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07 December 2023

Two Mercantilists meet

Our briefing this morning is focused strongly on EU-China relations: Ursula von der Leyen is travelling to China with threats of trade sanctions; Italy has formally left China's belt-and-road initiative; and the European Court of Auditors calls for more transparent and tougher screening of foreign direct investment; we also have stories on whether a deal on the stability and growth pact is on the cards tonight; on France's reduced growth prospects; and, below, on the biggest of all Russian sanctions failures.

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A price cap that doesn't cap

Aside from its attempt to cut off Russia’s access to the global financial system, the most ambitious set of sanctions the west launched against Russia targeted its oil industry. This is a significant source of revenue from the Kremlin. Oil and gas combined account for around 28% of its income. The idea was, via a price cap, to limit how much Russia could make, without starving the world of oil supply. Like the financial sanctions, the lever was a western-dominated sector of the financial services industry: maritime shipping.

Now, just over a year on from the cap coming into force, it’s safe to say that it has been a failure. What has happened is that a so-called shadow fleet of ageing tankers has sprung up to take over. According to calculations from Bloomberg, $11bn in oil revenue has changed hands this way. The shadow fleet is responsible for shipping around 45% of Russia’s oil. Greek-flagged ships still transport 20% of it.

What hasn’t helped either is the threadbare enforcement and compliance mechanisms from the sanctions. To comply with the cap, a shipper needs an attestation from the buyer, declaring that the oil has been bought for under the amount of the cap. There’s also now a cottage industry of opaque trading and insurance firms to move the oil around. These groups connect buyers, sellers, and shippers, all allowing for a veneer of plausible deniability. They are employing some old tricks of sanctions-busting, but on an even bigger scale than before.

Because of this, the price cap only really works when there are dips in global oil prices. When they go up, spreads between Russian and global benchmarks close, and Russian crude changes hands above the $60 a barrel limit. Oil bought on a free-on-board basis and loaded at the Far Eastern port of Kozmino has almost never traded below the cap. It only did so during a global oil price drop in the spring caused by SVB collapsing.

There’s a basic reason why the cap doesn’t work. Russia’s oil production, on average, amounts to about 10% of the crude oil consumed worldwide. This is a market that is pretty finely balanced between supply and demand. Another way of looking at the price cap is that it has been a success, for more cynical reasons. The EU’s embargo of Russian oil did have a genuine impact on demand for it, and prices. That was a threat to oil importers. The cap at least meant everyone could try and do something, or at least look like they were doing something, without hurting global oil supply as much.

6 December 2023

When societies decline

We see a decline in western power and influence all around us, yet it is difficult to pin this down to hard metrics like GDP, or even educational attainment data, like yesterday's Pisa results. 

A softer, but in our more reliable, indicator is the propensity of societies to get stuck in the past. One of the reasons for the UK's success during the 1980s all the way until the financial crisis was the country's relentless modernity, as represented by Margaret Thatcher and Tony Blair. Brexit had within it the two conflicting ideas of a throwback to a pre-EU past, and to a post-EU future. The past won hands down.

Germany, too, had periods of intense modernity, as represented by the Bauhaus phase in architecture in the 1920s, and then again in the post-war period until about the time of unification. 

Today, both countries have reverted to living in the past. Germany is trying to hang on to its industry. This was the future once. Today large parts of it are longer as dynamic and competitive. In the UK, the mainstream of both the Conservative and Labour define themselves in terms of previous generations. New Labour was radical and new in the 1990s, but not today. Thatcher, too, was a radical, who did not reference previous leaders, except to express contempt.

The New Yorker has a wonderful cultural survey of nostalgia, which correlates what it calls western doomscrolling with a tendency to look backward. We see that all around us. We slap preservation orders on ridiculous 19th century faux-classical palaces, or wasteful tiny cottage mews that remind us of mediaeval village life, when we have housing crises. There are indeed grandiose architectural marvels to be preserved. We are not proposing to tear down the Coliseum.

Nostalgia also guides our education systems. One of us was surprised to learn that the curriculum for English literature is hardly changed from what it was in the 1970s, except that the great American playwrights and novelists were modern then. And while we may obsess about mathematics rankings in the Pisa study, we forget that school maths curricula are still geared towards engineering as the main application, with its focus on trigonometry and calculus. This is not the maths of data science, artificial intelligence, quantum computing, or crypto. Our schools, too, have not left the past.

