This is just a short story to pick up on a point made by Jens Weidmann, the former Bundesbank president and supervisory board chairman of Commerzbank. Weidmann said the merger would constitute a mutualisation of debt in Europe. He is clearly not a neutral source. But the comment highlights an important German take-away from the sovereign debt crisis. Germany has lost all appetite for turning the euro into a functioning monetary union.

We note that quite a number of people in our wider community are starting to panic about the euro area, and are calling for a eurobond, and a capital markets union, to be introduced right now. The euro crisis was the moment to have done that. We all know that the politicians did not end it. What ended it was Mario Draghi’s central bank backstop. Weidmann clearly understood that too. He consistently voted against all backstops, and any balance sheet policies.

Draghi did indeed save the euro area at the time. But it came at a price. It reinforced the sovereign-bank nexus. We recall the image at the time of two drunks walking through town at night propping each other up. They have sobered up a bit, but they still prop each other up.

There is the Irish joke of somebody saying when asked for a direction: I would not start from here. That’s the problem with all the ideas of further integration of the euro area. Of course, it would be great to have a capital markets union. But not with these banks. There is much toxicity left in European sovereign debt markets and the banking system that has hidden them from view. Why would Italian sovereign debt carry such a low spread, when underlying economic growth is as non-existent as it was during Italy’s 25 year-membership of the euro area? At 0 growth, and 135% debt-to-GDP Italy would not be sustainable in the euro area without Italy’s banks. All the toxicity in the Italian banking system dates back to that fateful moment in 2012, when the euro area solved its problems through the central bank’s balance sheet.

We are not saying that Weidmann is right. But we are not surprised to hear this argument. And it will be made again and again. We, too, would not start from here.

In politics, narratives emerge as a result of timing. Donald Trump compared the Russia-Ukraine war with two children fighting with each other. Then he got into a spat himself with Elon Musk.

Emmanuel Macron had his own misfortunes with timing this week. Over the weekend, he criticised the public focus on violence, drama, and on what goes wrong rather than on what can be done to do better. Yesterday his comments met reality. A middle school student fatally stabbed a supervisor when she wanted to inspect his bag in Nogent, a small town in France. On the same day, Austria had its first school massacre in Graz with 10 killed and 12 injured.

Macron built his success on an impeccable sense of timing. He just knew when to speak, when to remain silent, when to act or delay, when to expose or protect. But since the dissolution of parliament last year, Macron's timing is increasingly off. He jumps from one theme to another, none with sufficient support to carry it into another day, be it on children’s rights, referendums or his positions on Israel and Palestine. The long interventions on television are anchored in the past to defend his record, but lack vision for the future. His hesitation over Michel Barnier as prime minister and now his estranged relation to Francois Bayrou do not give the impression of a president who knows what he is doing.

The brainwashing comment over the weekend was another example of talking down risks and yet not having the power to do anything to change it. In response to what happened in Nogent, Macron promised to ban social media for those under-15s. He stood by his earlier comments, highlighting the influence of certain journalists in forging public opinion. He said what happened in Nogent, happened. Very much unlike Marine Le Pen and other politicians, who openly talk about the horror and savagery in Nogent. For Macron, what counts is the response that follows.

What a contrast to Austria, where Chancellor Christian Stocker talked about a national tragedy, ordering three days of national mourning. A school needs to remain a place of peace, Stocker insisted.

As people plough through the over 1000 pages of the Big, Ugly Bill that is currently in the US Senate, they find that the Trump administration sneaked in stuff that normally does not belong in a budget bill. In this case it is a 10-year moratorium on AI regulation by the states. The reason, its defenders argue, is that the US does not want to end with EU-style regulation that kills the industry.

The reason it is in the budget bill is the extension of a $500bn programme to modernise the US information technology infrastructure with the help of AI and other automation technologies. As part of this finance appropriation passage, a 10-year moratorium on regulation is imposed on the states that prohibits them to pass regulation to restrict artificial intelligence models, system or automated systems that affect inter-state commerce. There have been 1000 AI regulatory proposals issued in the US this year alone. If this continues the US would end up with an AI development very similar to what happened in the EU.

