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02 December 2022

This is how hyper-globalisation ends

In our lead story we discuss the successful political backlash against kangaroo courts to protect investor interests, a feature of the age of hyper-globalisation; we also have stories on another aspect of the same phenomenon, an agreement on the corporate sustainability due diligence directive; on Italy's wish to extend the recovery plan investment horizon; on how renewable investments suffer from bad policy; on Europe's ever-so-tiny chips act; and on the far right entering the European mainstream.

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Today's free story

What happened to the cordon sanitaire?

The far-right is a political reality in several EU member states. They are in power either as leaders or partners in a coalition government, or via confidence and supply agreements. When coalitions are formed between centre-right, liberal and far right parties, the traditional fault lines in EU politics are blurred. This has repercussions for the European Parliament.

The once-heralded cordon sanitaire, where traditional parties refused to cooperate with the far right, is no more. Italy now has a coalition government that includes two far-right parties. In Sweden, the new centre-right government relies on the far-right to get laws through parliament.

For the French MEP Pascal Durand, Sweden’s case was reason enough to quit the Renew Europe Group. Its 109 members include Karin Karlsbro, MEP from Sweden’s Liberals, a party that joined the new government coalition and thus is seen as benefitting from far-right support. The Renew Europe group had several tumultuous behind-closed-door meetings in October to define its response. MEPs from France, Belgium and even Romania called for excluding the Liberals, but the Nordic countries blocked that decision on the grounds that exclusion is too violent, writes Le Monde. Several amongst them also no longer hold firm on their cordon sanitaire, refusing to rule out future government cooperation with the far-right. After long debates, the members of the Renew group settled for a compromise. The Liberals are allowed to remain a member, but they have been excluded from all activities within Renew. Renew will also monitor the party's behaviour in Sweden.

This is not enough for Durand, whose conviction, and departure from Renew to join the Social Democrats, is raising some fundamental questions. If the far-right is getting to power throughout Europe, what happens to those from the centre-right who still believe in the cordon sanitaire? They may no longer find their place in the EP’s political groupings. Messy coalitions at home are a good reason for transnational lists, where political pan-European platforms can be formed without the muddled positions from national policy making.

1 December 2022

Sticks and carrots for Hungary

The European Commission made good on its decision to recommend to freeze Hungary’s share of the EU budget worth €13bn, as Hungary did not do enough to fulfil the rule of law conditions the Commission had stipulated. It is the first time they have applied the so-called conditionality mechanism. There is a carrot too, as the Commission has offered to approve €5.8bn Hungary is set to receive from the EU recovery fund, contingent on Hungary implementing 27 key reforms. The two procedures have the same goal for Hungary over its law and order violations. But they were negotiated with different EU teams and have different conditionalities in mind. Why have they been so strict on one set and lenient on the other?

The Ecofin council will have to make sense of the two different recommendations next week. And it only takes a qualified majority to adopt the Commission’s proposal. But there is politics at play here too. The Ecofin’s agenda for December 6 opens with the case on Hungary and closes with a vote on Hungary and whether to back up the Commission’s recommendation. In between are two other items on the agenda, a €18bn aid package for Ukraine and minimum tax rates for multinational companies. These are two subjects Hungary vetoed in the past.

The Czechs are currently holding the EU presidency and are working to convince Viktor Orbán to relent on his vetoes. Will this be enough as a quid pro quo for a softer Commission response? Even if they were to go soft in tone, or change conditionality by introducing milestones in return for funds, Hungary still has to deliver those milestones to actually get the money, as the Verfassungsblog reminded us. This is what they did with Poland before, and it is similar to the way the bailout programmes worked in the past. It is about making member states take responsibility for solving the problem. But if this vote is simply about setting an example over rules enforcement or punishment in the EU, it won’t work as long as Orbán is in power. It would only strengthen his case nationally.

30 November 2022

Industry is really worried about IRA

Whether you talk to European industrialists in Brussels or German industrialists in Berlin, you get the same message these days. They are really worried about the US inflation reduction act. At the BDI conference in Berlin, it was the dominant subject. FAZ quotes the president of the German federation of industry as saying that more than a fifth of German medium-sized companies they had polled were considering packing up and leaving the country. We cannot recall ever seeing such a figure. The main reason he cites are the high energy costs. Despite recent market moves, end user energy prices will not revert to the pre-war times on a sustained level. Many privately-owned industrial companies are operating at the limits of their pain thresholds with low profit margins. But it is one thing for a company to pull through a recession, with their owners forgoing income for a year, or for the owners to conclude that the business model is no longer viable in its current form. The German government's gas price break is not going to make the difference between viability and non-viability. It will help struggling, but viable businesses to tide themselves over. The time horizon when cheap renewable energies will shift the viability calculations for companies is still outside all planning horizons, even for long-term oriented private company owners.

