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24 September 2021

What to watch out for on Sunday

In our main story we offer a guide to Sunday's German elections, and how to interpret early results; we also have stories on the energy crisis that is now taking on pandemic proportions; on Ireland offering a deal to the EU on corporate taxes; on Sir Keir's not quite so big ideas; on how the EU does not quite understand digitalisation in all its dimensions; on, below, on an egregious case of over-regulation.

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Today's free story

EU tries to ban lightning. Good luck.

We read in Suddeutsche Zeitung first that the Commission is now ready to impose a unified charger on all electronic devices, including of course mobile telephones. This is consistent with the EU’s attempt to seek global power through regulation, even in industries Europe has long abandoned. The thinking is that 500m of the worlds wealthiest consumers clearly have some muscle to counter high tech oligopolies. Or do they really?

We have been critical of the EU’s attempt to become the global super-regulator in industries in which EU companies are at best peripheral actors. In the past, product regulation was never primarily done for the consumer, but to provide a level-playing for producers, within reason. Since today’s high-tech producers are mostly American and Asian, strategy has shifted. In the case of the now mandated USB-C charger cable, it has probably met its nemesis.

The Commission said the idea is to reduce electronic waste. It had given the industry time to come up with the solution for the electronic charger problem, but to no avail. Apple uses the lightning charger for its phones, while most Asian manufacturers of Android phones use USB-C. As users of too many electronics gadgets ourselves, we, too, would welcome a reduction in the variety of charger cables. But our experience has been that the main problem is the reliability and longevity of USB-C cables, whose lifespan compares unfavourably with fresh dairy products.

In any case, we agree with Apple, unusually for us, that this directive would stifle innovation. There have been several USB standards over the years. No standard has ever been final. A next-generation product might require a technology that does not currently exist, and that may not be deliverable in the confines of the USB-C socket. What will happen is that the European consumer could end up with dumbed-down product versions or, more likely, resort to the unregulated grey market.

23 September 2021

What happens at EU's eastern borders?

A humanitarian crisis is unfolding at our doorstep as migrants entering from Belarus are stuck at the EU's eastern borders, with first reports of death by freezing and exhaustion. 

Alexander Lukashenko knows immigration is where the EU is at its most vulnerable, and has resorted to abusing refugees as a weapon in this hybrid war. Migrants are trapped at the borders of Lithuania, Latvia and now Poland, unable to legally enter the EU nor to go back into Belarus.

Poland looks at the refugees predominantly as a security threat along its 400km border with Belarus. Film footage shows Belarusian military vehicles dropping migrants off near the barbed wired borders. Belarus stands accused of flying in tens of thousands of Afghans, Somalians and Iraqis, wanting to reach Germany via Latvia, Lithuania or Poland. There had been 4000 attempts to cross the border with Poland in September alone. The Polish parliament authorised pushbacks that still have to be signed off by the senate and president. Frontex is engaged in Lithuania and Latvia, but Poland has so far not requested assistance, according to Euractiv sources. 

The humanitarian crisis is likely to get worse with the onset of winter. What exactly happens to those refugees is hard to tell. Poland sealed off the region by declaring a state of emergency. No NGOs or media can enter. Der Standard reports that food provisions from locals were blocked by border controls, migrant contacts with human rights lawyers via megaphone interrupted by roaring engines of their military vehicles. 

This is not a crisis for Poland, Latvia and Lithuania alone. Without an integrated strategy that includes humanitarian and security aspects, the EU, too, will find itself trapped by its own contradictions. 

22 September 2021

After the debt brake: the inflation brake

There is a category of ideas that are so daft that it takes quite a bit of wit to come up with them in the first place. Yesterday we heard Markus Söder demand an inflation brake, the ugly step sister of the debt brake. The really funny thing about what he is demanding is that it is actually inflationary. He demands that German citizens are fully compensated for low interest rates through higher tax brakes for savers, and that they receive compensation for higher electricity and heating costs. He is also demanding an increase in housing subsidies for low-income households.

We don’t want to criticise politicians campaigning for social redistribution ahead of an election, merely to point out that this is how second-round inflation effects start: through full compensation for initial shocks. If you really wanted an inflation-brake, you should make sure that public-sector salaries and social contributions rise in line with the ECB’s inflation target of 2%, rather than in line with current domestic inflation rates of around 4%.

Like the debt brake, this, too, will end up doing the opposite of what it hopes to achieve.

