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08 November 2024

Trump’s European friends

Our lead story this morning is about the likely reaction of European leaders to Donald Trump, a popularity contest for his attention rather than unity amongst themselves; we also have stories on how Trump's policies could affect oil markets; on Christian Lindner's political machinations not paying off; on Italy's own attempts to limit subsidies to Chinese electric carmakers; on Austria's difficult economic outlook due to cost and structural factors; and, below, on why a Trump presidency could turn out better for the Middle East than for Europe.

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Today's free story

Trump in the Middle East

In as much as Donald Trump is perceived as a threat in Europe, he is seen as a chance in the Middle East. As a friend of Israel and a friend of the Arab world, he is uniquely positioned to mediate a peace deal for the region. Trump owes his landslide victory to the many Jewish Americans and Arab Americans who voted for him. They have hope in him that he could bring an end to these wars at last.

Trump could well become the peacemaker in the Middle East if that is what he choses to pursue in his second term. His transactional style in foreign policy is well understood throughout the region. With his frank talk he ruffled feathers but also defended many of their leaders against contempt in the western world during his first term.   

His personality makes sure that everyone understands who is the boss and that there are concrete results at the end. The many trips of Anthony Blinken without achieving anything tangible there would be unthinkable under Trump. After all, it is US security and military equipment that Israel and Arab states want. If the US is to invest into this region, there has to be a return for the US in it too, and a peace deal could just be that price to pay. Trump will not accept being dragged down by the minutiae of war diplomacy, as happened to Joe Biden’s administration.

Trump already said that he wants the wars to be over by the time he takes office in January. It gives Israel some time to wrap up its military operations in Lebanon and Gaza on its own accord. This is a friendly warning.

Trump comes to the scene with ample credibility. Israel never had a more supportive US president during his 2017-2021 presidency. Back then he recognised Jerusalem as Israel’s capital by moving the US embassy from Tel Aviv and recognised Israeli sovereignty over the Golan Heights. He withdrew from the Iran nuclear deal and brokered the normalisation between Israel and four Arab States without the necessity of recognising a Palestinian statehood.

At the same time, Trump enjoyed doing business with the Gulf States and Saudi Arabia, despite international human rights concerns. These countries had something to offer Trump, and they wanted to buy military equipment from the US. They all had an interest in curbing Iran’s influence in the region and were to gain from normalisation with Israel. Trump has supporters amongst autocratic leaders in the region, amongst them Egypt’s president Abdel Fattah Al-Sisi.

Trump comes back to the White House with personal credibility too, now that he has not only a Jewish but also a Lebanese son-in-law with an influential family behind him. During his election campaign he met with leaders from Jewish but also from Muslim communities without ever being called anti-semitic. He is his own man who forges deals that others find impossible.

What will his role in the Middle East be? In his first term, Trump cemented Israel’s rights and backed its interests in the region. Could his second term now be about recalibrating this by recognising Palestinian rights as part of a peace deal? The chances for a peace deal were never better. The senior leadership of Hamas and Hezbollah is gone, and Iran is weakened. All Arab States are supporting a peace deal or at least are not against it. This consensus line up never happened before. Recognising Palestinian sovereign rights is their condition for normalisation. It is now Israel’s turn to decide what price they are willing to pay for peace. Trump could be the deal maker in this historic moment.

7 November 2024

Kaput

On the day Donald Trump was elected, the German coalition collapsed, a decision that condemns the country to a political vacuum that could last for 8 or 9 months. If you want to know how Europe reacts to Trump, this is your answer: no statesmanship, no coordination, and pettiness. Annalena Baerbock, the German foreign minister, put it in a nutshell when she said that this was a bad day for Europe. She was not referring to Donald Trump, but to the small-mindedness of a German political system interested only in itself.

Olaf Scholz yesterday fired Christian Lindner as finance minister. The decision marks the formal end of the three-party coalition. Lindner was fired after refusing to accept Scholz’s order to declare a state of fiscal emergency that would allow the government to bypass the rules of the debt brake. Scholz went on national TV to declare he wants to set aside money to support Ukraine, and for an increase in defence spending that has now become necessary after the victory of Donald Trump. He also said he would not accept a trade-off with social policies. This will be the theme of the election campaign - and the new dividing line in German politics.

