

Northern Ireland's identity challenged

The season of marches started in Northern Ireland, led by union flag-waving loyalists, just as tensions over the Northern Ireland protocol spike. Against this backdrop, and following a UK-France spat over sausages at the G7 meeting, it will be a decisive week in politics that will decide whether there will be a new first minister or new elections.

Arlene Foster will step down as first minister today, with hardliner Paul Givan nominated as her successor by Edwin Poots, the new DUP leader. Sinn Fein needs to confirm this choice as part of their joint leadership role. Their prerequisite for accepting Givan is that the DUP enacts the Irish Language act that would give the Irish language equal status to the English. Troubles are ahead as Sinn Fein accuses the DUP leadership of bad faith by promising the Irish Language Act but having no intention to deliver it, the Belfast Telegraph reports. Sinn Fein also called for a full implementation of the New Decade, New Approach (NDNA) deal, which restored power sharing in Stormont last year. The cultural elements of this deal would have to be delivered in the form of amendments to the 1998 Northern Ireland Act. And Sinn Fein wants it all to be enacted before the end of the summer. Both the DUP and Sinn Fein have seven days to re-nominate the job as first minister and deputy minister. What could possibly go wrong?

Not that the UK and the EU make it any easier for them. A reported exchange over sausages between Boris Johnson and Emmanuel Macron shows just how easy it is to stir up emotions and sensibilities in this conflict. In a private meeting between the two men, Johnson allegedly asked: How would you like it if the French courts stopped you moving Toulouse sausages to Paris? To which Macron answered that it was not a good comparison because Paris and Toulouse are part of the same country. Obviously, Macron got the facts wrong. His slip caused an avalanche of statements of indignation from Poots, Johnson and Dominic Raab, his foreign minister.

This made it ever so clear, if it was still even necessary, that the EU has no understanding of the basics nor the finer details of what is at stake in Northern Ireland. Will Northern Ireland become the proxy-conflict for Brexit?

What is clear is that those stories will stir up emotions amongst unionists and loyalists, as they are about to re-identify with their past thanks to the challenges of Brexit and the protocol. The loyalists' procession last week, peaceful but without authorisation, may be the beginning of a long marching summer, writes the Guardian, as the new post-Brexit reality reopens old wounds. Under the Northern Ireland protocol there are border checks of people's handbags and products as they come over the sea from Scotland or England to Northern Ireland. No pet can travel to England or Scotland without a vaccination pass anymore, and many products are no longer available in supermarkets or can't be ordered via Amazon. For unionists and loyalists it is a daily experienced threat to their British sovereignty. 

The EU needs to realise that this is not about compatibility with single market rules, or even trade, and that peace in the union will take precedent for London. We would not be surprised if the UK triggered Article 16 of the withdrawal agreement. 

11 June 2021

You think the Germans are green?

There are polls, and there are polls that explain the polls. The latter are the interesting ones.

An Infratest dimap poll, published yesterday, debunked one of the more persistent myths about Germany - that it is naturally a green country. Germany has a strong Green party, but there is a specific history to that, one that one should not be confused with general attitudes in society.

Here are some of the highlights. Should the state outlaw behaviour that is particularly damaging to the climate? 53% say No. Are you in favour of higher petrol prices? 75% say No. Should the government encourage a shift from fuel-driven to electrical cars? 57% say No.

To their credit, Germans are now mostly in favour of a speed limit on motorways and higher prices for flights. Pollster beware, that’s easier to say in a lockdown. But don’t think for a moment that the Germans are particularly green.

The current political polls are best read with that information in mind. The Greens are back to where they were at the beginning of the year, at around 20-22% - which we think is where the current core support lies. What we saw in April was a bubble. Germans thought for a while that Annalena Baerbock was cool. Now they have gotten to know her, they don’t think this any more. Having been found vastly more popular than Armin Laschet and Olaf Scholz, she is now trailing both.

Baerbock had a strong performance in a TV interview yesterday. She will have to keep this up. What she will need to do in the next three months is focus on selling the Green world view, and not scare commuters with threats of high petrol prices. To land at 25%+, she will need to fight for the voters.

