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23 November 2020

German Greens prepare for power

Our main story is on the tough positions adopted by the German Greens on emissions cuts and the minimum guaranteed income ahead of next year's elections. In other news, we write about Berlusconi's offer of support to Italy's governing coalition; on the possible sale of Monte Paschi di Siena to Unicredit; on EU cities' competition to host a new cybersecurity centre; on how the insurance industry seeks to reduce pandemic-related risks; on Erdogan's sudden, and suspicious pro-European turn; and on whatever happen to re-shoring, a persistent French pipe dream.

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EU cities battle for cybersecurity supremacy

Europe’s fragmented approach to Huawei's involvement in 5G development is back under the spotlight, as a host of European cities compete to host the EU’s planned European Cybersecurity Industrial, Technology and Research Competence Centre. Financed by Digital Europe and Horizon Europe, the project is expected to pool resources and centralise Europe’s cybersecurity technology and industrial ecosystem. Brussels, Munich, León, Vilnius, Luxembourg, Bucharest and Warsaw have all thrown their hats in the ring. Spain's and Poland’s bids have received the most media attention.

Spain is the only southern EU member state to have submitted a bid, and its candidate city, León, is the only non-capital in the group. The Spanish government cites many factors in its favour: León has been home to Spain’s National Institute on Cybersecurity since 2006, it is already home to 20% of the country’s industrial cybersecurity laboratories, and it is connected to the country’s expansive high-speed rail network. Spain's bid focuses heavily on 5G development, and the government argued last week that being the first country in the EU to deploy 5G internet gives Spain a competitive advantage. The country's upcoming 5G toolkit will also be aligned with the EU toolbox on the security of 5G networks, released in January this year.

But 5G could be a sticking point because incumbent operator Telefónica’s existing 4G network depends entirely on Huawei equipment. After intense lobbying from the US government, Spain awarded 5G contracts to Ericsson and Nokia in September this year, under plans to make 5G available to 75% of the population before 2021. Telefónica has said that a new strategy to drastically reduce the amount of equipment it buys from Huawei will phase the company out of next generation networks by 2024. But Foreign Policy reported in January this year that no matter how much Washington complains, Telefónica will continue to have Huawei technology in its 5G core, where the most sensitive information is stored.

Nicolas Pascual De La Parte, Spain’s special ambassador for cybersecurity and hybrid threats, told Euractiv that Spain is in favour of free, secure, inclusive and fair access to cyberspace, and that cyberspace should not segregate international communities, indicating the country wants to avoid choosing between the US and China.

In contrast, Poland has adopted a much stronger anti-Huawei stance. In September the Polish ministry of digital affairs published a draft cybersecurity law proposing new risk-assessment criteria which could result in a de-facto ban of Huawei equipment in 5G infrastructure. In the same month, Poland signed a joint declaration with the US to collaborate on 5G security, which emphasised protecting next-generation networks from disruption or manipulation, and ensuring the privacy of individual liberties of American and Polish citizens. US Vice President Mike Pence said the declaration set a vital example for the rest of Europe. Huawei wrote to the EU to complain that Poland’s plans are contrary to the fundamental principles of the EU.

Both countries’ 5G positions could put them out of the running to host the new cybersecurity centre. We note that Lithuania appears to have grasped another important issue. Its foreign affairs ministry wrote that Vilnius' bid has a clear edge over other member states’ proposals because it is more cost-effective. According to the Lithuanian proposal, Lithuania’s national contribution to the centre would cover five years of rent and maintenance for its proposed location in the Vilnius TV Tower.

The European Commission will assess each bid before 2 December and present them to EU ambassadors one week later. The winning bid will require unanimous approval. 

20 November 2020

Forgive us our debts

One of the highlights of daily perusals of the European press is finding conservative German commentators discussing Italian economic ideas. This morning we noted an outraged news story about a suggestion by David Sassoli, the president of the European Parliament, to forgive all pandemic-related debt. We can sense the blood pressure of FAZ readers rising to life-threatening levels. 