The decision means that Germany will not have a 2025 budget unless Friedrich Merz, the opposition leader, changes his mind. The FDP insisted that the increase in defence spending should be funded from the social budget. That was a red line for the SPD and the Greens. This is also the dividing line in Germany, the line around which the next election will be fought. How do we fund the increase in defence spending? German opinion polls – more on this below – do not reflect this like development. The only two ways to fund higher defence spending is either inside the budget or outside. The SPD will not accept a redirection of social money to defence. Germany is a high-tax country. There is not much scope for tax increases either. The social budget is the ultimate red line around Scholz’ support for Ukraine and for his commitments inside Nato. The CDU and the FDP continue to place their red lines around the debt brake itself. Since neither SPD/Greens nor CDU/CSU/FDP are large enough to form a government amongst each other, they would have to form a coalition. A grand coalition between CDU/CSU and SPD would face the same unsolved dilemmas as the current one.

Scholz is a most absent communicator, but last night he gave a feisty speech, a taster of what this election campaign will be like. This election will flush out policy positions that are not openly discussed. German politics is caught in a trilemma of social spending, defence spending, and the fiscal rules. The political fight will be about what to sacrifice. This could be one of those campaigns like 2002, 2005 and 2021, with the potential to upend all early forecasts because big political themes intrude.

Scholz has one procedural trump card up his sleeve. He can determine the timing for the next election. He is pushing it back. He said the priority now is to pass the budget. He is daring the CDU to veto a rise in defence spending, and a rise in financial support for Ukraine. He will then call for a confidence vote on 15 January to pave the way for elections mid-to-late March. This would be six months before the envisaged date. He would stay in power after the elections until a new government is formed, which could take months, depending on the result. The shortest time frame would be June or July for a new government to be in place, but this process might drag all the way into the autumn.

The bottom line is that even when faced with a US president who has promised to reduce his commitment to Nato and to impose a 20% tariff on European manufactured goods, European politics remains stuck in petty discourse. The euro crisis disproved the theory that if only the threat is sufficient large, Europe will unite. We have not seen anything since to suggest otherwise.

We would like to end with a small announcement. It is a coincidence of timing that the coalition would formally end on the publication day of a book, written by one of us on the decline on the German economy. It is entitled Kaput, published today by Swift Press in the UK. The book is about the decline of the German economic model and the deep reasons why German politics finds itself at its current impasse. 

6 November 2024

Europe, fragmented

European election outcomes use to have some resemblance with the two party system in the US. At the end of a long election night we would have a clear winner, where either the conservative party won or the Social Democrats did, with perhaps some smaller parties in a supporting role.

These winners had proper majorities to govern. But this resemblance is no more. Over the past decade, elections in European nations produced fragmented parliaments and government coalitions had to be built, often with more than two parties. Today, the political landscape in Germany or France looks more like the Netherlands than the US, as Nick Alipour puts it in Euractiv.

Currently, nearly a quarter of EU countries have minority governments, and more than half lead coalitions with at least three parties. Electorates split according to micro-ideologies, making thresholds like the 5% one in Germany easy to surpass.

Minority governments or coalitions with three or even more parties are taking up lots of energy and time negotiating what governments can and cannot do. The outcome is often far behind their campaign promises. Snap elections occur more often. Spain has on average voted every two years during the past decade. Germany could reach the end its coalition ahead of its term, while Emmanuel Macron took a risky gamble by dissolving the National Assembly under the fateful delusion that there still is a clear majority to be won.

In Germany, the two main parties, the Christian Democrats and the Social Democrats, used to received 87% of the votes. Now they might not even make it over 50% according to Politico’s poll of polls. The number of parties increased from four to six and is set to increase further next year with Sara Wagenknecht’s new BSW party.