5 December 2023

Adieu les Nupes!

The Nupes disappeared from the political landscape in France as fast as they came about. The group's four parties, the Socialist Party, the Communist, the Greens, and LFI, had united under Jean Luc Mélenchon in a surprising last-minute attempt to win the legislative elections 2022.  One and a half years later, the Nupes fell apart due to disagreements over Hamas. Mélenchon is now preparing for 2027 on his own, without the constraints of cross-party consensus building.

The end of the left-wing alliance has been death by a thousand cuts. The first tensions came in September 2022, after Mélenchon put his weight behind Adrien Quatennens, the No 2 in LFI, amidst domestic violence allegations. The next fissures happened during the pension reform, where the LFI’s blockade strategy in the National Assembly was not backed by other Nupes parties. Then in June, after a young man was shot dead during a police stop, and riots broke out, LFI refused to call for calm. The Socialists and Communists strongly criticised this position, but without prevailing. Against this background, the Greens and the Communists decided to run their own list in the European elections, rather than a common one for the Nupes. The official explanation for the decision was that the differences over Europe amongst the parties were just too stark.

LFI was still pushing for a united list, which could have garnered some 25%, according to a Cluster poll, rather then the 8% and the 10% that they could get for individual lists. But then the final blow came when Hamas attacked Israeli towns and villages on 7 October. Mélenchon became the bête noire in French politics by refusing to condemn Hamas's attack. For Mélenchon, those who condemn the attack do not understand anything about resistance movements, while those who march against anti-Semitism lend unconditional support for the massacres in Gaza. The fallout amongst Nupes partners followed swiftly: the Socialists decided on a moratorium, the Greens suspended common work, and the Communists voted to exit the alliance.

Mélenchon made the end of the Nupes official, blaming, of course, the others for their childlike behaviour. He certainly won’t compromise on his positions. On the contrary, he invites those who dare to join him on his march towards the 2027 presidential elections. He had been presidential candidate three times, and is thus a pro when it comes to campaigning. With his revolutionary and daring rhetoric, he hopes to get over 25% next time. But how could a divisive candidate like him manage to get into a second round against Marine Le Pen? Not impossible, but also not very likely.

4 December 2023

How Meloni helps Le Pen

When Giorgia Meloni came to power, she defied her critics and showed that the economy can continue faring well under a far-right leader like her. This realisation is coming in handy for far-right movements elsewhere in Europe.

In France, for example, Meloni-hype benefits the Rassemblement National. Marine Le Pen's party is rolling out a strategy of winning over the enterprise sector, which had been a taboo for the party so far. Not any more, it seems. In plain sight, Le Pen is having lunch with Henri Proglio, a former chairman of EDF. For Le Pen, this is an occasion to show that the rubicon has been indeed been crossed. Proglio may say that it was just to talk about energy, but clearly something is moving in the relationship between RN and company bosses.

Meloni’s story offers the context. French politics does the rest. Since elections in 2020, RN’s 89 MPs have demonstrated their sense of responsibility during the pension reform hysteria, where even the conservative Les Républicains got caught up in their own game. Jordan Bardella, the leader of the party, is showing up at various conferences and fairs, like at the HEC business school or the French SME confederation's fair, shaking hands and listening to what they have to say. His MPs are working at the constituency level, showing up at meetings and parties of local companies.

Eventually, these meetings will have to translate to influence on the party programme if RN is to get the business vote. Some of the most controversial proposals will have to go. At the moment, the sector is still taking an ambivalent stance towards Le Pen. How high will the price be for their backing? This is still to be negotiated. A manager may be denying that he would vote for Le Pen, but at the same time he is expecting that other managers to do so.

1 December 2023

Remembering our elders

We should respect our elders, especially in a week in which quite a few of them have passed away. We will leave reflections about Henry Kissinger to others. We would like to focus instead on Charlie Munger, who we would not hesitate to call the world's most successful investor. Munger was Warren Buffett's partner. People dismissively called him his sidekick. Others saw in him the brain behind the operation. 

In our attempt to understand why anyone could succeed in an activity such an investment over such a long time, one could do worse than listen to a thought experiment by Buffett himself. Imagine a coin toss contest by 300m US inhabitants. The law of large numbers would suggest that approximately half of the contestants would throw a head. After ten rounds, there would be around half a million people left who would have thrown ten consecutive heads. After 25 rounds, one would expect a little under 20. The idea of anyone succeeding 25 times in a coin toss game is mind-boggling. But when you start with enough people, someone will. 

