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22 January 2021

Give me ten votes

Our main story this morning is on Giuseppe Conte's struggle to flip ten opposition Senators to his side. This is proving difficult; we also have stories on Merkel's plan to co-opt Joe Biden into a compromise on Nord Stream 2; on a resolution by the European Parliament to condemn human rights abuses in China; on another resolution to blacklist tax havens; on the economic costs of the third lockdown; and on the UK's petty refusal to grant diplomatic status to the EU's mission in London.

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Today's free story

UK playing petty games

There are many ways in which the UK could promote Brexit with a positive spin. Take for example the vaccine roll out. Instead we see a petty game: As the BBC reports, the Foreign Office refuses ambassador status to the EU mission, which would give its delegation and their staff immunity from detention, criminal jurisdiction and taxation. The EU thus no longer would be on par with, for example, a Belgian delegation in terms of diplomatic status. Is this their way of saying yes to member states and no to the EU?

It is true, the rights given to staff of international organisations may be more ad hoc and less fixed. The EU, though, is a bit more than an international organisation. It has its own currency, judicial system and law making powers. What else do you need? They may cause some cheers at home, but this will poison relations with the EU further down the line. 

We consider the decision by the Foreign office to be petty and incoherent. The UK granted diplomatic status when they signed the Lisbon Treaty, and supported the diplomatic status throughout its EU membership. Nothing has changed since Brexit. The two sides still have to work together after all. Also, why would the UK chose to downgrade when 142 other countries recognise the diplomatic status of EU delegations? We cannot see a manifest and principled reason for the UK to do so.

This episode is not without precedent: The US under Donald Trump did the same, downgrading David O’Sullivan in 2019, but quickly reversed the decision after a backlash from Democrats and EU institutions. And, as Andrew Duff pointed out, this also happened in 1954-55 when the Tory MPs Empire Loyalist brigade, the forerunner of today's European Research Group, refused to allow Jean Monnet's High Authority full diplomatic status in London. Welcome to the new old world!

21 January 2021

America's celebrations and Europe's delusions

The good old days are back - or so it seems. European politicians finally felt safe to say what they really think about Donald Trump. EU leaders are clearly seeking a revival of transatlantic relations. Superficially, we will note that the tone will improve, on Twitter naturally, but also in bilateral meetings. But on almost all of the substantive disagreements, Europeans are about to discover that their problems are with the US as a country, and with the Democratic Party in particular.

Norbert Röttgen, the German politician who came third in the CDU leadership race but who remains as chairman of the Bundestag's foreign affairs committee, said he expected US opposition to Nordstream 2 to intensify. So do we. We cannot think of any project right now more disastrous for transatlantic relations than a pipeline that makes the EU dependent on Russian gas. 

Anthony Blinken, Joe Biden's nominee for secretary of state, told the Senate's foreign relations committee that Donald Trump was right in taking a tougher approach towards China. The disagreement is about details, not principle. We expect to hear a lot more of that in other foreign policy areas too. Europeans will discover that as far as they are concerned, the Biden administration is not going to be as much of a break from the Trump era as they had hoped.

And we also know from the days when Biden was vice-president, that he, more than Barack Obama, pushed the Europeans to implement their Nato defence spending promises.

Apart from Biden's symbolic decision to recommit the US to the Paris climate accord, we see no fundamental shifts in US environmental policies. 

The one big shift we do expect will be an end of the US blockade of multilateral institutions. The Biden administration will allow the WTO's appellate body to take up their work again, which requires the appointment of US members. There is scope for a deal on aircraft manufacturing - as there would have been if Trump had remained in office. But rhetoric aside, we do not see any fundamental shifts in US-EU trade conflicts. 

When we followed yesterday's reactions in Europe to Biden's inauguration, we got a sense that a lot of people over here are likely to end up disappointed. During the Trump years, Europeans dared at least discuss strategic autonomy - a notion many European politicians are deeply uncomfortable with because it would entail not only higher defence spending, but also shifts in the way we organise our command structures and defence industry supply chains. We consider the European yearning for a return of transatlantic relations as an addiction problem. Yesterday was the day when Europe hallucinated about a non-existent bottle. 

