Virtually all of the German coalition’s big strategic industrial subsidies have gone up in smoke because of misjudgements. Intel postponed its semiconductor factory in Magdeburg, eastern Germany. Wolfspeed did the same for its highly subsidised factory in the Saarland. ThyssenKrupp almost pulled out of the large Green steel project. But the biggest disaster of all is the Northvolt insolvency. On this project, the damage is even worse because of an unbelievably stupid way the German government funded the project.

Handelsblatt writes that the insolvency will cost the German state a cool $620m. Right now, this is a lot of money for Germany. It is also testimony to the failure of an industrial policy that was geared solely to the preservation of the car industry. They badly wanted the chips and the batteries to secure the car industry's supply chains. It was always and only about cars. 

It was only in March that Olaf Scholz, Robert Habeck, the state premier of Schlewig-Holstein, the Swedish ambassador, and the Northvolt CEO were pictured together in a PR stunt where they pretended to play a German version of Petanque on a north German beech, but this picture was as fake as the entire, now defunct project after Northvolt filed for bankruptcy in the US.

Handelsblatt writes that the German project is theoretically not affected, but the Chapter 11 proceedings in the US automatically triggered a convertible bond through which the government funded the subsidy – via KfW, the state-owned bank, through which German governments fund projects like these. The bond was insufficiently secured, since the German government attached a near-zero default risk to the venture. The risk is now shared equally by the federal government and the government of Schleswig-Holstein.

Donald Trump is on to something in his rejection of unfettered free global trade. The balance in which the US absorbs the trade surpluses of neo-Mercantilists like China and Germany is unstable and unsustainable. We noted an interesting argument by Richard Koo, who is best known for his idea of balance sheet recessions, who made the point that core supporters of the Democratic Party have been mostly shielded from the effects of an overvalued dollar.

We are therefore not surprised to see a political backlash against global free trade in countries with traditionally strong trade deficits – like the US and France. A decline in the value of the dollar would, from a US perspective, make political sense. If you want the industrial jobs back on a large scale, this is what will need to happen. But there is also a political price to be paid. And this is where Trump’s thinking is muddled.

It was one of the revealing parts of Angela Merkel’s memoirs in which she characterised Trump in terms of his zero-sum game mentality. This is something she had not encountered before, because politics, in Germany at least, is usually devoid of transactional characteristics. One reason why Trump focuses so much on trade is because trade is the ultimate zero-sum game from a political perspective. The economic theories of absolute and relative competitive advantage characterises free trade as a positive sum game. But the theory is silent on the distributional effects. What politicians know better than economists is that the median voter, not the average voter, determines the outcome of elections. This is why we should take Trump’s trade policy seriously. It wins elections. Where Trump is confused is about the international role of the US dollar. His recent warning to Brics countries not to set up a competing currency makes no sense for a number of reasons. For starters, the Brics have given up on this idea already, no doubt influenced by the experience of Europeans, who committed the folly of setting up a monetary union and then muddling through without a fiscal union and a single capital market. If Trump’s goal is to reduce the exchange rate of the dollar, then surely this will imply reduced capital inflows. You can’t have it both ways. In other words, if your political goal is to eliminate the trade deficit and to increase manufacturing at home, then you can’t simultaneously have a dollar policy.

This will have many consequences. One of them will be reduced scope to use the dollar in foreign policy. If others are becoming less reliant on you absorbing their savings surpluses, then they are also less vulnerable to your sanctions. Rather than creating a currency of their own, the Brics are doing something more clever by creating a separate payment infrastructure that allows them to transact amongst each other without recourse to the US dollar markets. This is the problem with the use of the dollar in foreign policy. You can’t have it, and use it at the same time, because others will find ways to reduce their dependency.

A world in which the US will absorb global savings surpluses to a lesser extent than today, and where the rest of the world is becoming less dependent on the US dollar, is a more stable equilibrium.

Josep Borrell left his office as the EU’s High Representative for foreign and security policy over the weekend. We will miss his frank talk, be it on the war in Ukraine or Gaza. He exposed the double standards of EU foreign policy in its dealings with Russia and Israel, and the EU’s inconsistent and ineffective actions. He added a voice of urgency to Europe’s foreign policy, and did his best to encourage member states to forge coherence on the most divisive foreign policy positions. But the divide runs deep over Europe’s role in the Middle East and how to finance support for Ukraine.