Robert Habeck said he was considering stricter local content rules, as the US has been doing, and a series of other measures. One of them are contracts for difference, where companies that invest in low-carbon technologies get subsidised by the state. There are national and European schemes, but they are much less effective than comparable US schemes. Habeck said that what takes two years in Germany takes two months in the US. Agility is the real threat of inflation reduction act. Europeans, too, are no strangers to subsidies. But the Americans deploy them faster.

What we expect to see in Germany is not so much large de-industrialisation but a shift in production technologies. We think that the headline number of a share in manufacturing in GDP of 20% exaggerates the underlying picture. Many manufacturing companies offer services that are not accounted for separately. We would therefore not use the officially recorded manufacturing share as a reliable metric. What we expect to see instead is a shift away from energy-intensive production, like bulk chemicals and steel, towards lower energy-intensive industrial segments, and a shift towards low carbon technologies in particular, a process that will be accompanied with friction and possibly lower GDP growth. What we do not expect is a complete overhaul of the industrial model as such. You are not going to transform hundreds of thousands workers in the car component industry into bankers. Nor would that be necessarily desirable if that were possible.

One of the big problems all manufacturers are struggling with right now is a shortage of skilled labour. This, too, is affected by bureaucracy. As FAZ reports, the German government is considering an overhaul of its immigration regime for skilled workers, by adopting a Canadian-style point system, which allows immigration for qualified workers even without concrete job offer.

29 November 2022

Could Syriza come back to power?

Greece is holding elections next summer. Unsurprisingly, today’s politics is done with elections in mind, buying favours to be rewarded at the polling stations. Current polls show that New Democracy could get between 35-36.5% of the vote if elections were held today, which will not be enough for an outright majority. Syriza comes second in the polls, though numbers vary between 20-29% depending on the poll. Macropolis notes that they did not capitalise on the difficulties the government faced over the summer with inflation and a scandal about wiretapping journalists and opposition politicians by the National Intelligence Service, which is under Kyriakos Mitsoutakis' direct control. Mitsoutakis assured that he did not know anything about it and would have objected to it had he known. The question various democratic committees are now trying to answer is how widespread the scandal was and how much the prime minister knew.

The cost-of-living crisis is straightforward by comparison. For New Democracy, pensioners are key voters. A recent bill that raises pensions for 1.7m retirees next year and offers a €250 inflation cheque to 2.5m pensioners will most certainly feature on the campaign trail. Whether this will be enough depends on how the cost-of-living crisis unfolds over the next six months and how the party emerges from the wiretapping scandal. The party has had chronic issues with corruption cases in the past. This is one of the reasons why Syriza, a new party from the far-left, rose to power in times of economic hardship during the Greek sovereign debt crisis. Today, the cost-of-living crisis is a priority, and on this front New Democracy is faring well. But new revelations from the scandal could awaken the ghosts of the past.

For an outright majority a party needs to win 37-38%. This is within reach for New Democracy. But so it is too for Alexis Tsipras, the Syriza leader and former prime minister. He could win if a sudden shift in public perception emerges over the coming months.

28 November 2022

Could Turkey lose it over the Kurds?

Turkey is rolling out its operation Claw Sword against the Kurds in Syria. Drone attacks on the headquarters of the Syrian Democratic Forces (SDF) last week were just the beginning. Ground troops could follow soon. It is payback time, as the Turkish Defence minister put it on Twitter. Is this the one mad move from Recep Tayip Erdogan that could lose him his political capital with the West and Russia?

The US has been backing the Syrian Democratic Forces (SDF) in the fight against Islamic State, the jihadist group that swept over Iraq and Syria during the last decade. The Kurds were the ones who fought IS. They now keep the group's members locked up in prisons. There is concern that if Turkish troops face the SDF on the ground, it could allow the terrorists to escape.

The US is also worried about the safety of its own troops stationed in the Kurdish region of Syria. So far they only issued a warning to their Nato-partner, Turkey. But from the sound bites we are hearing this probably won’t stop the Turkish military in its pursuit of the Kurds.