21 September 2021

German election vega

The Greek letter vega is used in options markets to depict how the price of an option changes in response to the volatility of an underlying stock. If a stock becomes more volatile, the underlying value of the option goes up. That’s also how the German media work. Volatile campaigns sell newspapers, which in turn add to the volatility. First the media talked up Annalena Baerbock, only to tear her down in the most brutal manner. They did exactly the opposite to Olaf Scholz, who was ignored and belittled in the beginning, then worshipped. Armin Laschet was dismissed all the way through, but apparently he is now closing the gap.

Should we take it seriously? Not really. One poll that projected a six-point lead for the SPD now shows it narrowing to three points. We don’t think that anything changed at all, except that the first polls probably exaggerated an underlying trend. The message from the polls is that the race is too close to call, but Scholz has momentum. Use that information as you like. There is not much more to be said.

With inherent error margins, a three point lead is effectively a dead heat. We noted two seasoned commentators yesterday warning about a possible upset in the elections. Stefan Aust, a former editor of Spiegel who now writes for Die Welt, notes that German election results often bring surprises that are not captured in the opinion polls because people’s voting behaviour is premised on their own interests, which they don’t necessarily reveal to pollsters. The shy Tory, as they call this phenomenon in the UK.

Jaspar von Altenbeckum writes that CDU/CSU underestimated Scholz, and did not have the possibility of a red-red-green coalition on their radar screens until late in the campaign. But he writes that there is a last-minute anti-Scholz backlash going on, and that Laschet might squeeze past him.

In all these comments there is probably an element of wishful thinking, hiding the simple fact that commentators struggle to admit that they don’t know. The reality is that there are many undecideds in these elections who are making up in their minds right now whether to vote at all and whom to vote for.

We make no predictions. Our expectation is for a drawn out process afterwards. Markus Söder yesterday ruled out the possibility of a Jamaica coalition if the CDU/CSU were to come second. He doesn’t want Laschet to become chancellor, of course. But we think it is not that clear-cut. If red-red-green is arithmetically not possible, we think Armin Laschet could end up as chancellor of a coalition with FDP and the Greens, even if the CDU/CSU were to come second. But this is only one of several scenarios. The red-red-green arithmetic is going to be decisive. At the moment, all the polls suggest that R2G has a majority, but it is within the error margin. And so is virtually every other scenario.

20 September 2021

An anomaly in the Spanish polls

Read the results of most Spanish opinion polls, and you’ll conclude that Pedro Sánchez is in trouble. They will tell you that his party, the Socialists, lost their lead to the opposition Partido Popular just over four months ago and that their coalition partner, Podemos, are treading water. Based on their predictions, if an election were held tomorrow, winning it would be tricky.

Not so, according to one major pollster. The Centre for Sociological Investigation, CIS in Spanish, put the Socialists nine percentage points ahead of the PP in its latest poll. By contrast, the latest average from Europe Elects, a polling aggregator, has the Socialists four points behind the PP. And this isn’t a new trend. The CIS has recorded a higher Socialist voting intention than the comparable aggregated average for some time.

A weird opinion poll isn’t necessarily a wrong one. The prime example of this was YouGov’s polling ahead of the UK’s 2017 general election. It correctly predicted a hung parliament when virtually every other poll forecasted a clear Conservative majority. But some believe that the CIS’s numbers are fishy.

As ABC alludes to, the suspicion is because José Félix Tezanos, the current president of the CIS, is a Socialist. His appointment as head of the public research institute in 2018 was controversial, and harsh opposition critiques pressured Tezanos into stepping down from a role on the Socialists’ executive. Right-leaning Spanish dailies, like ABC, still routinely refer to the CIS surveys as Tezanos polls.

The Socialist lead in the CIS polls has also stayed robust despite recent events which most analysts, including us, view as having been damaging for Sánchez’s government. July’s CIS poll, which came after Sánchez’s controversial pardon of jailed Catalan separatists, still gave the Socialists a healthy 5 point lead. And the CIS did the fieldwork for its latest poll during a serious, and still ongoing, electricity crisis that we discussed last week.

Maybe it’s possible that Spanish voters are much more forgiving of Sánchez and his government than we, or most others, would expect. But it’s more likely that this is a cautionary tale, reinforcing a point that we’ve made time and again: don’t read too much into individual polls. Our opinion is that, on the balance of probabilities, anyone who divines predictions about the next Spanish election from the CIS numbers is going to be very wrong indeed.

17 September 2021

The new Blue Card

A rare, small bright spot in the EU’s struggle to work together on migration came two days ago. The European Parliament passed a directive to change how the EU treats highly skilled non-EU migrant workers with the European Council’s provisional go-ahead. With the Council’s formal approval, it will be the first new legislation that the EU has agreed on immigration since 2016.