What is interesting is that the bursting of the Green bubble did not benefit the SPD but only the CDU/CSU. What the shifts are telling us is that there are 6-8% of swing voters who are open to the Greens in principle, but who are not core Green voters. The Greens won’t catch these voters with threats, but with promises of investment in climate technologies. That plus the strong emphasis on technologies is the most attractive element electorally of the Green agenda.

10 June 2021

The case for optimism on inflation

We have been writing in recent times about anecdotal early indicators of a rise in inflation down the line. Our focus has been about whether the ECB is prepared to handle an inflationary shock.

Guntram Wolff has taken a look at developments in Germany specifically, and concludes that current trends in the labour market do not give rise to concerns. On the contrary, as he rightly points out, German inflation would need to be higher than average eurozone inflation in order to correct the fall in Germany’s real exchange rate that accompanied the first decade of the euro area. In a monetary union, the real exchange rate is essentially a metric of diverging wage costs. This was the decade when Germany tried to out-compete the rest of Europe by keeping industrial wages low.

Wolff took a look at wage growth, traditionally the most important early indicator of future inflation. Wage growth at 3%, combined with productivity growth of 1%, is in line with the ECB’s current inflation target. He then goes on to look at collective wage agreements, which are still playing a big role in Germany. The recently concluded wage agreements do not give rise to concern.

What we can conclude from this analysis is that Germany and the euro area are unlikely to generate inflationary pressure in the short-to-medium term, based on the usually domestic demand channels. We would agree with that analysis.

But that’s not the whole story. We recall the 1970s when the inflationary impetus was triggered by a series of oil price shocks. The foreseeable external events would be a rise in US inflation and a rise in global commodities prices. In theory, an appreciating euro exchange rate could compensate for any external price shock. The main inflationary risk we see is thus based on a metric of the exchange rate’s failure to adjust completely. This is a derived risk, one that is very hard to foresee let alone predict. That said, we agree with Wolff’s analysis that the domestic developments in the euro area do not show signs of rising inflationary pressure. The euro area can easily live with German inflation at 3% over a longer period.

8 June 2021

Germany's strange crypto-debate

Handelsblatt has an interesting comparison between Germany’s political parties in respect of their plans for crypto currencies. We have been arguing that the election is primarily about whether Germany sticks to its analogue past - best exemplified by the policies of the current grand coalition - or whether it embraces 21st century technologies. While the Greens and the FDP disagree on many things, they are two modernist parties.

The problem with the Handelsblatt comparison is that it lumps central bank digital money and cryptocurrencies together, which is a common error. They both constitute forms of digital means of transactions, but they have nothing in common because they are different in nature and used for different purposes.

The CDU/CSU is almost apathetic to this issue. The party says it supports a digital euro and sees potential in the blockchain technology. We would like to add that it is far from clear whether the ECB will settle on blockchain or a centralised ledger as the infrastructure for a digital euro. The ECB has been experimenting and has yet to decide. In any case, this will not be the decision of the next German government. On private crypto-currencies, the party says ok in principle, but warns about non-European crypto currencies. If we import standards, we import values, a party spokeswoman said. While we would agree with that statement, the position conveniently ignores that all the main cryptocurrencies are non-European. What this tells us is that the strategy will be to counter the technological leaders of others through regulation. Good luck with that.

The Greens are very hostile to crypto-currencies. They want to reaffirm the money monopoly of the state, with clear rules for digital currencies. They seek transparency digital payments from a certain value upwards. Ok with digital euro, but say it should not replace cash. Acknowledge that China is ahead of us, and that Europe needs to secure the international role of the euro through its own infrastructure. The Greens are opposed to bitcoin because of its energy consumption.

The FDP is the only party enthusiastic about all things crypto. It welcomes alternative private monies. It says the digital euro is overrated and misunderstood. It says digitalisation of payments is a matter for the private sector. The party also sees a role in crypto-currencies for international payments systems.

The SPD is opposed to all things crypto, but in favour of a digital euro.

The position of the Left Party is almost identical to that of the Greens. It wants to ban all private crypto currencies, and to protect cash. It wants cash to remain a legal tender in all payments. In other words, it cannot be refused. We think this would severely constrain the use of a digital euro, since the attraction for traders would be reduced cost of cash handling. The Left Party has a strong focus on data protection.

