We use cookies to help improve and maintain our site. More information.

25 April 2024

Is this it for Sánchez?

In our lead story we look at Pedro Sánchez' announcement that he may resign as Spain's prime minister after the start of a preliminary investigation into his wife over influence-peddling; we also have stories on the parallels between Germany's exposure to China and the subprime crisis; on why the EU should not try to fight China with bureaucracy but with supply chain diversification; on Emmanuel Macron's entry into the European campaign; on more signs of a German recovery; and, below, on the West losing whatever credibility it has left over Rafah.

If you would like to read more, please contact us for a free trial

Today's free story

Rafah and then what?

What is the point of red lines if they fail to stop what they meant to stop? And what does it tell us about the ones who are setting those red lines? Israel’s war in Gaza passed many red lines, right in front of our eyes. Whenever the Israeli government disregards the warnings from the US and its allies, the rhetoric sharpens, but no action is taken once the red line is crossed. The world adjusts to the new status quo until another unimaginable event shakes the world and a new precedent is set. It reminds us of the settlers’ strategy in the West Bank, where settlers take over land and create facts for everyone else to adapt to their reality. Palestinians only have the choice to go elsewhere or confront. The same happens to the US administration and our governments when it comes to political positioning, and everyone can see it. Israel’s capacity to produce facts on the ground exposes our biggest weakness: we cannot deliver on what we set out to do. What precedent does this set in the world?

Rafah has been one of those red lines. The IDF is ready for an operation in Rafah, waiting for the last go-ahead from the Israeli government. The US administration already softened its red line, now saying that it is not advisable. What will the US or the Europeans do if the IDF enters Rafah without an adequate evacuation plan for over a million civilians who are seeking shelter there? The US and European countries won’t suddenly stop supporting Israel or sending weapons there. A new narrative frame will emerge and everyone pretends that there will be a tomorrow without a yesterday. No one will be held accountable in the political discourse, neither Israel for the civilian deaths and destruction it caused in Gaza, nor the West for not doing more to stop this carnage.

This visible inaction comes at a high price. Our values and human rights principles sound hollow without visible action. There are already tension building up via street protests and at university campuses in the US that have a fledgling civil war quality to it. The West's reputation in the world at stake. Is our human rights discourse just virtue signalling, another way of selling our products with a feel good factpr attach to? Who will take us seriously after that?

China and Russia will not miss the occasion to turn the tables here. President Xi Jinping can point the fingers back to us whenever we raise the human rights violations against the Uyghur Muslims. And Russia is already in pay-back mode. They reportedly have been encouraging Nicaragua’s case against Germany at the International Court of Justice to accuse Berlin of facilitating genocide in Gaza. Will the fact that Russia is behind it disqualify the case in our eyes? That would be a mistake. Germany has a tendency to create dependency relations that eventually turn unhealthy. Be it with Russia for gas, with China for manufacturing, or Israel for Germany’s desire to be on the right side of history this time. It is time to take this mirror of hypocrisy, learn lessons, and develop a more balanced approach that allows real moral choices instead of blind backing of one side, which only leads to a reaction mode.

24 April 2024

Immigration talks we should be having

Politicians spend a lot of time in Europe fretting about illegal, or irregular, migration. One ill-fated attempt to deal with this, the UK’s plan to deport asylum-seekers to Rwanda, passed in the House of Commons earlier this week. Last week, the European Commission set out its ambitions to strike a deal with Lebanon, to stop asylum-seekers reaching the EU from there. Giorgia Meloni now spends so much time in Tunisia, where the EU signed another agreement to limit migration, that she should consider buying a time-share in Bizerte.

There is, basically, a lot of talk about limiting the kind of migration we do not want. But there is also an omerta around the bigger and perhaps more important topic, the necessity of figuring out, and encouraging, what kind of immigration we would prefer.

Fabio Panetta, the Banca d’Italia’s governor, recently made a welcome intervention on this. He made a point which you do not hear very often: that without more immigration, the EU will sink demographically. That will mean both its economic and fiscal situation becoming unsustainable. According to Panetta, a common EU-level policy is necessary. Migrants, legally or not, come into the EU as a whole. Even if they are legally restricted to one member state, practically speaking there is often little to stop them moving across borders in a border-free Schengen area.

In Panetta’s own home country, the situation is especially bad. Italy’s total fertility rate is now 1.25 as of 2021. This is far below the so-called replacement level of 2.1, which is necessary to keep a country’s population stable. The only thing stopping its population from cratering is the immigration it receives already. Even if the government could stumble on a way to increase the total fertility rate to replacement level, something virtually no developed country has managed, there would still be inertia.

This basic demographic reality is acute in Italy, but not unique to it. The only countries mitigating it so far are those that accept high numbers of immigrants and integrate them into the workforce, like the UK, Spain, and Portugal. Yet it is something politicians skirt around, for fear that their voters are not prepared to hear the truth.

What you end up with is a worst-of-both-worlds situation. Politicians, especially if they act on their own and not on the EU level, cannot get a handle on irregular migration and asylum-seekers, despite repeatedly promising to. All they accomplish is raising the issue’s salience, while driving disillusioned voters to the far-right.