Historically, innovation happens first, and regulation usually comes after a time delay. The car came before the Highway Code. The purpose of good regulation is not to protect consumers or frustrate business, as has been the case in the EU, but to ensure level-playing conditions in markets – both between companies, and between companies and consumers.

Regulatory fragmentation is an issue in both the US and the EU. EU member states have gold-plated internal market legislation, leading to increasing fragmentation, and in parts, over-regulation. Very few people who express views on AI, often negative views, have a truly deep understanding of how it works, and how it affects the economy. What makes AI distinct from other digital technologies is that the big economic benefits accrue to users more than producers. AI has been developing in many different directions – large language models are most familiar, but not the most important. Robotics is going to have a far bigger impact on the economy than ChatGPT. AI, like other high-tech before, has important applications for the military and the health services. This is not a technology you wanted to keep outside your door.

Those born in Italy to non-Italian parents, or who move to Italy from abroad, face a longer wait to get citizenship than elsewhere. To get an Italian passport, you need 10 years of continuous residence, as opposed to five in most other big European countries. Children of non-Italian parents have to wait until they are 18 to request citizenship. At the same time, rules have historically been loose for descendants of Italians, who might have never even set foot in Italy.

Over yesterday and today, a referendum is taking place on a number of initiatives. One of them is changing the country’s citizenship laws to bring the eligibility period for citizenship from 10 years to five. But to become law, the initiative wouldn’t just have to pass with a majority of votes. It would have to reach a turnout quorum, of 50%-plus-one.

Voting will continue until 3pm today. But as of 11pm last night, it looks very unlikely that the referendum will pass the quorum. At that point, turnout had reached 22.7%. The last initiative of this kind to pass was against water services privatisation in 2011. That reached 41% by the same point in time. It would take a major shift for the citizenship referendum to get to 50% from this position.

In large part this is because all of the governing parties boycotted the referendum. Giorgia Meloni’s argument is that there is nothing wrong with Italy’s citizenship laws. It is true that large numbers of people already acquire Italian citizenship. In 2023, 213,500 people did, around 20% of all citizenships granted that year in the EU. But we will have to see what these numbers look like in the future after a law agreed on by the cabinet in March tightens eligibility criteria for citizenship by descent.

Various referenda take place quite frequently in Italian politics. Either this is to change the constitution, or amend laws via citizens' initiatives. Boycotting is a frequent tactic used by those who don't want an initiative to pass. It is much easier to combine your non-votes with those of apathetic people who will not vote anyway, than it is to vote against and risk pushing the quorum above 50%. What's happening, then, is not surprising, and the most effective tactic the government can employ. 

Citizenship is not just a moral question for Italy. It is a practical one too. The country has a low birth rate, and is facing demographic decline that threatens it socially, economically, and fiscally. The European Commission’s latest recommendations to Italy highlighted the demographic situation as a particular problem, given the country’s already-high social spending.

Some of what Italy can do involves encouraging more workforce participation for Italians who aren’t already engaged, especially women. But in the medium to long-term, it will be hard to avoid more immigration, and long-term integration of arrivals. Immigrants with the best skill sets, who do want to settle permanently wherever they end up, will have a choice of countries. How long it takes to get citizenship is one parameter they will definitely take into account.

This is the paradox of tightening migration criteria. If you do it, you risk scaring off those you do want, who often have choices as to where they can end up. Those left are more desperate people who are willing to jump through whatever hoops you put in place.

Germany is both the largest country in the EU, and its largest economy. But neither of these things are necessarily reflected in the size of its military. The country currently has an active-duty military force of around 180,000. France, by contrast, has around a quarter of a million active-duty personnel, give or take. One of the main aims in Germany’s military push, then, is to get more people into the forces. Boris Pistorius has said that the goal is to recruit roughly 60,000 new personnel, or around a third of the current forces.

We will be interested to see how Pistorius manages to do this, because recruiting more people is going to be one of the most difficult things the Bundeswehr, Germany’s armed forces, will do. First, there’s the fact that the pool of available recruits is shrinking. Germany’s so-called prime working age population, those from 20-50, will have gone from 36-37m in 1990 to 27m in 2030.