He also left behind a stark warning for the European Commission’s president to stay out of issues that are not EU competences. Art. 17 (1) of the Lisbon Treaty clearly delineates what the EU can and cannot do. It says that the EU's executive has external representation, except for the union's foreign and security policy. Ursula von der Leyen never accepted these limitations since the beginning when real problems of foreign and security policy emerged, said Borrell in his last interview as the European Commision's top diplomat with Euractiv. When von der Leyen was pledging action on the Taiwan straits, military support for Ukraine, or full support for Israel, there was no common EU position. This problem is likely to get worse in von der Leyen’s second term. Some already accuse her of applying divide and rule tactics by intentionally designing an overlap in competences in the new Commission. The EU as a whole, not the Commission, needs to become a geopolitical actor, according to Borrell.

The moment of truth will come eventually when EU states will have to reveal how much money they are willing to spend on foreign policy priorities if there is not much left in the pot for domestic projects. And it will be the job of Kaja Kallas to forge a coherent EU strategy out of this.

Benjamin Netanyahu is immune to the ICC arrest warrant, the French foreign ministry assured us yesterday. The French have some skills in bending the law, testing its flexibility and durability, but this is a stretch that is ultimately bound to fail legally, though it may politically be a success.

The French argument is that Netanyahu is covered by immunity because he is the head of a government in a state that is not a member of the ICC. This legal argument won’t hold, according to legal experts on immunity.

First there is no extra-treatment for heads of states. According to Art. 27 of the Rome Statute, all wanted persons are equal before the court, including heads of state or government. And no immunities under international law may bar the court from exercising its jurisdiction. 

Second, there is the definition of jurisdiction. Israel may not be member of the ICC, but the State of Palestine is. It was granted membership back in 2015. This means the court can investigate Israeli nationals for crimes committed in occupied Palestine, which includes the Gaza Strip, the West Bank and East Jerusalem. 

There is also no exception for France. All 124 signatories to the Rome Statute, including all EU member states, are legally obliged to arrest Netanyahu and Yoav Gallant on their soil and hand them over to the courts. Member states are the enforcers of ICC arrest warrants, whether or not they agree with them politically.

There is one loophole, however. International law has one caveat provision for officials from non-ICC member countries. Art. 98 (1) stipulates that an ICC member country like France could waive an arrest warrant against someone like Netanyahu if that would force France to act inconsistently with its international law obligations on state or diplomatic immunity.

Art. 98 (1) has been used in the past by states that refused to hand over Vladimir Putin and Omar al-Bashir of Sudan, both nationals of non-member states of the ICC. Jordan triggered Art. 98 (1) when it did not arrest Bashir in 2017. The second case was Mongolia, which refused to arrest Putin when he came for a visit in September, claiming that he enjoys immunity.

Both immunity pleas have been dismissed by the ICC as unfounded, and both countries have thus been found to be in breach of the Rome Statute. In its explanations, the ICC wrote that the reference to state immunity under Art. 98 (1) is related to the immunity of a state and its property, not its leaders or officials. A similar ICC ruling is expected in response to the French immunity plea for Netanyahu.

But perhaps from a French perspective the purpose of this plea is not a legal one but a political bargain. Could France play a long game with the ICC in return for Netanyahu agreeing to a cease-fire deal in Lebanon? The ICC arrest warrant is a big deal for Netanyahu and a bargaining chip that may make him override opposition from within his own coalition. A deal that treats one pain for another: France accepts admonition from the ICC for Netanyahu to accept overriding his far-right allies.

How far could they take it? What are the consequences for an ICC member state if they refuse to implement its arrest warrants? How long until the far-right allies pull out and bring Netanyahu’s government down? Is this just playing for time? It may give them a couple of months, enough to help a ceasefire deal getting off the ground and for Donald Trump to take over the negotiations. But could this be a sustained position? Inside the EU, if France were to follow this logic, this would open a schism between those who advocate adherence to international law and those who see it more as a suggestion that can be overridden by bigger geopolitical concerns. Watch that space.

We notice a significant change in tone in the media since Donald Trump got elected and Elon Musk no longer holds back on Twitter. What used to be considered politically incorrect no longer seems so outlandishly wrong. Quite the contrary. People dish out their brash judgements of others online, contempt is discovered as a powerful tool for self-gratification, the language is increasingly Trumpian. Nationalism and us-against-them rhetoric is celebrating a comeback. Not only in the US, in Europe too, us-against-them narratives and positions have hardened, though the tone is much softer on this side of the Atlantic.