The directive reworks the blue card scheme, which the EU introduced in 2009 to boost highly skilled migration as an alternative to national work permits. The EU and its member states fretted about needing more highly skilled migrant workers as far back as 2000, when Germany introduced a green card for IT professionals. But these attempts have largely failed. The blue card itself has seen a low take up. Less than 40,000 were issued in 2019.

The changes to the blue card do make it better. Steve Peers writes that there are some important new features. Three of the best are fast-track options for employers chosen by member states, allowing family members of the cardholder to live and work in the same country, and validity for highly skilled refugees and asylum seekers. Moving from one EU country to another with the card will also be easier.

The new scheme helps clear some bureaucratic hurdles, deals with the family reunification problems that contributed to the failure of Germany’s green card 20 years ago, and partially tackles underemployment among highly skilled refugees. But there are still major obstacles when it comes to highly skilled migration that it cannot address.

Sona Kalantaryan talked about a few of these obstacles in her look at the blue card changes, but four of them stand out to us. The first two, language and low wage premiums, will be impossible for the EU to resolve. The EU cannot just turn itself into an English speaking entity with higher wage premiums. The other two, non-recognition of foreign qualifications and closed professional networks, are more within the EU’s gift. And it is these that made Syrian or Afghan doctors and engineers working as taxi drivers or supermarket checkout workers after they come to the EU as refugees.

There are solutions to these problems out there, like a European qualifications passport for refugees that the Council of Europe is piloting with several EU member states. Rolling out something like this, executing it well, and making sure it is widely recognised in member states would probably do more to bring highly skilled migrants into the workforce than the new blue card.

16 September 2021

France left out of new military alliance

A new military alliance between the US, UK and Australia was announced last night, a thinly veiled counter move to an increasingly more assertive China in the Indo-Pacific region. Under the acronym Aukus, the three countries plan to intensify their collaboration on key technologies like artificial intelligence, cyber, quantum, underwater systems, and long-range strike capabilities. Over the next 18 months they will also consider the possible transfer of sensitive technology to Australia to run nuclear powered submarines.

This new Aukus deal will be a blow for France. Australia will abandon a $90bn submarine deal with the French Naval Group to acquire American nuclear-powered submarines instead. The French deal, signed in 2016, was in trouble for some time over cost implosion and delays. The blame is not on the French side alone, Australia's industrial strategy had its share in this debacle too, as explained by the Sydney Morning Herald. Australia only had six submarines and was to get 12 traditional submarines under the French contract. Now they go all nuclear with US submarines to ramp up their presence in the Indo-Pacific.

The new alliance will have consequences for Europe. With the UK out, France rediscovered its role as the leading nation in the EU when it comes to military matters. The submarine order blow will certainly weigh on the Franco-British resentment scale. Les Echos already wrote this morning that the French have to pick up the bill for this new alliance to counter China. The new alliance is likely to shake up foreign and military planning for the EU too. 

Submarines are a vital military capability in navies. Modern submarines can operate under the surface undetected for long periods of time, providing an indispensable tool for surveillance as well as a credible threat to sink surface ships with torpedoes or anti-ship missiles. China is estimated to have about 74 submarines, the US has 69 and Russia 59. North Korea is said to have most submarines in the world with 75, but the majority are believed to be outdated and regionally inferior. 

The US has shared intelligence only with the UK so far. To bring in Australia is a big step that is yet to make its way through Congress. A sale of submarines will take years, but until then the US nuclear submarines could make calls in Australia's ports to dock and refill or just show presence, writes Politico. Last year the US made a deal with Norway that allows them to dock and refill in the Artic, where the Russians are expanding their military presence. There is some strategic rethinking coming from the Pentagon.

15 September 2021

Norway's eurosceptics

Norway’s recent election has received a lot of coverage, most of it looking at climate change and how Western Europe’s biggest oil producer will adjust. What we want to focus on is a good result in the election for the country's eurosceptics.

Norway is not a member of the EU, thanks to a 52-48 victory for the No camp in a 1994 membership referendum. It is a member of the European Economic Area though, so it follows the four freedoms, and many EU laws and regulations. This is a point of contention for the Norwegian Centre Party and the Socialist Left Party, who are anti-EEA. In the election, both parties increased their vote share. A coalition between the Centre Party’s 28 MPs, the Socialist Left’s 13 and the Labour Party’s 48 would now be the simplest way for any grouping to reach a majority in the Norwegian Parliament. Labour have said publicly that this three-way arrangement is their Plan A.