The author quotes him as saying that governments should spend as much money as possible, as quickly as possible. And that the ECB should then cancel all debt related to Covid-19.

This is what conservative Germans always feared would happen. It is the sentiment that lies behind each and every euro-related lawsuit by assorted professors: that an Italian would come along one day and commit the ultimate sin.

But it gets better. The author says that this idea is also supported by the Catholic Church. The role of forgiveness is central to Catholicism. In this case forgiveness is not by God, but the next best thing we have on earth: the central bank.

19 November 2020

A novel twist for EU/UK talks

We picked an interesting snippet of information hidden deep in an article by FAZ about the ratification procedure for the EU/UK trade deal. An emergency plan is being drawn up for provisional application of an EU/UK agreement before full ratification by the European Parliament. This would mean that the negotiations could, in theory, continue all the way until the end of the year, with parliamentary ratification postponed until 2021.

We reported yesterday that the EU is considering the possibility of classifying this agreement EU-only, as opposed to a mixed trade deal. That would avoid the need for ratification by national parliaments, but does not get around the timetable problem. National ratification would not have to take place this year in any case. But, so long as the EU insists on the EP ratifying the deal before the end of the year, the timetabling problem persists. 

We think this discussion will proceed in stages. For now, we are still on track for parliamentary ratification this year. If the outline of a deal becomes visible, say, early next week, it may be possible to conclude the agreement by the end of the month. The EP may either ratify at a plenary on December 17 as previously foreseen, or reconvene for an emergency session between Christmas and New Year. If a deal is not concluded by early December, the EU might be seriously looking at provisional application. The legal position is unclear, at least to us. It has never happened before, but that does not mean it is impossible. We think the EU would want to maximise its room for manoeuvre, if only because it believes a hard deadline would strengthen its negotiating position. We are not so sure it does in reality.

18 November 2020

How to solve the budget impasse

The first reaction to an EU-level crisis is always huffing and puffing. In the case of Poland and Hungary's veto this consisted of trying to convince oneself that the two countries were bluffing. A more intelligent response would be to explore ways to untangle the recovery fund from the EU budget. The two countries have not blocked the budget itself, but the expansion of the own-resources ceiling, which is necessary to finance the recovery fund. We completely agree with Guy Verhofstadt that the way forward is an enhanced co-operation procedure. 

Here at Eurointelligence we have been advocating eurozone-level solutions. We see a strong case for a debt-financed eurozone-wide fiscal facility. But we don't see any case whatsoever for this to happen at the EU level. The enhanced co-operation procedure was been created specifically for the eurozone to forge ahead, but it hasn't been used for that purpose in the past. 

It was introduced in a restricted version in the Amsterdam treaty in 1997, but it has only been used for a limited range of policy areas like the EU patent and the European public prosecutor. The recovery fund would upgrade this instrument enormously, and it would set an important precedent: that the eurozone goes ahead without being stopped by authoritarian blackmailers or eurosceptics.

The recovery fund would meet the technical conditions for enhanced co-operation: a minimum of nine countries and no changes to the rules of the single market. It would be open to anyone who wanted to join. If the EU went down that road, the Polish and Hungarian veto would become much less credible. They could still try to block the rest of the budget. The regimes in both countries are determined to stop the rule-of-law linkage. But, with the recovery fund sidelined, the EU would be able to fight the Hungarians and Poles without risk of folding under the pressure of the pandemic. 

An enhanced co-operation is a compromise between our original idea of a coalition of the willing and the route chosen by the European Commission, which was to fold the recovery fund into the EU budget. We argued for an inter-governmental arrangement to ensure that the funds could be deployed quickly and to avoid political blackmail. The problems we feared have now occurred. If the EU sticks with the current plan, the recovery fund will face severe delays. 