One country where the trend plays out is is Austria. Before the Austrian elections in September, people would hesitate to admit on camera that they will vote for Herbert Kickl and his Freedom party. Kickl was branded too radical by the establishment, yet he won the national elections and the state elections in Styria convincingly. His programme Fortress Austria and his speeches suggest a very different Austria, a government that would seek to get back control from the EU, and over migration. Concretely Kickl promised to introduce emergency laws to suspend human rights for asylum seekers, a change to the constitution to protect Austria against the attacks from the EU or the WHO, more monitoring of teachers and the media and what they say, and a prime minister from the people and for the people, whatever that means.

Austria’s president did not want to take the risk, and gave the mandate to form a government to the conservative ÖVP, which came second in the elections but has since lost massively in Styria. 

The Archives of the Austrian Resistance published a representative survey of over 2100 people to explore their opinions on far-right themes. They defined far-right extremism looking at three phenomena: the so-called ethnocentrism or people's community; anti-egalitarianism, rejecting the idea of equality of humans in a society; and the idea that an authoritarianism that can, but does not have to, be accompanied by violence. Thus defined, they can be found across the political spectrum. Most of them, 58%, are FPÖ voters, whilst 17% vote for the SPÖ, 11% for the ÖVP, 6% for the Beer Party, 4% for the Neos, 3% for the Greens, and 2% for the Communist party.

And their views reveal a sobering image for Austria’s democracy and the people's desire to take back control:

• A third longs for a strong man who does not have to worry about a parliament as the head of the country. The number goes up to 90% amongst far-right extremists.
• More than half of all respondents agree that dangerous people should be locked up before committing crimes.
• Half of them agree one can become a good Austrian citizen, even if their ancestors were not Austrian. But also half of them back comprehensive re-migration of immigrants, with numbers going up to 70% amongst far right extremists.
• They found three forms of anti-Semitism: traditional, Israel-related antisemitism, and guilt-avoidance antisemitism, which is increasing rapidly amongst right-wing extremists. A shocking 42% believe that Israel's policy in Palestine is like that of the Nazis in World War II, and the number is 60% amongst far-right extremists.
• Over a third of them did not want to live next to a Muslim, rising to 69% amongst far-right extremists.

A three-month ceasefire started in Lebanon this morning. Israel and Lebanon agreed to an arrangement as a first step towards implementing the existing UN Security Counil resolution 1701. Over the next sixty days, the Lebanese army is expected to deploy 5000 troops to South Lebanon, while Hezbollah and Israel military are expected to pull out of the territory. Israel counts on the US to help enforcing the deal, and on the Lebanese army to ensure that Hezbollah’s infrastructure and weaponry is removed and that it cannot be rebuilt there.

While officially it was an agreement between two states, it was de facto negotiated with the Hezbollah militia, and Lebanese parliamentary speaker Nabih Berri mediating on its behalf. Berri is the most senior Shia office-holder in Lebanon, though he is not affiliated with Hezbollah. Crucially for the success of the ceasefire deal, Hezbollah no longer insisted on Israel ending its war in Gaza as a pre-condition for stopping Hezbollah’s hostilities. Israel also reserved the right to intervene if the terms are violated. We will find out what that means exactly over the next three months.

The monitoring of violations and efforts to mediate have been strengthened. The US and France will join the existing tripartite mechanism, which involves Unifil, Lebanon and Israel, at Unifil’s headquarters in Naqoura. They will ensure that the deal is enforced. The immediate aim over the next three months is to enable the Lebanese and Israeli militaries to resolve any potential ceasefire violations via indirect mediation.

Four European countries have played key roles in Unifil operations in Lebanon since 2006. Germany leads the naval task force, Spain oversees the eastern sector, Italy manages the western sector, and France handles patrols in the operational area.

Will the deal lead to a disbandment of Hezbollah, which is also part of the 1701 resolution? The deal itself only requires weapons and military infrastructure to move north of the Litani river. Those guns and missiles will continue to exist, writes Zvi Bar'el in Haaretz. The new monitoring mechanism may help to prevent an influx of new weapons. But ultimately how far Hezbollah will go to meet the terms of the resolution is up to Iran. Without Iran’s strategic decision to break up the Gaza support line and delineate the fates of Hezbollah and Hamas, this deal would not have been possible. Iran will also be crucial for implementing the deal.

The 60-day ceasefire will test all parties and define the terms of what a violation is and what responses are permissible under the agreement. It will be the litmus test for Iran, and how far it will go to allow its militia to retreat.