Investing is not a coin-toss game. Some strategies are superior to others. But nobody would reasonably deny the importance of chance. In a world of investors with equally good strategies, some would throw the equivalent of 25 coin tosses, while others would not. We should therefore not overthink the success stories. We recall a joke made by Buffett about his hypothetical coin toss game: some of those 20 who ended with 25 heads in a row would end up writing books, boasting about their strategy. The lesson is that there is no such thing as a successful investment strategy over all periods, though some strategies succeed more than others at certain times. 

Perhaps the most important skill of successful investors is not their strategy but their ability to hold several ideas and models in their heads simultaneously, and abandon those that don't work. What makes them successful is the lack of groupthink, and especially academic group think, and of what statisticians call bias. Bias is also the bane of economic and financial forecasting, a theme we have often written about in the past. Believing in your own stories is absolutely ruinous for investors. 

We don't care much for Munger's views on investment. Or even his very negative views on bitcoin, which he hilariously called a "gambling contract with a nearly 100% edge for the house". What we take from Munger is a mindset that persistently self-reassesses, and that shifts when new facts or insights intrude.

30 November 2023


Ursula von der Leyen, like anyone else in power in Brussels in the last eight years, understands nothing about Brexit. When she says we goofed it up, calling on the next generation to fix the mistake, we are not sure what she means. The EU goofed up in several important ways: lending support to a second referendum campaign, pushing the UK into the hardest version of Brexit through Michel Barnier's protectionist negotiating stance, or granting the UK all these opt-outs over the years that increased the alienation. We don't think she means any of those. Von der Leyen deals in a world of appearances. It is the reputational damage of Brexit she is most worried about. And calling Brexit a mistake is a criticism of voters. It is about the most counter-productive way to re-start this debate, as we saw yesterday in the British parliament.

The UK will not rejoin in this decade. Sir Keir Starmer has already said he would seek a closer relationship but would not join the single market or the customs union. This means, not much will change at all. The earliest Sir Keir Starmer can ascend to power will be at the end of next year, or early 2025. Assuming that his next term of office will last five years, the following term won't start at least until late 2029. It is possible that he might promise a referendum on UK membership. If he were to win an election with such a commitment, a multi-annual process would unroll, very similar to what happened in 2015 after David Cameron won the election. It is conceivable that there would be a referendum shortly after the election, but would the UK and the EU have already agreed the terms of the accession by then? Would it include the euro and Schengen? Would the EU be ready to grant the UK all of its old opt-outs, just to repair the reputational damage of Brexit? Von der Leyen may be inclined to do so. The sheer act of Britain rejoining would count as an important symbolic act. If you deal in a world of appearances, this is what you care about. Not everybody in the EU does though. Moreover, membership on that basis would be doomed. 

We also don't think that all member states would agree to having the UK back with the same old opt-out. Nor do we see even the europhiles in the UK embracing the euro and the Schengen system. Remember that it was Gordon Brown in his role as chancellor who killed off the idea of a euro membership, by setting a whole series of unfulfillable tests. Those in the UK who are talking about rejoining the EU, and who have already started a quiet campaign, work on the implicit assumption that the UK would automatically get the same deal. It is not hard to see that even with the best intentions, the whole process would descend into chaos. 

If von der Leyen was really interested in strengthening the EU, she would campaign for a treaty change to create a new membership status. Call it associate membership, or sugar-coat the term the way you like. This would allow a group of countries that have no interest in joining the euro to be part of virtually all the things the EU does right now, with full voting rights, including of course the single market and trade policy. A dual membership structure would require treaty change. The new structure needs to be formally delineated. Voting weights would need to change. Enhanced co-operation procedures need to be further facilitated. Von der Leyen would no longer be in office if the UK were to rejoin, even if she were to gain a second term. But what she could do in the meantime is get the EU ready for UK membership. We see no signs of that happening. 

29 November 2023

Is UK politics losing its marbles?

We normally do not cover the day-to-day diplomatic exchanges between two countries, but Rishi Sunak’s last minute cancellation of a meeting with Kyriakos Mitsotakis in London over the question of ownership of the Pantheon marbles is such a peculiar one that we could not resist. With the war in Ukraine and Gaza going on, it is a side show where one wonders whether there had been any adults in the room.