Recep Tayyip Erdogan blamed the recent bombing in Istanbul, which killed six and wounded 80 people, on the PKK, a terrorist group for the Turkish, recognised as such by all western nations. But Turkey went one step further, viewing the SDF as part of the PKK. This is the rubicon the West has not crossed. Sweden and Finland too had used this distinction in their bid to convince Turkey to back their accession to Nato. But Turkey's patience has run out. Erdogan said last week that he is having no more of the West’s efforts to differentiate the SDF ad the PYD and YPG, its subdivisions, from the PKK, writes Al Monitor.

What should we look out for at the political level? Erdogan is signalling that a meeting with Bashar al-Assad is likely. If Syria and Turkey were to come to an agreement, the Kurds will be at the centre of those discussion and risk being the ones who will lose out in such a deal. Turkey is also likely to seek some form of clearance from the US and Russia.

How much leverage are the US and Russia ready to use against Erdogan, given that the Kurds are no longer a priority? Russia could play it over al-Assad, who is indebted to Vladimir Putin for helping him to win the civil war. This leaves the US. If the US does not step up its response against Turkey’s operation in the Kurdish region, it could force them to give up their support for the SDF and their troops there. After Afghanistan, would be another highly symbolic retreat from the US in the region. If the US were to step up its response against Turkey, the conflict would come into Nato. And Sweden may have to wait even longer to get the green light from Ankara for its accession.

25 November 2022

Erdogan, the Kurds and the economy

Turkey is testing the West with its military operations against the US-backed Kurds in Syria while its economic experiment at home is defying economic orthodoxy and market expectations. Both military and economic narratives are framed by Recep Tayyip Erdogan as battles, against Kurdish terrorists and for economic independence. Both are tools of Turkey’s foreign policy, to define a space somewhere between the US, the EU, China and Russia and to defend its position in the region.

Turkey’s latest military attack against the Kurds came after they blamed Syrian Kurds for the bomb attack in Istanbul. The drone strike on Sunday hit Kurdish headquarters in their region of Syria, only 130m away from where US troops are. Even if it is not the full-blown operation on the ground, the increased likelihood of further attacks raises serious concerns over Syria’s security situation for US troops, Kurds and ISIS prisoners. Clearly, the two Nato partners, the US and Turkey, are not on the same page here. We also do not know what it means for Sweden and Finland’s accession process as it is pending on the two Nordic countries cutting ties with Syrian Kurds.

In economic terms, the difference with the West is most visible in monetary policy. Western economies raise interest rates when inflation rates gets to 9%. The Turkish central bank lowered its interest rate for the third time since August to 9%, and this is despite an inflation rate of over 85% in CPI terms and 150% in producer prices. The Turkish Lira is at an all-time low, losing 50% of its value against the dollar compared to last year, but it has been stable over the past couple of months.

The dynamics of a devaluing currency combined with high-cost imports push up inflation while exports are soaring, the main reason behind high GDP growth rates of 5.7%. But despite those high growth rates, export revenues and tourism still do not bring in enough foreign currency to balance the current account. Friendly central banks from China, Qatar, South Korea, UAE and Azerbaijan have had to help with swap loans. Saudi Arabia opened up a $5bn credit line this week, according to the FAZ. Russia is said to have transferred a similar amount in the summer. Domestically, the government also scraped foreign exchange and gold from private individuals and companies with the promise that they would compensate them for the exchange rate loss. The currency risk is thus shifted to the state budget. According to Reuters, the central bank netted $100bn this way and was thus able to stabilise the Turkish lira over recent months.

Can this continue? Rating agencies, market observers and the IMF are warning that this is unsustainable. The Turkish government does not relent on its narrative and prefers to focus on the bright side of soaring exports and high numbers of tourists this year. Market observers expect things to turn sour next year, and for GDP growth to fall to 3.5%, but what if Erdogan keeps the show going with some of his creative tricks? For how long?

It seems unlikely that Erdogan will change his tune before the elections and the Turkish republic's centennial celebrations next year. He wants to demonstrate that the Turkish economy runs under his rules, not the ones dictated by the West or the markets. And he wants to win the elections. So his model has to last at least for another seven months.

His economic agenda clearly has foreign policy implications. Given their need for cash to stabilise the exchange rate, Turkey’s economic connection with Russia and China is likely to deepen further, creating new dependencies. Can Turkey continue to be relied upon as a neutral broker for peace? This depends on how far Erdogan wants to take his operation against the Kurds and how the economy will cope with these price shocks. A high-wire act that requires none of these big bets go wrong, be it militarily or economically.