Hans Kundnani offers a useful classification: Europe has reinforced its sovereignty during the Trump years, but will not embrace strategic autonomy. Strategic autonomy means, at its core, a reduced reliance on the US for its defence. European sovereignty implies the pursuit of joint commercial interests. We don't think that this dichotomy can be sustained for a long time because the Americans will eventually call this bluff. 

20 January 2021

When the pandemic destroys livelihoods

We should pause and reflect on comments by the German Allensbach polling institute. Allensbach is not better, or worse, than others in tracking voter preferences for national elections, but they are known to produce good early warning signals about shifting moods in the population. Now is such a moment. 

Renate Köcher, the head of the institute, has come out with a warning the mood in the country is turning for the worse. The crisis is becoming existential for a very large number of people. During the first lockdown, the Germans rallied behind the government and eagerly sought information from the media. A year later, a growing number are saying that they are in a worse state than they were a year ago, both materially and psychologically. What is becoming clear is that the crisis destroys livelihoods. There is an overwhelming sense that selfishness, aggression and impatience have become more prevalent, Köcher told Handelsblatt in an interview. A particular feature of this crisis is that it will have permanent winners and losers. This aspect, she says, is not prevalent at all in the public debate. Only about 10% of the Germans fall into the group of Covid-19 deniers. But many of those who are not in this group feel they can't speak their mind for fear of being branded extremist. The anger is turning against the media.

These comments support the view that this pandemic is a structural slump. A pandemic is a quintessential macro event. But it gives rise to a micro crisis. The public debate focuses almost entirely on the macro side - impact on GDP, measured unemployment. But this time, there is a real possibility that we get the macro broadly right, but the micro completely wrong. As Köcher says, there are many losers. Historically, EU countries are not nearly as robust as the US in handling sudden social shifts. As we saw in the UK, the many losers from European integration ultimately ganged up. The politics of the pandemic has yet to play out. What we are beginning to observe is that the pro-incumbent sentiment of 2020 is gone.

One of the big uncertainties of this year relates to the logistics and the politics of the vaccine roll-out. Unless there is a fast pick-up in vaccination rates and vaccine supplies, there is a clear and present danger that the public will start to measure the mistakes of the EU's vaccine procurement policy in terms of human lives lost. 

19 January 2021

Laschet - friend of Putin and Assad

The Spiegel journalist Mathieu von Rohr has written a shocking note in which he highlights Armin Laschet's extraordinary foreign policy positions, which played no role whatsoever in the CDU leadership campaign. Laschet has been a strong supporter of Bashar al-Assad, the Syrian president. In 2018 Laschet accused the Americans of supporting Isis, and spread the false statement that the Ghouta chemical attack that took place in 2013 had been the work of Isis, despite evidence that the Syrian government was behind it. Laschet at the time wrote that the only solution to the crisis in Syria would involve Russia.

Von Rohr also pointed out that, unusually for a CDU politician, Laschet seems to be very close to Vladimir Putin. He complained several times about anti-Putin populism in Germany. He is a strong advocate of Nordstream 2. Laschet also cast doubt on British intelligence reports that the former Russia spy Sergei Skripal and his daughter were poisoned with Novichok, a Russian nerve agent.

Von Rohr says it is incomprehensible that none of these statements had even been discussed during the leadership campaign, a reflection of the inward-looking nature of the German political debate. We consider these statements either a monumental lapse of judgement, or worse, a reflection of a coming geopolitical repositioning of Germany of which the public is not aware.

18 January 2021

Digital nomads

The pandemic is set to change the labour market structurally. In sectors most affected, up to half of all workers have part-time or temporary contracts or are self-employed, according to the OECD. Many lack job security and have limited access to unemployment benefits. In several countries, employees only remained in their jobs thanks to employment retention schemes. What will happen to them once these schemes cease to exist will be one of the big political battles this year. 