What is it about those marbles? The Parthenon sculptures were removed from Athens by diplomat Lord Elgin in the 19th century, when Greece was under Ottoman rule, and have been housed in London since then. Various Greek governments have called on the UK to return those marbles, a recurring theme in bilateral meetings. Recent negotiations with the British Museum even looked at ways to loan the sculptures back to Athens. But Sunak has ruled out any changes to legislation dating from the 1960s that stops the British Museum from returning the sculptures permanently. So both positions have been clearly stated in public and have been repeatedly part of diplomatic exchanges. Why then creating a diplomatic incident over this?

The story we read in the media this morning is that Mitsotakis discussed the marbles with Sir Keir Starmer the evening before he was due to meet with Sunak. Sunak then uninvited Mitsotakis. The timing suggests a domestic motive, as the Conservatives are eager to point out that Sir Keir is going soft on the marbles. One conservative politician told Politico that it would be a disregard for British taxpayers, who have looked after those marbles for generations.

A spokesperson for Sunak explained that Mitsotakis had given assurances that he would not raise the dispute over the marbles in London. Given that those assurances were not adhered to, Sunak decided it would not be productive to have a meeting with Mitsotakis talking about marbles rather than other, more important, things British and Greek people care about. The Greek government has since denied that any such assurances were made. 

By cancelling the meeting, Sunak has achieved exactly the opposite from what he intended. Newspapers and social media in both countries have played up this incident as a drama of cultural identity and disproportionate response. Greece’s insistence that the British Museum should return the Parthenon Marbles got much more media coverage than if he just had taken the meeting and restated his position. Even the majority of British people think that he should not have cancelled the meeting. The hangover from this episode will be another loss of Sunak’s power to shape narratives.

28 November 2023

Crepol, Dublin and project fear

The knife attacks in Dublin and Crépol last week were two events in two different EU countries that brought up high emotions. Far-right extremists instrumentalised the attacks to unleash more violence and anti-immigration slogans.

In Dublin, far-right extremists unleashed a destructive attack after a five-year-old girl was stabbed in front of her school. The rioters set buses and cars on fire and looted shops. The images were unusual for Ireland, and a shock to the establishment. In the same week in France, the young Thomas was stabbed by a group of outsiders at a village party and died. In response, about 100 extreme-right activists travelled on Saturday to the nearby town of Romans-sur-Isere, where they thought the attackers came from, looking for a fight. Tensions continued on Sunday too in another town.

Both events raise questions about how societies deal with these kind of shocks. In Ireland, communities now talk about forming vigilante groups as they feel insufficiently protected by the police against such violent riots. In France, riots are much more common. On Sunday, Eric Ciotti from Les Républicains refused to condemn the far-right’s actions the day before, while Jordan Bardella from Marine Le Pen's Rassemblement National called for reason, saying violence should not be responded to by violence. A world that is upside down.

At what point does a single event trigger something bigger? Even before the knife attack, France was facing high tensions between communities after Israel’s attacks in Gaza. Social media does its bit to amplify the mood of fear and anger. The reassurances from the French government were shrugged off as meaningless. Instead, a video went viral showing a village man in a yellow vest dismissing the state response as a metropolitan bling-bling while rural people try to raise their children well. This will go on for a while. The best thing to do is not to fall into this fear trap, and stay away from the toxic mood spread by the media.

27 November 2023

Is the VVD to clever by half?

If experience is any guide, coalition negotiations in the Netherlands could last for months. But the first big move has come days after the Dutch election. Dilan Yesilgoz, the VVD’s leader, has said that the party will not go into a coalition with Geert Wilders and the PVV. She is, however, open to supporting a Wilders-led coalition on confidence-and-supply. 

What this means in practice is a minority government. Wilders will not have enough support in parliament to govern with a majority if the VVD isn’t in the coalition. This prospect means that coalition negotiations could take even longer than before. It will make any future Dutch government much less stable. But predicting that a Dutch government will collapse before elections are due is like confirming the pope’s Catholicism. 

The tactical logic behind Yesilgoz’s move is obvious. Backing Wilders more thoroughly, or forcing early elections, are her other options. They both present clear risks. Being in a coalition with Wilders will make the VVD implicitly responsible for whatever he does. Forcing repeat elections could make him even stronger. Being outside of government but supporting him hedges the VVD’s bets. The VVD can support him for as long as it is convenient. Then, if things go badly, it can withdraw this support.