Throughout Europe, far-right parties emerge either as a completely new party under a charismatic leader or increase their share to become a main opposition party or a potential coalition partner. They are running on an anti-establishment and anti-immigrant platform and voters found an outlet for their frustrations. Those mainstream parties that chose to exclude the far-right from any coalition, find it more and more difficult to do so faced with dwindling votes for mainstream parties. Belgium’s elections this year just barely escaped Vlaams Belang winning in Flanders, but at federal level still struggle to form a coalition with five parties that are arithmetically the only way forward. In Austria, the FPÖ did win national elections, but Austria’s president gave the mandate to form a government to the conservatives, who came second.

Then there are minority parties, such as the farmers BBB party in the Netherlands, which rose to fame and won elections during the farmers protests. Social media has a lot to do with those flash moments that have lasting consequences for our democracies.

How to get things done in this political landscape is a major struggle that feeds frustrations. Is this fragmentation part of the destructive course in politics that needs renewal?

5 November 2024

Lindner's list

Hopeless but not serious is how we would describe what is going on in Berlin. There is no hope for this coalition. 

Christian Lindner caused the latest crisis with a provocative paper he leaked, whilst simultaneously expressing shock that it found its way into the public domain. It would be a real mistake to read this paper as a serious contribution to the debate about the German economy. We are no fans ourselves of supply chain laws and the other bureaucratic monsters both Germany and the EU legislated this decade. But Lindner’s list is an agenda of displacement activities.

The one most important reforms is not on the list. The heavy lifting would have to come from a redirection of private-sector capital flows from decripit old companies to new ones. It is politicised state-owned banks that feed the ancient-technology industrial model. Lindner is focused on bureaucracy, important but secondary.

The problem with regulation is that it flushes the wrong people to the top. James Watt, the inventor of the steam engine, was surely not motivated by a desire to observe EU emissions standards. Bureaucracy sucks the life-force out of innovation.

But bureaucracy is not the direct cause of Germany’s structural slump. It is technological decline, and a financial system that does not react to it.

The SPD tries to intervene directly by saving jobs. Lindner wants to cut bureaucracy. VW concludes that it can have less bureaucracy in Portugal and Slovakia. And the costs are lower too. ThyssenKrupp decides to shrink. The German political system ignores basic commercial realities.

If you want to excel in 21st century technologies, the priority must be to decouple the government from the banks. Start with by allowing Unicredit to buy Commerzbank. End the Sparkassen model. And back a European capital market backed by a single asset. No prizes for guessing who would oppose this the most.

4 November 2024

No, Harris did not bounce back

You could probably build a trading model that places strategic bets against volatile swings in political polling. From the data we know – and this is all we have – no candidate in the US elections has been ahead of any other candidate at any point in the entire election campaign. To a statistically illiterate person it may seem that 48 to 47 in favour of candidate A would indicate a small lead. In reality it means something else: that, based on the assumption of unbiased polling, we can infer, with a chosen confidence level, that the support for candidate is in a range around this number. The precise width of the range - often in the ballpark of 3pp either side of the number - would depend on the number of people polled and the chosen confidence level. The midpoint of the range, the number published in the media, is of no particular significance. What can reduce the range is a large sample. This is why exit polling is usually so successful. It also eliminates the differential turnout bias.

What distinguishes the US voting system from others is the high degree of early voting. The later polls should be better than earlier polls as pollster can ask two questions: who do you support, and have you voted already? This amounts to the reduction of one important source of bias. But you would still need to throw large numbers at it to get reliable results. In the US you would have to do this is several swing states.

The poll of polls does not solve the large-number problem. They generally perform a little better than individual polls but twenty polls of 1000 people each are not the same as a well designed poll of 20000 people.

In addition to turn-out biases, there are many other biases that are hard to control. Online polling ignores people who have not transitioned to the computer age. 

We all want to know who wins tomorrow’s election, but the fact is that we do not have the information that allows us to do this. Big data has brought us AI. But it has done almost nothing for statistical inference.

1 November 2024

Tanker trouble

The ships that carry Russian oil in violation of the G7’s price cap often go to great lengths to conceal what they are doing. A recent example of this comes to us from Finland. There, YLE news reports that spoofing, when a ship shows itself as a being in a different location from where it actually is, has been causing issues with navigation in the Gulf of Finland. Russia has also engaged in satellite jamming around its oil ports to protect them from Ukrainian drone strikes. This is another problem for the Finnish coast guard to deal with.