On the bright side, affected sectors had to find new ways to remain in business. Restaurants and shops, for example, digitalised to offer delivery services. This led to a record number of new one-person enterprises registered in France, and a shift from employment to self-employment. In this crisis it seems easier to find clients than jobs. This trend has been going on for some time with uberisation and digital jobs. With remote working practices put into place during lockdowns, there are more choices too when it comes to location. People can move out of crowded cities to the countryside or even change their country of residence altogether. 

Greece, for example, is an ideal destination for digital nomads, provided that network infrastructure and a broad ecosystem of technology allow for remote working. The new 5G technology will be important for efforts to attract this new type of resident. Forget golden visas, digital infrastructure is becoming key to attracting new business. 

15 January 2021

Back to square 1 for Macron?

The French government proclaimed a 6pm curfew to prevent the spread of the latest virus mutations. While this may be necessary, the longer the confinement, the more pessimistic and risk-averse people become. After the first lockdown people were much more positive, but fears about their future and health risks are spreading with consecutive lockdowns and curfews. The nation embarked with Emmanuel Macron in 2017 on a great adventure to transform the country. Transformation did indeed happen, but not as planned and not primarily through politics, but insurrection (gilets jaunes) and a virus that forced the country under lockdown. Once the pandemic recedes, should Macron return to his role as reformer?

A relevant Isop poll for Les Echos casts doubt on this. It shows that the French agree with Macron's mandate to transform the country, but see little evidence of real change since he came to power three years ago. A strong and courageous reformer is much less appreciated today. Instead there is an increased desire for reforms to be fair and balanced, as well as transparent and well-communicated to the public. 

The pandemic and the lockdowns clearly changed voters' priorities. The liberate and protect slogan of 2017 lost its gusto for liberalisation, while the desire for protection increased. Transformation and change are still terms with a positive connotation for 70% of those polled, but 68% also say that the multiple reforms of Macron's first years had a negative impact on them, in particular amongst the elderly and low income classes. The most desired protective measures are: relocation of companies, border controls, reduced inequality and fighting against Islamist radicals. 

France as a country for start-ups no longer seems appealing. Fewer French are in favour of a digitalised France, at 34%, down from 50% in 2017. And the desire for less Europe increased to 49%, up from 44% in 2017. 

There is a clear cut between high-income and low-income households. The lower the income or level of education, the more hostile they are towards a reform that does not protect. This fracture in society means that the two camps push in opposite directions: those who want to see more reforms and those who want to roll back the state to its role as protector. How to proceed from here? It all depends on what Macron can do before 2022.

14 January 2021

Getting nervous about crypto

Central bankers and economists hate private crypto-currencies because they constitute a threat to the fiat money system, to which many of them owe their jobs and influence. Many of the bitcoin groupies hate the fiat money system because they regard it as part of a deep-state conspiracy. They also hate economic arguments. The debate on crypto thus consists mostly of people screaming at each other.

We belong to the he-said-she-said crowd, watching this cockfight from a safe distance. Our specific interest in this debate is the impact of digital currencies - private and public - on the stability and cohesion of the monetary union. The ECB is not only the lender of last resort. It is the only well-functioning institution in the eurozone. If central banks become less effective because of technological innovation, then surely this will be a problem for a monetary union that relies on the ECB for its oxygen.

We noted a comment from Christine Lagarde yesterday, calling for regulation of bitcoin. She called bitcoin a speculative asset that had given rise to some funny business as she called it, including money laundering. She said the regulation would have to take place at a global level.

Remember the Tobin tax - the idea of a global financial transactions tax to tame the world of shadow banking? Even the EU could not agree on a financial transactions tax so far, not even among a smaller group of countries who adopted the enhanced co-operation procedure to get this done. Global crypto regulation is a much taller order. It is usually a sign of desperation when you call for global regulation. We just don't think we will succeed to enlist the help of China or Singapore to help the ECB maintain its money monopoly.