24 November 2022

23 birthdays

This is the decade of the supply chain: complex global networks of the flow of goods between companies. Twitter is a network, of course. And so is the crypto blockchain. And global financial markets. Many of our biggest misjudgements this century relate to a generalised failure to understand network dynamics. 

The simplest example we can think of mistaken network maths is an old problem from probability theory - though most people don't think of it this way: on average, how many people do you need in a room for two to share the same birthday? The counter-intuitive result is that it takes only 23 people. The reason our brains get this wrong is that we cannot intuitively compute simultaneous probabilities. We are prone to the fallacy of composition, which is ultimately a failure to understand networks. The chance of our own birthday falling on a given day in the year is 1 in 365. So we extrapolate, mistakenly, that it takes some 180 people for any two to share the same birthday. The mistake we are making is massive. 

Supply chain dynamics shares some characteristics of the birthday problem. Your output may be my input. It might only take 23 individual disruptions to disrupt a large chain.

Pollsters misjudged network dynamics when non-voters turned up at the polling both in the US presidential elections in 2016 and in the Brexit referendum. The failure to predict the global financial crisis was a failure to grasp financial networks. A minor fiscal crisis in Greece ended up being a life-threatening financial crisis for the entire euro area because of network effects. EU member states all imposed synchronous austerity.

Macroeconomists, whose reasoning is often based on linear logic, are particularly prone to misjudgements when they leave their reservation. The other day, we heard a well-known economist gloating about the collapse of the FTX crypto exchange, and concluding that crypto itself would be doomed. That's your classic fallacy of composition - making a macro judgement based, in this case, on a single case. There was, without a doubt, a bubble in the crypto markets that has now largely deflated. But crypto itself is rock-solid. The bitcoin blockchain, for example, did not have a moment of disruption since its start in 2008. The same goes for the other big blockchain, Ethereum. 

A technical expert, meanwhile, was quoted in newspapers last weekend saying that twitter's demise was imminent because Elon Musk had fired essential staff. But there has not been a single moment of disruption. That judgement was not so much a fallacy of composition, but simple wishful thinking. The experts were not so much afraid that Twitter would fail, but afraid that it would survive. Without them.

Many fearful Twitter users turned to Mastodon, a decentralised, open-source, social network, with Twitter-like features, and projected all their hopes into it. We think Mastodon has its uses, for scientific communities for example.  But it cannot replace Twitter because of network effects.

Just consider this: Many Twitter users have often spent more than a decade building up a large following. If you leave and join another network, you are starting from scratch. We, too, set up an account at Mastodon, and were shocked to find that we had a single follower after one week.

All of these examples stem from only two sources: globalisation and the internet. Both have had a tremendous impact on our lives this century. Neither will go away. What they both have in common is that they are networks, something we humans are not well equipped to understand intuitively. 

23 November 2022

Normad visas to attract skilled workers

Remember the golden visas that cash-strapped EU countries like Greece, Malta, Cyprus, and Portugal issued to foreigners in return for investments or cash? Now we are seeing a new category of visas emerging, the so-called nomad visas. These are temporary residence and work permits. Their popularity surged with the pandemic and its lockdowns, which allowed people to work from home or wherever they are as long as they have a good internet connection.

Greece and other southern EU countries see this as a way to attract young people who seek a nice place to stay and work. They bring in taxes and are good for the economy. Sifted listed all EU countries that are offering these kinds of visas. Most of them have some conditions attached, for example a lower threshold of monthly or annual earnings either as employee of or consultant (free lancers or self-employed) working mostly for foreign companies. The targeted group is not fruit-pickers but high earners from IT, financial services or the gaming industry. Some countries require a certain level of education or years of experience. It is similar to a job application only that the job itself is not defined only the entry requirements. Some are open to EU workers only, while others attract people from all over the world.

Spain is one of the large countries that is now trying out this kind of temporary immigration for mobile workers. They have one last hurdle to clear in the senate before it becomes active in January next year. The visa is for one year, extendable to five. Applicants must have a degree or a postgraduate diploma from a reputable university or business school, or have more than three years’ working experience. There is also a requirement of at least a €2000 minimum salary per month according to media reports. This is the Jet-set version of migration.