We noted that the AfD was not on the list, but have a suspicion that crypto-currencies are not high on their priority list.

If the FDP ends up in a coalition, we suspect it will hold either the finance ministry or the economics ministry, which means that they will be influential in this debate. The same will be true for the Greens too. Crypto could thus turn into a political controversy within the next coalition. What we would like to know from the Greens is whether their position would change if the energy implications of bitcoin mining are mitigated - which will happen eventually. We suspect not.

We see the crypto debate as the quintessential modern political confrontation because it is ultimately about the role of the state in the 21st century. We think the FDP and the Left Party are the only ones who seem to have thought through this - obviously coming to the opposite conclusions.

7 June 2021

Putin's threat

Norbert Röttgen had it spot-on. When Vladimir Putin said Ukraine would need to show goodwill to remain a transit country for Russian gas, Putin started blackmail the country even before Nord Stream 2 is completed. This is telling us that Putin has already moved beyond Nord Stream 2. As Röttgen put it, Putin is using gas supplies as a weapon, just as Poland, the Baltic States and Ukraine always said he would. Ukraine's interior minister said he expects terror attacks, clandestinely organised by the Russian secret service, as an excuse by Russia to turn off the gas flows. He said he already received reports to that effect. And German politics - with the exception of the Greens, and the lone voice of Röttgen in the CDU - will side with Putin when push comes to shove. 

FAZ reports that President Joe Biden wants to raise this issue with Putin at their upcoming summit, and he may well receive assurances. But we don't think they will count for much in the real world.

4 June 2021

Turkey bets on Poland

Last week Turkey and Poland took a crucial step and moved bilateral collaboration beyond their NATO partnership commitment with the Polish purchase of 24 Bayraktar TB2 armed drones, produced by a Turkish company owned by Erdogan’s son-in-law Selcuk Bayraktar. It is the first time ever that a Nato and EU member has bought Turkish drones, and it serves political purposes on both sides, but is likely to increase tensions with Russia, writes Al-Monitor

The deal has been facilitated by a political affinity between Recep Tayyip Erdogan and the right-wing Polish president Andrzej Duda. Both are populist leaders, accused of undermining democracy in their respective countries, and both enjoyed an extraordinary chemistry with Donald Trump during his term in office.

Selling drones to Poland serves two purposes for Erdogan: One is to demonstrate his standing with Nato and the other is to use Poland as a sort of Trojan horse inside the EU. Ankara would like to see a proponent speak on its behalf when it comes to speeding up the customs union with the EU and to rally more Nato backing against eventual tougher US sanctions over its purchase of Russian S-400 air defence system. Warsaw, for its part, wants Ankara to align with the Bucharest Nine, a group of eastern European countries created at the initiative of Poland and Romania against perceived threats from Russia following its annexation of Crimea in 2014.

Can both countries deliver when push comes to shove? Duda envisions Turkey as a bulwark against Russian dominance in the Black Sea region. But Erdogan's support may sink as fast as quicksand once Russia flexes its muscles. For Erdogan the value is more in a double game strategy where he can play the US and Russia against each other. Adding a military dimension to Turkey's military ties with Poland could strain his relations with Russia, and a drone sale to a Nato ally is not what will deter the US from further sanctions. The question is, where is the tolerance threshold for the Russians? When Duda visited Ankara last week, Sergey Lavrov, Russian foreign minister, urged Ankara to carefully analyse the situation and stop fuelling Kiev's militaristic sentiment. Encouraging aggressive Ukrainian actions on Crimea amounts to an encroachment on Russia's territorial integrity, Lavrov added. Erdogan wants a place at the adult table in this geopolitical game. Erdogan punches above his weight in geopolitics with the backing Turkish drone technology. This sounds like playing with fire to us.