The Times had an interesting article contrasting the EU's approach with the UK's. The Treasury has opened a consultation on the regulation of crypto assets and stablecoins. Like the EU, the UK, too, is concerned about money laundering. But John Glen, economic secretary to the UK Treasury, also said the UK wanted to make most of the opportunities posed by these innovations. The UK's approach is thus not the same as Lagarde's. What this is telling us is that if there is no common position on crypto assets in Europe, there can be no common global regulation either. 

For an opinionated but factual background on the effect of stablecoins, we recommend an article by Frances Coppola, who explains their complex relationship with cryptocurrencies. The most important stablecoin is USDT. The idea behind a stablecoin is to guarantee the value of the cryptocurrencies in dollar terms and to hedge volatility risk. USDT does not have a 1:1 dollar backing. It is not the equivalent of a currency board. Much of the enthusiasm behind Bitcoin relies on the idea that the issuer of USDT, a company called Tether, can maintain the dollar peg. Her conclusion is that USDT makes it easier for people to trade cryptocurrencies - an intrinsically scarce asset subject to excess demand. But USDT may end up exacerbating the price decline in the event of a bitcoin crash. 

13 January 2021

The CAI's corporate benefits

Dominic Raab, the British foreign secretary, unveiled new measures designed to ensure no British companies allow the use of forced Uighur labour from Xinjiang in their supply chain yesterday. In the EU, Airbus and Deutsche Telekom are set to benefit from leaders’ willingness to look the other way.  

Raab’s announcement came as news was breaking that Germany and France had secured side deals for two important multinationals during negotiations for the yet-to-be-published EU-China comprehensive agreement on investment (CAI). Wirtschaftswoche broke the story, reporting that within five years, Deutsche Telekom will receive a license to provide mobile services in China. In return, telecoms operator China Mobile will be permitted to enter the German market.

We agree with Thorsten Benner, director of the Global Public Policy Institute, who described it as the side deal from hell since it will expose German critical infrastructure even further. As we’ve previously noted, the reciprocal benefits are also unclear. Under the CAI, EU telecoms investment in China will be capped at less than 50%. Deutsche Telekom will have to enter a joint venture with a Chinese firm to operate in China. The Commission reports that China has committed to ending technology transfer under the CAI. We are extremely sceptical.

Details on the Airbus deal were less concrete. Wirtschaftswoche wrote that China wants to benefit from technology transfer from Airbus, which has been operating a factory in Tianjin since 2009. It wants to become a global player in aviation manufacturing by getting more involved in Airbus production and supply, with the goal of selling its own aircraft in the global market.

We don’t see how France stands to benefit in this case, but we would point to $35bn of contracts Airbus signed with China in 2019 to supply 300 aircraft. It took years for Macron to finalise the deal, and we imagine he is keen to protect it. Chinese customers accounted for nearly 20% of Airbus deliveries last year. But its deliveries of completed planes fell by 34% in 2020, while global orders are down 65% this year.

Also yesterday, Franck Riester, France’s junior minister for trade, was forced to admit that the EU will not wait for Beijing to adopt a ban on forced labour before ratifying the CAI. It will instead establish a calendar for Beijing's reforms. In Germany, meanwhile, Bild reported that China had benefitted from €283m of German development spending by successfully bidding on international projects that align with its belt and road initiative.

As we have been arguing, mercantilism is not a strategy, and corporate interests should not dictate foreign policy. The CAI is incompatible with EU values. It is a bad deal in every sense. 

12 January 2021

Angela Merkel is right

If we had been asked to conceive of the two most counter-productive responses to last week's mob attack on Congress, it would be to impeach Donald Trump for the sole purpose of trying to prevent him from running for president in 2024, and removing him from social media. If American liberals feel that censorship is the only way they can defeat Trump, they are in more trouble than even we thought they were.