An enhanced co-operation procedure could be the best of both worlds. It is the only form of legal embedding for which we could see the recovery fund turning into a formal precedent. As a facility of the ordinary EU budget it is, and will remain, a one-off money shower. There is no appetite in EU member states for a generalised increase in the size of the EU budget. But a eurozone stabilisation facility would be a different matter.

17 November 2020

Transnistria - the next conflict zone?

Have you ever heard of Transnistria? It is a region of Moldova that is de-facto Russian. In 1990 the region declared its independence from Moldova, and the rebels were backed by Russia. After two years of fighting, Moldova and the rebels signed a peace treaty. Russia deployed soldiers for a so-called peace-keeping mission, and remained there. This is the double reality they are living today. The children learn Russian in school and use the Cyrillic alphabet, not the Roman one. The region has its own army, anthem and flag. They are provided with free Russian gas supplies, and Russia tops up pensions and salaries to keep the economy afloat. They issue a Transnistrian passport, insignificant outside the region, and they use the Moldovan one to cast their votes. Ahead of the Moldovan presidential elections there was a concern that voters from Transnistria, brought to the polls in buses, could swing the elections in favour of the Russia-backed candidate Igor Dodon. This did not happen. Mass mobilisation in Transnistria, but also among the Moldovan diaspora, resulted in the victory of the pro-EU candidate Maia Sandu. 

So what next?  Without a majority in parliament, there is nothing much she can do that would challenge the status quo. But if she ever gets a parliamentary majority, this would be a game changer and Transnistria could turn into another geopolitical conflict between the EU and Russia, warns Dimtry Trenin. Are we heading towards another Ukraine scenario?

President-elect Maia Sandu vowed to pursue her ambition for Moldova to join the EU. If she gets a parliamentary majority, will Transnistria be claimed or taken hostage by Russia as some commentators suggest? Sandu's first priority is to clear up the corrupt institutions in her country. This could take a while and divert attention away from any EU accession project. It could also be used by either side, Russia or the EU, to ensure Moldova will never be ready to join the EU. This is a long-term bet. What is clear, though, is that two of Sandu's ambitions, joining the EU and uniting the country, won't happen with Transnistria. 

16 November 2020

Muddled thinking on EU defence

Probably the least helpful proposal you can make to help the EU move in the direction of strategic autonomy is to call for a European army. The problem is not only that it sets the bar too high, which it does. It also diverts attention from the security discussion the EU needs to have instead. This would be to accept that the EU has autonomous strategic interests, and to leverage existing non-military instruments in their pursuit.

Welt am Sonntag reports that a working group of the SPD in the Bundestag has come up with a 12-page paper to create a 28th EU army, subordinate to the European Commission and with a designated European defence commissioner as commander in chief.

This is one of those ideas where you don't know where to begin dismantling it. Our first thought was this: are they trying to do to defence what they did to the eurozone? Create a dysfunctional system in the vague hope that future generations will fix it, except that this time we are using live ammo and killing people? Have they considered what might happen if the European Commission charged into battle and lost? The British are still traumatised by the Charge of the Light Brigade in the Crimean War. An army is not an inter-institutional working group that meets on Tuesdays.

One of the main lessons of the monetary union is surely that you need to create systems that are robust and flexible enough during crises, and that carry broad political support. The fiscal rules nearly destroyed the eurozone through mindless pro-cyclical application of austerity in the middle of a crisis. 

The paper also reveals a shocking lack of understanding of the EU's security priorities in the early 21st century. The biggest threats to our security right now do not stem from invasion by a foreign power, or our refusal to participate in a war in the Middle East or Africa. Our list of priorities would include the following: defence against cyber threats from Russia and China; a restoration of the Iran nuclear deal; the co-ordination of the fight against terrorism; the push against empire-building in our neighbourhood; and a defence of EU companies and individuals targeted by the US for secondary economic sanctions. It is rather difficult to think of an EU security interest for which you would need a European army.

13 November 2020

The palm oil problem

The EU’s upcoming environmental due diligence legislation is a big problem for companies in southeast Asia because of its implications for the palm oil industry. It will directly affect EU-Asean trade relations.