3 June 2021

Regulatory divergence - GMO edition

We have been less pessimistic about the economic impact of Brexit than other commentators. Once the UK has left the regulatory framework of the European Union, London will able to redefine its industrial policy without the EU's strings attached. Artificial intelligence is one area we expect the UK to venture into. Another one will be genetically edited crops and animals. Next week the UK government is expected to announce a loosening of the rules, making it easier for the biotech industry to test and commercialise genetically engineered crops, according to Science Magazine

This is not the classic GMO as we know it from the US. Gene editing alters a species' own genes without adding any new genetic material. Proponents argue gene editing is merely an acceleration of classical breeding techniques, which select for traits enhanced by mutations, often created by chemicals or radiation. It opens a door for the biotech industry, as it may no longer need to file detailed applications and reviews before any field trials and commercial approval. These requirements made those projects commercially unviable. The loosened reporting rules will bring more commercial interest to the biotech sector. But the effects will not be limited to the UK.

Once genetically modified wheat or other crops are commercialised in the UK, what stops the seeds from spreading to the European continent? In Europe, winds tend to go from west to east. What kind of impact will this have on the biodiversity and wild life, when chemically enhanced and genetically engineered plants take over their place? 

In our human centric legal framework, usefulness for humans trumps the rights of nature. Crops have already been manipulated through chemicals and radiation, gene-editing seems just the high art at the end of this process. Gene editing would make the crops more resistant to diseases. This seems to be a good thing. But natural selection would be tampered with, and the emphasis on survival means less tolerance for other function in the natural world. It will ultimately change the way we think about our food and ourselves.

So far the European Parliament has been the gatekeeper against GMO regulation. But in Europe, too, the pressure to allow gene-editing is on the rise. Commercialisation needs not only regulation but the trust of society. This is not a given in the EU or UK. Opponents of GMO practices argue that animals and crops modified to resist disease could promote environmentally damaging intensive farming practices.

A regulatory shift would open up a door and a battle for commercial advances in a post-Brexit world. It will be interesting to see whether the sentiment for revenge on Brexit that some politicians are harbouring will override environmental considerations. A new conflict is on the horizon.

2 June 2021

Clean and green vs belt and road

At next week's G7 meeting, the US and allies are set to announce an alternative to China’s belt and road initiative, an expansive geopolitical development agenda that has seen billions poured into the countries connecting China to Europe via old silk road trade routes.

Dubbed the Clean Green Initiative, the G7 plan is expected to provide a framework for sustainable development and the green transition in developing countries, according to anonymous officials who spoke to Bloomberg. Dubious name aside, details are scant – it is not clear whether any new money will be put behind the new initiative, nor is it clear how this new plan relates either to an earlier plan floated by the Biden administration, or to the US blue dot initiative, a standards-setting exercise that was also aimed at countering the belt and road initiative, and which went nowhere.

Furthermore, it seems as though G7 leaders do not know where the initiative should be located: Germany, France and Italy are pushing for new activity in Africa, while the US wants to focus on Latin America and Asia. Japan is calling for a focus on the Indo-Pacific region.

Assuming the strategy is not lacking money, structure and a geographic focus, we think its launch reveals a fundamental misunderstanding about the purpose of the belt and road initiative. China’s $1tn plan has been endorsed by more than 100 countries, and its portfolio of belt and road investment already covers much of the developing world, as well as many European countries.

The clean green initiative is meant to improve transparency and help countries avoid white elephant projects, like Montenegro’s €1bn Chinese-financed highway to nowhere, which have left them with unsustainably high levels of debt to China. But this fails to acknowledge that the belt and road initiative flourished best in corrupt countries, where a successful project was never the goal. For China, the belt and road initiative is a tool of debt trap diplomacy. For borrower countries, it offers an opportunity for the ruling political class to enrich itself. Any plan promising the opposite is unlikely to succeed.

If borrowing countries wanted more transparency and stringent lending requirements, they would ask the IMF, World Bank, or EBRD. Which raises the question – why call the new initiative clean and green? Is this a sign that the G7 wants to create its own herd of white elephants?  

Rather than focus on marketing terms that could lend themselves to greenwashing exercises, the G7 should be working on a belt and road bailout plan for countries that cannot afford to repay their debt. This would offer its members better political and diplomatic leverage than new, and perhaps unnecessary projects.