The two parties have different reasons for their position. Payments to the EU, worth €2.8bn for the 2014-2021 budget period, and energy policy are more important for the Centre Party. Workers’ rights are more important to the Socialist Left. They do share, though, a philosophy that will be familiar to Brexit watchers. For both, being part of the EEA leaves too much power in the hands of Brussels and not enough in the hands of Norway and, by extension, Norwegians.

Even if Norexit became government policy, an extreme scenario, it would not look like Brexit. Leaving the EEA is, on paper, like leaving the EU, with a shorter 12-month withdrawal period. But the Centre Party and Socialist Left have both promised a committee-based assessment of alternatives before leaving. Neither party would tolerate a cliff-edge exit. They would also want to at least try and renegotiate first, rather than leaving right away. So, the build-up would be longer, and voters would have a much better idea of what might replace the current EEA agreement.

That is if it gets to that point. Opposition to the EEA is about the only thing the Centre Party and the Socialist Left can agree on. Trygve Slagsvold Vedum, the Centre Party leader, has ruled out a coalition with the Socialist Left. The Socialist Left, for their part, want a five-party coalition, including two smaller left-wing parties, the Reds and Greens. Labour is also strongly pro-EEA, and they will do their best to find other forms of concession instead. Expect a long coalition formation process before there is more clarity.

While Norexit might not be right on the horizon, this is still the best result for anti-EEA parties in Norway since the 1994 referendum. In Labour’s Plan A, they would hold just under half of all the seats in the government between them. Ditching the EEA completely is less likely. Trying to review parts of the agreement, like the adoption of the EU’s third energy package, or the size and targeting of Norway’s payments to the EU, is more plausible. If the eurosceptics are there to stay, Norway’s relationship with the EU could become more contentious, with a constant back-and-forth.

14 September 2021

On horseback in deepest Germany

This is a story from Friedrich Merz's constituency, deep in the hills of Westphalia, in the middle of nowhere and not exactly at the edge of modernity. A local photographer in the town of Schmallenberg-Oberkirchen set himself the ultimate challenge of trying to send a 4.5 gigabyte data file via the internet to a printer 10km away. Rather than accepting the inevitable fate, this photographer had a brilliant idea. He organised a backup, a friend on horseback who delivered a DVD with the images to the printer. The data transfer and the horse set off at the same time. The horse arrived first.

Germany is wealthy but it has one of the worst telecommunication infrastructures in the EU, and the absolute worst mobile telecom infrastructure. There are many places with no connectivity whatsoever.

This is why, in 2021, digitalisation is still a thing in German politics. Politicians list digital alongside green investment in their order of priorities. Germany, as a country, collectively underestimated the implications of several important technologies, such as the electric car and the mobile telephone. Most households are connected to the internet through copper cables. Only 1.4m households use fibre optic cables, compared to 5m in the UK.

When German governments auctioned off telecoms licences, they maximised revenue, rather than maximising service. Half a trillion euros of underinvestment later, horses have become competitive again.

10 September 2021

Police raid Scholz' ministry

German police stormed the finance ministry yesterday in a dawn raid to seek documents relating to a financial fraud. One of the agencies of the finance ministry, the Financial Intelligence Union apparently colluded with criminals who sent money to fund terrorist activities in Africa. The FIU is Germany's answer to the Bureau of Alcohol, Tobacco, Firearms and Explosives in the US. A transaction of more than €1m was reported to the FIU by an unnamed bank, which had suspected that the transactions would to be used to fund drugs and arms purchases. The Cologne-based FIU is formally part of German Customs, which itself is overseen by the finance ministry. The purpose of the raid was to identify whether documents regarding this issue had been transmitted to the ministry.

What struck us about this case was Olaf Scholz' bizarre reaction. He said the police should have called the ministry, and asked for the information instead. Nobody suspects Scholz to be involved in this, but it is odd that he would criticise a police investigation. Scholz is surrounded by financial scandals that happened under his watch as mayor of Hamburg and finance minister. The other parties made a big deal about this yesterday. The Greens said Scholz does not have his ministry under control. We are also wondering, why this stuff keeps happening to him? Will that continue in the chancellery if he wins?

Die Welt reports that the main target of the investigation was indeed a staff member of the FIU. But that would not have warranted such a spectacular raid on the ministry. The public prosecutor said that there had been communication between the FIU and the ministry that might be relevant to the case, and that it might several weeks to analyse.

An official from the police trade union, who works at the customs office, said that Scholz had been warned for years about problems at the FIU, but he trusted his officials.

We don't think this incident is going to be the bullet in this election. But it instils some doubt about Scholz' performance in government.