Spoofing is a popular tool to try and get around sanctions. Windward, a maritime technology firm, said last year that it had recorded an 82% increase since 2021 in recorded instances of location manipulation from oil tankers and dry bulk shipping. There is also some evidence to suggest Russia is doing this with their liquefied natural gas shipping fleet.

It is not the only tool that ships carrying sanctioned Russian goods have at their disposal either. Ship-to-ship transfers at sea, for instance, can also be used to try and conceal goods’ origins and destinations. In the immediate aftermath of Russia’s invasion of Ukraine, the coast off of Greece and Malta became a popular destination for doing this.

These technical workarounds underscore the difficulties of effectively meting out economic sanctions, especially on a significant commodity exporter like Russia. Experience since 2022 has shown that when a good needs to get from point A to point B badly enough, someone somewhere will find a way to make it happen. The G7 price cap has, as a result, become a bit of a joke, with Russian oil frequently trading above it as market conditions allow.

But we should also think a bit more about the economic impact of geopolitical events. Often, what you find is a sudden shock when an event hits, followed by resourceful market actors blunting the impact. Shippers can use tricks to evade sanctions, or container freighters can avoid the Suez Canal. Alternatives often present themselves.

The problem, then, is not necessarily in any particular event as a one-off. It is in the slow build-up of friction in the global economy and trading system through a succession of them. When people are shipping oil through some dubious method, or taking a sub-optimal route, or cautiously hedging their bets, there is a trade-off made. The question too is whether these events are really a one-off, or a result of underlying trends that will continue to play out over the years and decades, chiselling away at our own way of doing things.

31 October 2024

Europe's multilateral hypocrisy

Norway will ask the UN to clarify Israel’s obligations under international law. Last week Israel’s parliament adopted two laws that ban the UNRWA from their territory, which means they no longer can operate in the Shoafat refugee camp in East Jerusalem, a territory annexed by Israel. These laws make it also extremely difficult for the organisation to deliver humanitarian aid to Gaza and the West Bank.

UNRWA is most known for its disaster response in the Gaza war, but on a day-to-day basis it delivers essential social services to Palestinians in East Jerusalem, Gaza, and the West Bank. Two thirds of children in Gaza, and a quarter of students in the West Bank, rely on UNRWA for their education. It maintains a health organisation and provides essential food. It is functioning like a basic welfare service for Palestinians in the occupied territories.

UNRWA operates under a mandate from the UN General Assembly, and only the UN can shut it down. Israel can close its operations from its own soil, however, and so it did, with no alternative to take over those essential services. The two laws are to come into force in 90 days. Norway now wants the ICJ to clarify Israel's obligations as an occupying power to facilitate humanitarian aid to Palestinians from international organisations, the UN and the member states. The crucial question is, what happens if the UN court rules against Israel’s laws and Israel ignores it?

There are words of condemnation and indignation from the EU and the UK. The US indicated that there will be consequences. But as long as none of the western states are ready to map out what those consequences actually will be for Israel if it pursues down this road, those statements are empty placeholders to buy time. It is an astonishing act of caution after western nations so quickly decided on far-reaching sanctions against Russia only days after it invaded Ukraine.

The fact that sanctions backfired economically in Russia does not mean that they are politically dispensable. Mapping out consequences, be it in sanctions or trade, may not deter the war-faring parties from proceeding. But it raises the stakes and defends international law and its institutions. It upholds principles that apply to all, with no exception to any member country. Mapping out consequences can also help Israel to make informed choices. Sanctions worked in South Africa to end apartheid. Why not in Israel?

European nations have been upholding the multilateral system created after the second world war as one of its greatest achievements to guarantee peace and prosperity. We go to lengths to comply with rules of the WTO, even if the US and China already are doing their own thing. But it also means that we need to defend those institutions when necessary. This is about the integrity of our own foreign and trade policies.