Germany’s total fertility rate is relatively low, coming in at an average of 1.46 children per woman in 2022. In 2023, the median age in Germany was 45.7. In France, it was 42.3. France has the advantage of more young people, relatively speaking, to recruit into the military.

Against an overall population of 27m, recruiting an extra 60,000 people might not sound like much. But the problem is what is going on elsewhere in the economy. Although German industry has been stagnating, it has not totally disappeared, and labour shortages still exist. The recent slowing economy has taken some of the edge off, but not gotten rid of them completely. Those 60,000 people are going to have alternatives that do not involve months of basic training and spartan living conditions.

Which brings us onto another issue: willingness. Insa recently conducted a poll, commissioned by ZDF, on attitudes towards the military build-up. Respondents were strongly in favour of spending more on the military, by a ratio of 70% to 26%. They also broadly agreed that Germany should be ready for war, by 50-31%. But only if someone else is doing the fighting: only 29% said that they were personally willing to take up arms to defend Germany.

We would also question whether Germany will get the ratio of quality to quantity. What we can see, both in Ukraine and elsewhere, is that warfare is changing, and so are the requirements. You may still need infantry soldiers. But you will also need more IT specialists, engineers, and drone operators.

In 2005, Germany decided that it, too, needed US-style elite universities. That did not happen because they mixed up cause and effect. Havard is not excellent because it is elite. It is also questionable whether elite universities still have that cutting edge in a time when more and more research, on AI for example, is happening within the private sector, or in areas where universities can no longer claim monopoly positions. If you had to draw up a university system for an advanced economy from scratch, one fits the requirements of the 21st century, you would probably not create an Ivy League.

There is a lot of confusion in the heads of continental Europeans about the state of their globally declining universities. One of the more confused people in power right now is Germany’s new culture secretary, Wolfram Weimer. His one notable initiative so far is to offer a campus-in-exile for Harvard University.

FAZ reminds us of what makes Harvard different from the best of the German universities. Harvard has 2400 professors, 22,000 full-time students, and an endowment of $50bn. The University of Bonn, one of the top universities in Germany, has 700 professors, 37,000 students, and is funded mostly by the state. German universities have on average 50 students per professor, whereas in the UK the ratio is more like 17 to one, which is similar to the US average. The elite universities in both the UK and the US are outliers.

FAZ writes that to create such a university in Germany, or even a single department within a German university with a similar teacher-student relationship, is not possible given current budgets, and the political, social and legal environment. If you really wanted to fix the university system, a better teacher-student relationship would be a good start. Or linking teachers’ pay to their performance.

We see Weimer’s proposal as yet another attempt to cling to the past, in this case someone else’s past. The public discussions in Germany, whether it is about the economy, or research, tends to vary between different visions of the 20th century. Universities are not fundamentally different from economies. They thrive on competition, not regulation.

In the UK, there is perhaps no more concrete symbol of state failure than Thames Water. In the privatised British water system, Thames Water is the country’s largest supplier. It provides water to around 16m people, including London. Despite this, and a literally captive market, the firm has found itself in financial difficulties, and in need of a rescue.

One option to do this has just vanished. Initially, KKR, the private equity group, had said that it would put £4bn into Thames Water, and deliver a plan to turn the firm around. But yesterday, it pulled out of the deal.

Now another option will have to be found. The government would prefer that Thames Water and its £20bn debt pile becomes the responsibility of the firm’s creditors, who would take the company over and try to turn it around. But it is also possible that the firm could be put in a so-called special administration regime, or SAR. This would basically entail the government, for a time, nationalising the firm.

Thames Water is the most egregious example of the Kafkaesque mix of public and private that has arisen in so many areas of British public services and the economy as a whole. Companies were privatised. But in many instances, like rail travel and especially water, this happened in sectors where competitive markets are very difficult to achieve. So, there was strict regulation to ensure decent services and avoid price-gouging.

But these have become hard to bear financially. The result is a system where you have companies that are de jure privatised but almost quasi-state backed. Thames Water might not be run by the government. But if there is no other option, it will be. It is almost the definition of too-big-to-fail.

The costliest instance of too-big-to-fail for the British government, of course, was its banking system. That blew up in the UK’s face almost two decades ago, during the global financial crisis. Since then, there has been little progress in finding an economic model away from firms that are nominally private, but implicitly rely on the state’s backing if things go wrong.