It will also test Israel’s government. Some of its far-right ministers want Israel to continue to fight Hezbollah, but two front wars are very costly for Israel. The deal with Lebanon, if successful, could also open up a whole new logic for Gaza: if Israel can agree to a ceasefire with Hezbollah, without reaching its goal of complete destruction of the militia, why can’t they do the same with Hamas in Gaza and free the hostages?

DL News has a cracking story out this morning about what the Trump administration and the Republican majority in Congress mean for the future of future crypto regulation. The story is that Congress plans to bring global crypto regulation back from the EU to the US. This is also one of the reasons why the price of bitcoin and other crypto assets has risen so strongly since the US elections. The total estimated increase in the wider-cryptosphere’s market capitalisation has been a staggering $1.2 trillion since the elections.

We recall that the crypto industry raised some $200m to influence the 2024 presidential and Congressional elections. The reason is that the industry wants crypto to be recognised as a separate asset class, a request refused by Gary Gensler, the chairman of the Securities and Exchange Commission, who applied existing regulatory laws and principles to crypto. By comparisons with Gensler’s approach, the EU’s Markets in Crypto-Asset Regulation (MiCA), passed earlier this year, was a relative improvement from the industry’s perspective because it is a transparent rules-based system, as opposed to an approach that relied primarily on legal enforcement by courts. After the elections earlier this month, Gensler announced that he will step down from the SEC on the day of Trump’s inauguration to make way for a new administration appointment.

We know that Donald Trump is pro-crypto, as are Scott Bessent, his nominee for treasury secretary, and Howard Lutnick, his choice for commerce secretary. Trump and his family are behind one crypto venture, World Liberty Financial. DL News reports that Cynthia Lummins, a Republican Congresswoman from Wyoming, is planning to introduce legislation that will formally classify crypto as an asset class in its own right. The idea is to supplant MiCA as the de facto global regulatory standard. Given the virtual absence of large EU-based players in the crypto industry, we think this is reasonable to succeed to bring the industry out of its off-shore status. It is another nail in the coffin of the if-you-can’t-beat-them-regulate-them approach by the EU to 20th century technologies. We would expect to see similar developments arising in every areas of tech regulations passed in Brussels during the previous two legislative terms, including the recent attempt to force social networks operators to moderate their content. Social media companies will ultimately respond to this either by operating outside of the EU, or through political pressure through the US administration. We already heard JD Vance threatening the EU into dropping attempts to restrict Elon Musk’s X platform, or else face the consequences of a reduced US commitment to Nato. While we don’t take this particular threat seriously, we don’t think that the EU’s approach to tech regulation is sustainable.

DL News also reports that the crypto industry has already raised $78m for the 2026 mid-term elections. While Republicans are leading the fight towards a industry-friendly crypto regulatory framework, we doubt Congressional Democrats will allow themselves to be pushed into a crypto-sceptic corner unless regulatory laissez-faire were to result in a financial crisis. We think that, at least for the moment, this is unlikely, but crypto is still in its wild-west stage of development. The US has traditionally regulated in response to events, rather than by trying to anticipate future problems, as has been the case in the EU.

Donald Tusk’s big idea is for a one-off eurobond for defence. We think this is a non-starter because defence spending falls into the category of expenditures, not investments.

Another non-starter is Olaf Scholz’s red line on defence spending – that he accepts no trade-offs between social policy and defence spending. How can there not be trade-offs between the two largest spending categories in the federal budget?

Another non-starter is the idea that a golden rule for investment would free up money for defence spending. It will do so in theory, but not in practice. The golden rule Germany discusses as a possibility for a reform of the debt brake will not come to the rescue here. Christian Lindner’s legacy for his successor is indeed a giant black financial hole. We wrote in a recent article that the total estimated funding gap is close to €800bn, covering only agreed targets. The main effect of a golden rule will be to protect investments from future cuts in government spending. Fiscal expenditures are, of course, fungible but only up to a point. If you exempt investments from your fiscal rules, you create space for other items, but there is no way that we can fund the increase in defence spending from borrowing, and certainly not from European borrowing. The main effect of a golden rule is distributional. It will not produce large permanent increases in the deficit.

Another non-starter is the re-purposing of EU cohesion fund spending. We reported on one of Ursula von der Leyen’s big idea to give member states the right to choose how to spend the EU money – something that would the EU turn into a fiscal redistribution mechanism. Of the cohesion funds, only 5% of the €400bn allocated in the current financial period has been spent. The idea is to give countries some leeway to use this money on defence.