At its last plenary session, European Parliament adopted a resolution calling on the EU to introduce mandatory environmental due diligence legislation aimed at halting EU-driven global deforestation. Three days later, the European Commission opened a consultation period for sustainable corporate governance, which includes mandatory due diligence legislation that is expected next year. The legislation will require companies to prove the products they sell in the EU do not drive global deforestation. It is being billed as an important component of the European green deal.

This is a problem for EU-Asean relations because two of Asean’s largest economies, Indonesia and Malaysia, are also the world’s largest palm oil producers. Palm oil is used in thousands of consumer products. Palm oil cultivation is driving deforestation in Indonesia, Malaysia and Papua New Guinea, although estimates of its environmental impact vary: a 2017 EP report asserted that 40% of global deforestation is caused by a shift to large-scale oil palm monoculture plantations, while the European Palm Oil Alliance reports this figure is closer to 2.3%.

Palm oil cultivation has become a major problem, particularly for relations between the EU and Indonesia, the world’s top producer. The EU has already announced plans to phase out palm oil imports over the next decade, following a protracted dispute with Indonesia over biofuel produced from palm oil, which saw the EU impose anti-dumping tariffs ranging from 9 to 23% between 2013 and 2018.  

As Josep Borrell wrote, the EU and Asean have one important thing in common – the will not align with China or the US in the growing strategic rivalry between them. The EU is seeking stronger ties with Asean, and its first priority as it moves to do this will be new trade deals. A deal with Indonesia would be a big step forward: with a population of nearly 270m, Indonesia is the largest Asean member, and it has recorded a consistent trade surplus with the EU over the previous decade. 

Indonesia and the EU have been negotiating an agreement since July 2016, and palm oil is a major sticking point. In December last year, Indonesian trade officials told the EU that if there is no palm oil, there’s no trade agreement. The EU’s former trade commissioner, Phil Hogan, has also said there would be no deal until the issue is resolved. New due diligence legislation is unlikely to end the stalemate.  

12 November 2020

Orbán's facts on the ground

Viktor Orbán's threat to veto the entire EU budget package is accompanied by a lot of political action that is going on in Hungary right now. Judit Varga, his justice minister, has introduced a series of constitutional changes. Each of them will trigger rule-of-law disputes with the EU. We are a little concerned about European media complacency on Orbán's budget veto threat, because we see him creating facts on the grounds. FAZ writes this morning that Orbán is bluffing because Hungary would be one of the big beneficiaries of the recovery fund. We are not so sure.

The most contentious amendment is an anti-LGBT one, stating explicitly that the mother is a woman, the father is a man. It will add further restrictions for singles and gay couples adopting children, and it will confine gender transition to adults. This is the precise wording:

"Hungary protects the right of children to self-identity according to their gender of birth and ensures education in accordance with the values based on Hungary's constitutional identity and Christian culture."

Another amendment reforms the electoral law. This one is more complicated to read from the outside, but we note that couple of people on our Twitter timeline who are familiar with this material are saying the amendment would restrict the ability of opposition parties to form joint lists. 

Another amendment concerns transparency rules regarding the use of public money. We have not studied this one in detail either, but we would be surprised it did not raise concerns about kleptocracy.

We assume that all of these constitutional changes constitute potential rule-of-law disputes with the EU, the kind the current budget proposals are designed to address. It will be Orbán's negotiating goal to exempt any existing constitutional laws from rule-of-law disputes. We expect that the eventual compromise will be very similar to the fines in the old stability pact: language that includes rule-of-law sanctions as lofty principles that are never to be applied in practice. 

11 November 2020

Diplomacy is not a dating network

Make an observation that is vaguely plausible, consistent with your deep beliefs, and then extend it into the distant future. This is the foundation of much political punditry, and it is how journalists concluded that the Biden presidency would leave the UK even more isolated. They treat diplomacy like a dating network, and become obsessed with things like who gets to talk to Joe Biden on the telephone first.