Trying to rationalise this mess would be a political project that the centre-left Labour party, if nobody else, could actually pull off. Railway nationalisation, and planning reform, are already tentative steps in a system that would do away with ersatz privatisation, and let the actually-existing private sector do what it has to. But there is no bigger vision for this so far.

Turning the economy, and public services, around is the only thing that will save the government's flagging popularity. Trying to be diet Nigel Farage won't do it. Neither will cutting deals with Donald Trump that only partially mitigate the damage in sectors that barely exist in the UK, like the exemption from new 50% steel and aluminium tariffs. 

As happens in the Netherlands, so happens in the rest of Europe later. The Dutch were some of the first to take up right-wing populism in any appreciable numbers, when Pim Fortuyn entered the scene more than two decades ago. Then Geert Wilders took up the mantle. The result has been something else we can now see across Europe: a destabilisation of coalition politics.

Since Wilders’ party, the PVV, first supported a government in 2010, Dutch cabinets do not have the best record for longevity. This is a trend that looks like it will probably continue with the four-party government that the PVV is part of, and the largest party in. It is the most unstable one yet.

This government may not even last to the end of this week. Last weekend, Wilders presented a series of ultimatums to the rest of the government over asylum policy. He wanted, amongst other things, a total stop to any acceptance of asylum-seekers, and the military at the border. If the rest of the cabinet was not willing to agree, he said he would walk away.

Wilders met with the other cabinet parties last night, and will continue to talk tomorrow. But so far, the atmosphere does not look good. After last night’s meeting, Wilders said that there was a serious problem, and that although he would sleep on it, he was clearly not happy.

The other three parties, for their part, are unimpressed with Wilders’ antics. They have said that if Wilders wants to get somewhere with tightening asylum policy, he should tell Marjolein Faber, the migration minister and a member of Wilders’ party, to get a move on. Faber has been slow to put policies already agreed on by the coalition in place, according to the other parties, and that should be the priority.

Everything is still up in the air, but to us it is difficult to see the other parties budging. Dealing with both Wilders and Faber is clearly aggravating them, and we are sure they are aware that if they give into Wilders’ blackmail this time, it will likely happen again. This is especially the case for the more centre-right VVD, Mark Rutte’s old party, and the NSC, which Pieter Omtzigt founded.

The question, then, is what Wilders does. He already threatened the government over migration and backed down, back in February. But now he is putting his reputation on the line in quite a serious way. If he decides to give in, he will end up losing more credibility with his voters, at a time when his party’s popularity has already been waning. The PVV is at about 20% in Politico’s poll of polls now, compared to 24% at the 2023 election, and a post-election high of 33%.

If Wilders does decide to leave, then that will be it. The cabinet will collapse, and new elections will have to be held in the coming months, likely sometime in late October. But the problems will likely not go away. Wilders does not have a power option without the centre-right. The centre-right has an unpalatable choice between teaming up with Wilders again and a grand coalition with the centre-left.

Natural disasters can hurt incumbent governments if the rescue and recovery operations are badly managed. Antonio Costa had to pay in popularity after a chaotic response to the devastating fires that destroyed large sways of land in Portugal in 2017. Same for Alexis Tsipras in Syriza after the 2018 wildfires that killed 104 in Greece, for which the government did not have an emergency response plan nor warning text message services. It even works as a promise in election campaigns. Gerhard Schröder won the elections back in 2002 which he was forecasted to lose after he put on his rubber boots to walk through the flooded city of Grimma, promising un-bureaucratic support if elected. And Armin Laschet lost the German elections after he was seen laughing at a flood visit in the Ahrtal that costed people’s lives and livelihoods. Showing up in crisis, and behaving appropriately, is key.

Natural disasters matter economically, but also culturally. Land is part of people’s identity. Irrevocable damage to the land upends the stories that shape the region and its people. If the landscape is destroyed, that loss is felt collectively. How the community dynamics then shapes political outcomes of those economic shocks is hardly understood.