1 June 2021

Crisis in Russian-German relations

When Germany made itself dependent on Russian energy, it did not anticipate that Russia would ultimately try to exercise power over German politics.

Russia last week banned three German NGOs. Specifically, it classified them as undesirable organisation, which under Russian law makes it illegal for them to operate in Russia, and for Russians to be in contact with them. We are sure that German diplomacy will at least try to find a way to muddle through this.

FAZ writes this morning that the decision, announced by Russia's General State Prosecutor, will endanger the St Petersburg Dialogue as a first direct consequence. This is a high-profile annual bilateral forum, initiated by Vladimir Putin and Gerhard Schröder in 2001. The three banned organisations are members of that annual junket, whose aim it has been to strengthen civil society ties between the two countries. The paper quoted several German board members of the St Petersburg Dialogue as saying that the annual meeting would have to be suspended until Russia ends the ban. FAZ writes that the Russian-German relations have reached the lowest point in living memory.

But apparently not low enough for Germany to suspend Nord Stream 2.

The three NGOs are the Center for Liberal Modernity, the German Russian Exchange, and the much smaller Forum of Russian-Speaking Europeans. Russia banned them over undesirable activities that violate Russian interests. Russia accuses the organisations of justifying terrorist activities and of resisting Russian energy projects, including Nord Stream 2. The organisations were accused of feeding nationalist and separatist tendencies and non-traditional values in young people, according to the official statement. The purpose of the ban is to counteract a western-inspired coloured revolution, as the various uprisings in eastern Europe are known in Russia.

The organisations have suspended all activities in Russia, and ended all contacts, including email. If an organisation is classified as undesirable, Russians face up to six years in jail should they be in contact with it.

We are not surprised to see Putin flex his muscles over what he considers an increased anti-Russian tendency in Germany. The Russians have also considered putting the Green's party Heinrich-Böll Foundation on the list, but decided not to do so because the Greens might become part of the next German government. The decision of the ban was announced last Wednesday, and as FAZ writes, it must have been coordinated with the Russian foreign ministry beforehand.

In this context we noted a comment by the British journalist Will Hutton who made the observation that the dictators are winning against the democrats. We agree with his observation, but disagree with the reasons. It is not because the west was not living according to its values, as Hutton argues, but because the west is willing to do dirty deals with the dictators for short-term gains, and not stand up to them. The ban of the three German NGOs is the best example of what happens if you don't.

28 May 2021

What is Putin up to?

It is always hard trying to figure out what Vladimir Putin has in mind, but a good second-best is trying to understand what he is doing. If his real intent is to distance himself from Alexander Lukashenko, as some Russian commentators have been trying to tell us, why would he retaliate by banning European flights over Russian territory - or formally those flights that bypass Belarus? We cannot exclude that there is a motive behind this decision that we fail to understand. But the obvious conclusion we draw from this event is that Putin and Lukashenko are acting together.

We have been reporting about the possibility of a Russia-Belarus political union - not a power grab, but a gradual process. The hijacking of the Ryanair plane has the potential to accelerate this process.

Russia is by far Belarus' largest trading partner, accounting for almost 50% of all trade, followed by the EU's 18%. Yesterday Josep Borrell, the EU’s high representative, told media that the EU will discuss sectorial and economic sanctions against Belarus, highlighting potash and gas as potential targets. Belarus supplies 20% of the world's potash, much of which is exported via Baltic states. Its potash and oil and gas sectors accounted for more than €2bn of EU exports last year, around a third of total exports to the union. 

If the EU widens economic sanctions, the strategic effect will be to make Belarus even more dependent on Russia. We are wondering whether this may have been Putin's and Lukashenko's intention all along.

For a different view we would like to direct readers to Artem Shreibman from Carnegie Moscow, who makes the point that Putin is likely to make some compromises as part of a wider understanding he may reach with President Joe Biden at their upcoming summit. Shreibman says Ukraine is more important to Putin than Belarus. He cannot easily compromise there, but he can let go of Belarus. What we learned from his analysis is that there are influential parts in Russian industry that do not want Russia to pour resources into Belarus, whose leader they regard as an embarrassment.

We keep an open mind on those two conflicting narratives. They can't both be true.