We don't often agree with Angela Merkel, but she made two pertinent observations recently about US politics: the first is that there is no such thing as a stable majority in American politics that supports multilateralism and transatlanticism. Trump mobilised 75m voters. Trumpism isn't dead. We also agree with her observation yesterday that the freedom of speech should not be censored by a private company. The fact that Twitter's decision will probably end up as the biggest corporate own goal since classic coke, is immaterial. Liberal democracies need to be careful in how they apply censorship. We are not going to defeat populists by cutting them off their airwaves - or our favourite news channels for that matter.

In this context we noted an interested article by Hans Kundnani, a fellow at Chatham House, who has come to similar conclusions about liberalism than we have. He draws a useful parallel with the UK in the 1930s: 

"If liberals want to save globalisation and a rules-based order, they need to think hard about how to reform it—and this probably involves dialling back integration. Something similar has been done before. The precedent for this is the way that liberals like John Maynard Keynes sought to moderate capitalism in order to save it in the 1930s. This ultimately means rediscovering the differences between the centre-left and the centre-right, not rejecting them as obsolete."

11 January 2021

Team Söder/Laschet vs Merz

FAZ is telling us this morning that the CDU establishment is rallying behind Armin Laschet as the next CDU chairman. This does not surprise us. He is the continuity guy, and the last thing the CDU headquarter likes is disruption. What has changed over the weekend is that Markus Söder, the Bavarian prime minister and CSU leader, has come out in support of Laschet. 

The CDU's virtual party congress will take place this Saturday when 1001 delegates cast an electronic vote between the three candidates. The two who come first will then go into a second round, which, according to German law, has to be decided by postal vote.

Söder's positioning is transparent. If elected, Laschet is less likely than Friedrich Merz to seek the chancellery. And despite his evident lack of public support, Laschet is very likely to score a higher share of the vote among the delegates than Norbert Röttgen. Laschet is Söder's ideal CDU chairman. 

We see the strategy, but we think this is too clever by half. For one, Jens Spahn has told friends that he wants to become chancellor. Spahn is Laschet's running mate. A perfectly plausible scenario would be for Laschet as CDU chairman to become chancellor for a relatively short term, to be followed by Spahn.

The other risk is that the CDU delegates may follow Helmut Kohl's dictum that it is best to combine the role of CDU leader and chancellor. The only split imaginable is between a CDU chairman and CSU chancellor candidate. But this is dangerous for the CDU. Söder would be the third CSU leader - after Franz-Josef Strauß and Edmund Stoiber - to be nominated chancellor-candidate, and the first one likely to succeed. With the state of the polls - the CDU/CSU steady at 35% - and the geometry of the political landscape in Berlin, the CDU/CSU candidate will almost certainly end up as chancellor. If Söder gets the nomination, he might well stick around. At 54, he is 14 years older than Spahn, but young enough to have a long political career ahead of him. Laschet will turn 60 next month.

What weighs against Laschet are two factors. He may be a moderate, but he is a supporter of coal. We are not sure that the Greens and a CDU headed by Laschet would find common ground on the key environmental policy areas on which the Greens are campaigning. Second, Laschet's astonishing unpopularity must be a factor in a big election year - with one federal election and six state elections. Of the 1001 delegates, 39% hold elected office - as local, state, federal or European parliamentarians. The others are ordinary party members. Laschet is also more popular among women than men, but only 34% of the delegates are women. 

Establishment support is important, but this will be an anonymous election. We think the AfD still constitutes a formidable factor despite its recent troubles. The AfD has been beset by inner party rivalries over whether or not to oust neo-Nazis. But as we are going into an election, we think the party will probably rally around its leader, Jörg Meuthen, who has been leading the campaign to oust neo-Nazis. We think that the approaching reality of a CDU/Green coalition would play into the hands of the AfD. Merz's pledge to CDU conservatives is that he is considered best placed to keep the AfD at bay.