For the EU as a whole it is not possible to achieve defence spending targets through intra-government redistribution mechanisms, or through debt. If you want to raise defence spending, the question really boils down to what taxes you want to raise, or what social expenditures you want to cut. If governing coalitions reject both, as is the case in Germany for example, the rise in defence is simply not credible.

Boris Pistorius was a media creation. Newspaper after newspaper had been commissioning opinion polls which purported to show that Pistorius is more popular than Olaf Scholz. What the polls didn’t show is how that popularity would hold up in a campaign. We are reminded of the polls in the US during late June, early July, showing that Joe Biden was certain to lose against Donald Trump, whereas Harris would defeat him. She might, or might not, have defeated him then, but people did not know her policies at the time. Same with Pistorius.

Yesterday, the German defence minister released a message to say that he is not going to be a candidate, leaving the media fuming. Spiegel declared Scholz to be the worst candidate in history, which is a bit of an exaggeration. Scholz was the only SPD candidate to have won an election since 2002. We don’t think this will happen again. But it would be a mistake to think that the elections are over. By 23 February, Trump will have been in office for a month. They could be a Ukraine peace deal on the table, or tariffs imposed on German cars. Friedrich Merz's idea that he could negotiate a trade deal with Trump would look very odd at that point.

One of the bigger polling organisations yesterday came up with a poll showing the SPD falling by 2pp and the Greens gaining by the same amount, with both of them now level at 14%. This only tells us something we know already - that voters prefer united parties. The poll shows that the sum total of the two parties of the left has been largely stable at around 28% - as is the total of support for AfD and Wagenknecht at around 25%. The CDU/CSU are stable well above 30%, so the broad picture has not changed much. Most of the movements are noise. And the FDP is still at 4%. Exiting the government does not appear to have worked for the FDP, but we think they still have a chance to clear the 5% hurdle, which would give them an opportunity to reinvent themselves in opposition.

A final observation. As the traditional media are starting to lose their control over politics, they are becoming increasingly aggressive. Bild started the campaign to support Pistorius because the paper disagreed with Scholz’s reluctance to send Taurus cruise missiles to Ukraine. Then Bild commissioned opinion polls appearing to confirm Pistorius’ popularity and running more headlines on the polling. This cycle continued for weeks. At no point did Pistorius declare he was a candidate. It is true that he did not explicitly rule it out until yesterday, but his candidacy was largely a figment of the media's imagination. The trouble is that senior SPD folk started to fall for it, and questioned Scholz’s leadership. And so it got out of control. Three months before an election is not a great moment for any party to suffer a nervous breakdown.

The Brexit referendum in 2016 and Donald Trump’s victory this year are fountains of wisdom for future political strategists because they both falsified beliefs that were held by a large majority of experts. We decided to write a loose mini-series on the hidden lessons of the US presidential campaign. The first in this series was our note from November 12 And finally, some fake news, in which we wrote about how legacy media, and the parties that rely on them, have lost control over communication. Yesterday, we wrote about the dangers of appointing popular but untested candidates, a mistake that Germany’s SPD is currently toying with. Today’s is about falsifiable claims - election strategies that fail to look beyond the election date.

The lies of the UK’s Remain campaign in 2016 were almost surely not the worst, but they got exposed because they lost and because the economy failed to collapse afterwards. Nigel Farage's mad claim that the UK would be overrun by Turkish immigrants, by contrast, is far worse, but not falsifiable because the Leave campaign won.

The claim that Trump means the end of democracy is just as falsifiable. It was a morale booster for Democrat activists, but voters cared about the economy more than about democracy. Kamala Harris entered the campaign without an economic policy, and never appeared comfortable talking about it.

Even after the elections, the Democrat-supporting media kept on repeating the same error with Doomsday predictions of Robert Kennedy’s appointment to the job of health secretary. We ourselves take no views on health debates. We know, however, that science – unlike economics – is not what 80% of scientists believe. Have you considered what would happen to the credibility of the scientific policy consensus if Kennedy were to succeed? What made Sweden's decision during the pandemic to refrain from a lockdown is to provide a rare example of a counter-factual. Remember the predictions? The Swedish decision was dangerous not to the Swedes, but to those in other countries happy to pull the trigger of lockdowns.

The overall lesson for political campaign managers is that they need to have a strategy both for winning the campaign, and for the credibility of their candidate after the election. Project Fear always fails the second test.