If we cannot fathom to act against violations of human rights, what is the point of those human rights if political interests can override those rights? Inaction risks discrediting these institutions by not following up words with deeds. The EU cannot rule by power, as the US or China do. That is why Europe’s best chances to prosper were under a multilateral system that benefited us over the past decades. Without those rules we are back to picking sides in conflicts, exasperating rather than diluting those.

Norway has a choice now: it can lay out what consequences Israel can expect if the court rules against its laws. This way it would set a precedent for other UN countries. Or it can just keep on kicking the can down the road with inconsequential diplomatic talk, a legal opinion here or a UN vote there. Israel creates facts with its military operations, and by banning UNRWA. Europe needs to show that it is serious about backing up its words with deeds.

30 October 2024

Take my migrants and I back you

Migrants have become part of the foreign policy tool box in the EU and its member states. For the Europeans it is about the rights to return irregular migrants either to where they came from or to a third country. It is also to encourage countries in Africa and the Middle East to prevent migrants from crossing over to reach Europe illegally. EU member states are willing to pay, politically as well as with money, to countries that offer them such a protection.

Off-shoring the care for irregular migrants to others in return for money is the new practice. Since 2016, the EU concluded pacts with Turkey, Tunisia and Lebanon for them to take back irregular migrants in return for cash and other benefits. Italy pursues its own strategy, such as the pact with Albania most recently. Spain and France have their bilateral dealings too.

The goal is to return migrants, but also to deter migrants without a chance of receiving asylum from taking the route towards Europe. The other is for EU governments to appease voters at home as migration has become one of their major concerns.

Such a carrot-and-stick approach causes reputational damage in the world, however, especially for former colonial powers. It also puts their relations with third party countries on a morally corrupt basis, where power is not always settled by money.

Take Morocco for example. This is a well-developed country that does not depend on aid. In recent years, Morocco slowed down its intake of Moroccans that were refused asylum in the EU. Spain, in particular, had little success with returning migrants back there. An EU study, which analysed 34 countries and their deportations, finds that in 2023 Morocco accepted only 8% of return decisions issued by EU states for Moroccan nationals. And this as Morocco, amongst all African countries, has the highest number of citizens departing towards Europe. Overall in 2023, the 27 EU countries succeeded in returning only 23% of irregular migrants, according to Eurostat data.

The EU calls on more cooperation with Morocco. Emmanuel Macron understood that this needs another approach than just a cash-for-migrant deal. Trade restrictions, as advocated by the interior minister Bruno Retailleau, would hurt the French economy too, as Morocco is the largest trading partner outside the EU for France. There had to be another quid-pro-quo. In his recent state visit, Macron offered what the Moroccans wanted to hear: France puts its weight behind Morocco’s plan for Western Sahara. The plan gives full sovereignty to Morocco in the contested desert territory on policy issues such as foreign affairs, currency, customs and defence. Even if this means tensions with the Algerians, who support an independent faction in the Western Sahara, so be it. But at the backbone of this deal are migrants.

Foreign policy based on migrant concerns puts the EU on the defensive side. It is short-sighted with no considerations of its long term effects. It also impacts how Europe can hope to attract migrants to counter its shrinking population and economic capacity.

29 October 2024

The economic costs of war

Israel’s multi-front war cannot go on like this. There is no prospect that it can be won. Israel killed the leadership of Hamas and Hezbollah, yet its organisations continue in a guerrilla type fashion to inflict daily losses on the Israeli army. Israel is certainly superior in the air, but its military forces are not made to win the war on the ground. Israel had a golden opportunity to strike a ceasefire deal with Lebanon after the killing of the Hezbollah leadership. That moment is gone. Now Hezbollah wins in the next phase of this war, by demonstrating that they resist whatever Israel is throwing at them. They could end up being celebrated as heroes, quite the opposite of what Israel wants to achieve.

The economic impact of this war is felt not only in Gaza or Lebanon, but also in Israel and its Western allies. The Atlantic Council just published an extensive report mapping out some of the costs of the war. The report was written by Perrihan Al-Riffai, an economic expert at the Qatari central bank and adviser to the IMF. Those costs are rising by the day, but it is worth reminding us of what has been lost due to the war.