But as we have seen elsewhere, confidence-and-supply is a poisoned chalice. What looks like a canny bet can come across as shirking responsibility. In fact, avoiding the tough decision is, in this instance, transparent. It is the reason why Yesilgoz did what she did. Her real problem is that she, and the VVD, have been caught by surprise. Wilders has always been around, but never a contender for power. Now, thanks to a savvy campaign on his part and an increasingly volatile Dutch electorate, he is. You can witness the failure of imagination through Yesilgoz’s shifting red lines. 

24 November 2023

Why the far right is so strong

Nothing in the European political landscape is as diverse as the phenomenon known as the populist right. Marine Le Pen disagrees with the pro-Nato and pro-Ukraine policies of Giorgia Meloni. Both want to remain in the EU and the euro area. But not so Germany's AfD. Geert Wilders seems to be in a category of its own. He claims his brand of Islamophobia claims is libertarian, as Antonio Polito remarked in this morning's Corriere della Sera. 

In the UK, Nigel Farage and Boris Johnson were the main representatives of a populism that resulted in Brexit. Yet neither is far-right. Farage, too, is in a category of his own. So is Javier Milei, the president-elect of Argentina. He is described in the Europe media as a right-wing populist, even though his central policy, the abolition of the currency and the central banks, falls into the extremist libertarian camp. 

The right-wingers are the world's unhappy families. They are all different. But there is one thing they have in common: a disinterest in geopolitics, in globalisation, and in multilateral institutions. In Europe, they are all eurosceptic. Antipathy to the EU is what unites them.

The EU is caught in a trap of its own making. When faced with a giant assault or conspiracy, you have two options. Go after the conspiracy, or solve the problem. The political centre in Europe goes after the conspiracy: through the embarrassingly unsuccessful rule-of-law procedure, or the doomed pushback against Brexit after the 2016 referendum. The European Parliament has erected a cordon sanitaire, or firewall, against the far-right. So have the centrist parties in Germany. 

What the centrists should do is solve the problem: an unsustainable economic and monetary union in its current framework; a failure to embrace technological change, to allow yourself to held captive by vested industrial interests; and, at EU level, a lack of focus. The EU used to be good at the few things it did, like running a single market. This is not true any more. 

During the 2017 German elections, we have made the observation that the Left Party was the only one that thought through EU macroeconomics, by calling for a fiscal union. We are absolutely not supporters of that party, but we found ourselves in a position where an extreme party was the only one that made economic sense. Our most enduring European policy advice over the years has been: never give people a rational reason to leave the EU, or the euro area. That means solving the problem. Don't kick the can down the road. What you will find at the end of the road are the assorted right-wing thugs who are kicking it back in your face.

Solve the problem. The EU should at this point not expand its powers, and pretend it is a geopolitical player when it clearly is not. Why not focus on areas that are vital for the future of the EU and mostly of no interest to the populists: complete the banking union; create a capital markets union; and manage de-industrialisation rather than fight it. Our advice: Do the boring stuff, and leave the toxic political fight to the member states.

Part of the right-wing backlash, in Germany and the Netherlands in particular, is a protest against the climate change agenda. Green politics used to be in the category of things everybody supported for as long as it had no consequences on their own lives. Now it does. Green policies are nowadays one of the main themes of the right. The AfD's current success is based largely on its outspoken anti-green views. We can, of course, see the logical case for a European green policy. But we believe the EU is setting itself up for failure, especially as we get closer to the point where these policies are starting to kick in. 

Over the years, the EU has widened its competences into areas that stand at the heart of national political discourse. We think that is a mistake. If they EU had focused on the single market and the development of a functioning economic and monetary union, it would still be able to achieve its full integrationist force. 

We believe that the future of European integration depends critically on the EU's ability and willingness to stage a tactical retreat from battle it cannot win, and focus on those it can, which also happen to the most important in the long run. 

We have no expectation that the EU will follow this advice. The political instinct of Ursula von der Leyen and most EU politicians is the exact opposite. When Covid came, the EU took it upon itself to buy vaccines, even though it has no experience in this area. Then it imposed sanctions on Russia, without thinking this through in detail. The offer of accession talks to Ukraine and Moldova is dishonest for as long as the EU has not agreed to deep reforms. Do we really need need a common EU immigration policy when there is no national consensus on this matter? 

We should not be surprised that the likes of Wilders are winning elections.