In the real world, diplomacy does not work like a dating network. It is more profitable to look at foreign policy from a perspective of revealed preferences about interests. Helmut Kohl said awful things about Mikhail Gorbachev before the two struck a strategic partnership. It was driven by interest. The personal relationship built on that, later. 

It is impossible to predict future personal relationships between people who have never met. But we can say that the UK is closer to the US position on many foreign policy issues that matter to Biden. We know that Biden is planning to take a tougher line on Russia than Trump. So is the US Congress. On this issue, there is more conflict potential with Germany than with the UK. The UK position is also more closely aligned with the US on China than the more diffuse positions of EU member states. 

The one issue that could become thorny in US/UK relations is Northern Ireland. The read-out of the phone calls Joe Biden held with the leaders of the UK, France, Germany and Ireland yesterday was mostly superficial, but it did mention the Good Friday Agreement. Depending on how the next few weeks go in the EU/UK trade talks, there is indeed a potential for conflict. We think that Johnson will be wise enough to compromise on the contentious sections in the internal market bill. But, by the time Biden is inaugurated, we will already be in a different phase of the EU/UK relationship: managing the consequences of what has been agreed, or not agreed.

On trade, we think it is too early for informed speculation. There is too much uncertainty about the make-up of the Biden administration and Congressional majorities. But on this issue, too, it may be easier for the US to reach a deal with the UK. 

10 November 2020

Transatlantic delusions I: Defence

One of the most interesting sections of modern political science is the analysis of how certain stories come to be believed by everybody, and then suddenly hit a wall. Austerity was one of those. We expect a similar fate to be met by another much older narrative, the fairy tale of the good old transatlantic relationship. David O'Sullivan, the EU's former ambassador to the US, has a well-argued comment in the Irish Times in which he warns the EU that it, too, will need to do its bit to revive the transatlantic relationship. Joe Biden is not going to do it for them. That illusion is already spreading in Brussels, like the austerity consensus did in the early part of the last decade. We noted a triumphant tweet by Donald Tusk, who sees Biden's narrow victory as the end of right-wing populism. Biden will pose a massive challenge for the EU for which it, and certainly Tusk and his friends in the EPP, are unprepared. 

O'Sullivan argues that Biden insists on burden-sharing within Nato. We presume in a different style than Donald Trump and with different intent, but not with any less urgency. O'Sullivan makes the point that the transatlantic alliance and strategic autonomy are interdependent. We would add that this is the critical point, the one the transatlanticists in Germany do not see. We reported last week on Annegret Kramp-Karrenbauer's dismissal of European strategic autonomy - which she framed as an opposite to good transatlantic relations. This is where the transatlantic shock waves will hit the transatlanticists the most. Transatlanticism has to make the transition from a military-dependency culture towards a military partnership. That will be the big European challenge of the Biden presidency. We note an inverse relationship between the tendency to gush about Biden and the willingness to do what it takes to make a relationship with Biden actually work. 

What we absolutely do not see is a return to the good old days of transatlantic relations, where the EU does not have to pull its weight and governments can reap the peace dividend without spending a reasonable share of GDP on their own defence. This has been the transatlanticists' delusional agenda.

O'Sullivan also addressed another European delusion: the ability to forge close trade relations with the US without bringing agriculture into any trade agreements. The EU will need to work together with the US on the taxation of global digital companies, and it will need to be co-opted into a joint strategy to confront China. Do we see France compromising on agriculture? Or Germany willing to sacrifice exports to China? Trump's defeat is likely to expose a lazy narrative that has built up in Europe: that the decline in the transatlantic partnership is all Trump's fault. The substantive threat is European weakness and its persistent collective action problem. It would be very foolish to rely on a strategy that critically depends on Biden ushering in an age of forbearance.

O'Sullivan is, of course, more diplomatic than we are. But this is essentially what he is saying. We see no chance whatsoever that the EU will deliver even a small portion of what O'Sullivan is demanding.