First we have the direct costs of the war for production processes. Some processes can no longer proceed in combat zones, or because labour is being employed by the military rather than in the economy. Demand too is either reduced to essentials in war zones or reduced. Growth and investment rates have been revised downwards by the Israeli central bank as the war progresses.

War takes a huge toll on humans. There is displacement of people. War means financial insecurity, food insecurity and poverty. Brain drain will increase in Israel as the war continues.

Whole sectors in the economy collapsed. Tourism in the region is down. This is a crucial pillar of the economy in Lebanon, which has been in an economic crisis for the past 5 years. The re-routing of container ships to avoid attacks in the Red Sea raised prices for the goods it transports. It deprives Egypt of income in its ports, one of its primary incomes. The longer the war goes on, the more it affects the wider region and beyond through the hike in commodity prices, supply chains, and fiscal costs for military expenses and support.

The destruction of housing and infrastructure will need decades to rebuild. This is a cost that the EU has not yet accounted for, focusing mainly on Ukraine and its reconstruction. Who will shoulder that bill depends on what will happen to Gaza after the war? Norway and some Gulf states have pledged $3bn over ten years last December. But this won’t be enough given the level of destruction today. The EU and Germany, as the largest contributor of humanitarian aid to Palestinian territories, will have to play their role there too. The US and Israel could be called upon to contribute.

War reduces the prospect of investment in the affected area. It has educational costs. The young, instead of driving the economy forward or being in education, are on the battlefield, or trying to survive as displaced families away from their homes and livelihood.

An escalation of the war will affect global commodity markets. The re-routing of shipping away from the Red sea and oil production cuts from OPEC+ countries have inflationary effects and cause supply chain disruptions. Rising trade restrictions could also exacerbate the negative spillovers of this war.

The global political failure to broker a permanent ceasefire or to construct a plan for the day after will entrench macroeconomic vulnerabilities and political instability in the region, with spillovers to the rest of the world. It will cause inter-generational fractures with the children and grandchildren, in which today’s generation will find it difficult to explain why this war was allowed to get to this point.

28 October 2024

Social Democrats win in Lithuania

The second round of Lithuania's elections confirmed the victory of the Social Democrats, securing them a majority for a coalition government with two other opposition parties. With nearly all votes counted, the Social Democrats ended up with 52 out of 141 seats, 39 more than in 2020. The ruling conservative party Homeland Union was down by 22 seats to 28. A completely new populist party, Dawn of Nemunas, managed to get to come third with 20 seats.

Social Democrats are set to form a coalition with Union of Democrats, For Lithuania, an ideologically mixed party that includes former members of almost every previously existing Lithuanian political party. A third coalition partner would be the Lithuanian Farmers and Greens Union. Together the three parties would have 74 seats, which gives them a narrow majority in the 141-seat assembly. There are no changes in foreign policy to be expected from the new government according to initial reports, but plans to tax the wealthy to finance more health and social service expenditures. All three are pro-European groups. Vilija Blinkeviciute, MEP and leader of the Social Democrats, has yet to declare whether or not she would be the next prime minister of this coalition.

The election also saw two new nationalist parties emerging out of nowhere to win 21 seats together. The largest one is Dawn of Nemunas, founded by firebrand Remigijus Zemaitaitis in November 2023. The party rose to fame in the presidential elections in May with Zemaitaitis as one of the candidates who made headlines with his antisemitic rants. Zemaitaitis had eventually to resign from parliament in April after the Constitutional Court found he broke his oath by stirring up hatred against Jews. Both the Social Democrats and the Christian Democrats promised a cordon sanitaire. But Zemaitaitis and his presidential election campaign earlier this year helped them to prominence, and to a third place in the general elections.

There also has been some disappearances compared with the elections in 2020. The Labour party, Freedom party, and the Lithuanian regional party did not win any seat in the Seimas assembly this time. In total, 10 parties made it into the assembly, one less than in 2020.

But the emergence of nationalist and populist parties means that Lithuania, like many other EU countries, will govern with a slim majority in a much more unruly assembly.