22 November 2022

Migration policy and political pressure

Migration is one of the thorniest and most divisive issues in EU politics. While member states all agree that the Dublin pact is not working, they do not agree on how to reform asylum procedures and burden sharing. Migration has given rise to the far-right in various member states, thus increasing the political risks for governments. And migrant numbers are rising from Africa and from over the Balkans.

Kicking the can down the road can only work for so long. Migration will remain on the agenda, and people will continue to flee conflicts and economic hardship to reach the shores of Europe. Ramping up border controls, as happened in a recent deal between France and the UK will still have to address asylum issues. Migrant reception centres are packed in countries like Belgium and Austria, Politico reports, while the number of migrants arriving in the Central Mediterranean region have doubled compared to last year. Most of those people do not qualify automatically for asylum under international protection against the real risk of harm in their homeland.

Politically, the divisions showed up recently in the spat between France and Italy over who is responsible for taking in migrants rescued by an NGO ship. Italy refused to let the 234 migrants disembark at a. Italian port. France then allowed the Ocean Viking to dock at one of their ports, accusing Italy of neglecting their duties. As a counter-measure France suspended plans to take 3300 asylum seekers from Italy, worsening the row even further. There are clearly domestic considerations for both in this. Emmanuel Macron is using Giorgia Meloni to get at Marine Le Pen. And Meloni is using France to please the far-right voter base. The spat is thus symptomatic of the mess the European system is in.

An emergency meeting of EU interior ministers are to address the row between the two this Friday. Legally, there is a bit of a vacuum here. Under current provisions, Italy would have had to take in the migrants as they were the first port to call. But the Italian government argues that France is responsible for those migrants since the Ocean Viking, the NGO ship, was running under French flag. And it should be thus France to take in those migrants. Italy is not alone with this argument. Other Mediterranean countries like Greece, Cyprus and Malta also argue that flag state of these NGOs should indeed play a role.

The European Commission says there are actually no clear provisions under maritime law to advise what to do when migrants are rescued by privately owned ships. The meeting will also be used to encourage voluntary relocation according to a deal that member states signed up to in June. So far only 100 have relocated despite pledges by some to take in 8000. And the Commission is to recommend spending €600m to help African countries stem the flow of migrants heading towards Europe.

21 November 2022

IT layoffs and the Irish growth model

The IT sector is going through a wave of restructuring, laying off employees around the world. This restructuring could have some macro economic effects in Ireland, where the sector employs some 6% of total workforce and produced 18% of value added in the latest quarter, according to the Esri research institute.

Meta, formerly Facebook, started the downward spiral by laying off 11,000 jobs. Stripe, an online payments processor, cut 14% of its workforce. Twitter announced it will cut one in two jobs and Snapchat one in five. Two Irish companies, Wayflyer and Intercom, are also planning to reduce their workforce. And this is just the beginning. Amazon is to let go of 10,000 jobs, while Microsoft and Intel have revised their forecasts downward for next year.

Ireland’s growth miracle, which has also helped the country to recover so well after the financial crisis, relies on foreign investment. With its low corporate tax rate of 12.5% and access to the EU market, it was uniquely positioned for companies from abroad. It has proven to be attractive for young, educated people, especially in Silicon Docks, the tech quarter along Dublin's canal. The tech sector in Ireland attracts people from all over the world due to the career prospects, sociable lifestyle and English-language environment. Northern American companies are still the most present of all, representing 70% of all foreign investment. If one takes foreign companies and their local suppliers together, they employ 500,000 in a country of 5m. This is massive.

This growth strategy has also created dependencies. Tax revenues were boosted by tech companies during the pandemic. Corporate tax revenues represented €15bn, about 21% of all revenue in 2021 and even more this year. Half of that intake come from only 10 firms, including Apple, Microsoft, Intel, Meta and Pfizer. To counter the fallout from recessions, the government is about to pay into a rainy day fund, €6bn in total.

They are also counting on the fact that their economy is diversified enough to deal with the shock in the tech sector. Ireland has offered since 2011 via its Institute for Bioprocessing Research and Training a hub for science diploma, but also bio-tech apprenticeships. This education advantage, together with the low 12.5% corporate tax rate and access to the EU, continues to play an important role. These factors are now also attracting the Chinese. Huawei announced in October that they will open their first European data centre for Europe in Ireland. The Wuxi Biologics group is also building two factories in Ireland. How will this play out with the US government and the tech companies located there? Ireland is about to find out.