Who benefits from those moments? Mismanagement happened under both centre-right and centre-left administrations. And mostly the opposition benefited from those fallouts. But what if the main opposition force is a far-right party? Disasters plays into their narratives, as cultural identity is a big theme for them. Could they benefit from natural disasters? Or just only a particular type of disaster?

The academic paper Without Roots written by Simone Cremaschi, Nicola Bariletto and Catherine E. De Vries measured the political effect in the Italian region of Puglia where an infestation of an imported bacteria in 2013 that led to a drying out of their sometimes very old olive trees within 5 years. The authors used an innovative mix of quantitative data and field work to capture the impact. They used data and stories the people tell to find out how they then voted. Objective and subjective data together revealed the interactive relations between nature, culture and politics.

Puglia was one of the main olive producers in Italy before the infestation, supplying 40% of total Italian production. The local authorities reacted late and insufficiently to limit the damage. The dying of the olive trees was a major economic shock for the agricultural sector and tourism. Politically, this was a move to the far-right. Both Fratelli d’Italia and Lega benefited, gaining together on average 2.2%, while the governing centre-left, the centre-right in opposition, and extreme left all lost votes. There were also more people showing up to vote on election day than before the crisis. So disasters can mobilise politically.

The researchers then went further to understand differences in the data. They interviewed people in two towns that were similarly affected by the crisis, but where the far-right overperformed in one town and underperformed in the other compared to the average. Olive trees played a huge part of their income generation and community life in both towns. The main difference they found is in a narrative of neglect by the state. In one town, the citizens felt for decades neglected by the state in the provision of public goods, while people in the other town had the complete opposite narrative. As a result, the disaster was interpreted as another sign of an ignorant elite in the first town, while in the other town it was seen as an unlucky catastrophe that could not have been avoided, just better handled. Narratives matter.

There are some lessons to be learnt from this, writes Max Hauser for Surplus, the new magazine founded by Isabella Weber and Adam Tooze amongst others. It requires smart and targeted policies in collaboration with local authorities. And to counter the apocalyptic visions of far-right politicians, more needs to be done to improve crisis prevention and containment as well as new ways to rethink cultivation methods and business models. The good old days may not come back, but people can be better protected.

We talk a lot about the rise of the far-right, and much less about the decline of social-democratic parties in Western Europe. These two trends are interrelated. Without money to spend for redistribution purposes in today’s budgets, parties on the left have less to offer than the far-right with their nativist ideologies. The war in Ukraine, the conflict in the Middle East and Donald Trump’s victory all push forward right-wing themes. Increasing polarisation in the electorate also favours the right and challenges the left.

Traditional left-wing parties, be it Socialists or Social Democrats, have lost their connection with core voters and are not the ones spearheading themes and agendas from the left anymore.

The French Socialists, for example, lost their leadership role on the left to Jean-Luc Mélenchon and his more radical La France Insoumise. It has been 13 years since they last have been in power, and since then they never bothered to present a fully fledged party programme. The two contenders for party leadership offer recycled ideas: tax to cut the deficit, support the taxi protesters, and limit budget savings. Their message is like a caricatured reflex: don’t save, we make the rich pay! As this recipe had worked in the past.

One of their biggest schisms today is between those who want to form an alliance with other left-wing parties and those who prefer to preserve the singularity of the Socialists. This party does not look like one that is getting ready for taking over power any time soon.

The German SPD also struggles with increased competition from the left. The Left party made a surprise entry in the last elections thanks to a mobilisation of young voters. The Social Democrats have another grand coalition with the centre-right CDU, something still unthinkable in France. This is the fourth grand coalition in the post-war era. Compromising with the right blurs lines and comes with a loss of identity. The SPD no longer represents a labour movement. Blue-collar workers and even trade union members used to be their core workers, today they are more likely to vote for the far-right than for the centre left. The SPD is the party of pensioners, of ageing middle-class voters in urban centres.

The French Socialists and the German Social Democrats used to be two very different versions of the centre-left. The French are the far more intellectual and ideology-driven party of the two, whilst the German left had been rooted in the industrial heartland. Both have lost their identity in the process of political renewal in their country without being able to clearly define a new sense of purpose and positioning. The rise of the far-right is to be seen also in light of the failure of the left to define a coherent answer to today’s challenges. Reindustrialisation won’t do the trick.