But on the other hand, they dodge the other side of the coin, the need to accept and properly integrate migrants to keep demographic, and fiscal, balances stable. Until governments are prepared to acknowledge these trade-offs, we should be wary of the feasibility of any commitments they make to consolidate public finances in the long term.

23 April 2024

EU future goals in Zeno's grip

The EU may roll out programmes with its targets set for 2030 or 2050, but this does not mean that it has the capacity to achieve those. It is a bit like Zeno’s paradox, which taught us a long time ago that before a moving object can reach its end point, it has to move to an infinite numbers of half-way points. This makes it impossible to reach the final destination.

In the case of the EU, it has to pass an infinite number of decision points where its long-term goals have to stand up against current pressures. In economic models, present pressures have more sway than the future. Yet this is only true if the future is not sufficiently represented in the present. When the urgency of the moment leads us to deviate from a given path, it often does so by playing down the impact of this deviation on the future outcome. It is the classic kicking the can down the road tactic. If we were to have perfect foresight, we would take those consequences into account.

We have seen this tendency to procrastinate in the EU during the financial crisis, where a capital markets union would have solved many long term issues. Instead, we patched up the current system with some extra reporting requirements for banks. We see it again with the green agenda where difficult changes are postponed for another day. Long-term goals are increasingly difficult to achieve as more resistance builds up, which requires more compromises to keep everyone happy.

The problem is also a question of representation. We are an ageing society. As such, our time horizon of our own decision making is much shorter than 2050. Could a Commissioner for future generations, as suggested by Alberto Alemanno and Elizabeth Dirth in Le Monde, help to keep the long term perspective alive in European decision making? A representative for the next generation is already included in governments like Finland or Canada. He or she may be able to flag up those longer-term consequences of deviations from the path. But ultimately, will it matter? Smokers know that it is bad for their health to smoke, yet they still smoke. This may be explained by a state of mini-rebellion against what is considered the right way, or by a hope that one is strong enough to defy the predicted outcome, or simply by not minding to die earlier when one feels still young. It is an immature way of looking into the future.

The same could be said about climate change. It is not that we have any fewer warnings. Yet we collectively seem to prefer to look the other way and solve quarrels to reassure farmers, or give our votes to the more climate-sceptical conservatives and the far-right instead. Unless the future becomes our urgency-to-act momentum, a conscious choice everyone has to make in their own lives, there will always be collective action problems that sidetrack us from achieving those goals, even if we all agree that those goals are worthy and good.

22 April 2024

FDP throws down the gauntlet

The remaining 18-months of the German traffic light coalition are going to be hell. The main adversaries in that coalition nowadays are Olaf Scholz and Christian Lindner. On economic policy, the common ground that once formed the basis of this coalition has disappeared.

Today, the FDP will present a 12-point plan, designed to cause maximum push-back from the SPD. On that metric, it already succeeded.

Lindner is proposing a reform of the citizen's income with strict penalties on people who refuse acceptable job offers. He wants to freeze all welfare payments in 2025, reverse the cut in the pension to 63, reduce employer contributions to unemployment insurance, and abolish subsidies for renewable energy. He also wants to abolish the German supply chain directive and boycott the implementation of recently agreed EU directive.

If he had slipped the re-introduction of the death penalty into this list, it would probably not have made much difference in terms of its overall popularity.

Lindner's comments give a foretaste of the 2025 budget negotiations, in which Lindner needs to generate some €25bn in savings. The budget will pitch the three parties against each other like nothing ever did. The purpose of the FDP's 12-point plan is to generate massive protests by both SPD and Green, as they go against the core tenets of their coalition agreement.

We are clearly in an election campaign. It is possible, but not likely, that an increasingly desperate FDP will pull the plug on this coalition. This would depend on what happens at the European elections in June, and the three east German state elections in September. Lindner's game is clearly to cause as much havoc as possible so that he can claim to defend the interests of business in this coalition. It is hard to see that this ends well for him. His agenda lacks coherence. What he and Scholz have in common is that they are both driven by red lines.   

As we saw during his visit to China, Olaf Scholz is also in full retreat towards the neo-Mercantilist position his party adopted under Gerhard Schröder, even going so far as to question the EU's competence over trade policy. It should come as no surprise that the German government is currently not contributing to solutions of European or global problems.

19 April 2024

British mobility issues

Anyone who believes there will be a quick move from the UK back towards the EU can think again. If you believe it may happen under a future Labour government, you can think again even harder. There are various possible barriers to the UK becoming meaningfully closer with the EU, let alone rejoining. But the most important one, immigration, remains.

This has become clear based on the response to overtures from the European Commission about a youth mobility agreement. Yesterday, the Commission proposed to EU member states that it would begin negotiating a deal with the UK that would allow 18-30-year-olds from both sides to benefit from reciprocal four-year visas. Both the UK and several EU member states already have agreements like this with other non-European countries.

In the world of immigration, youth mobility is usually as uncontroversial as it gets, at least between developed countries. We have also seen recently that Brexit has not really led to reduced immigration. Instead, EU membership was an excuse for the fact that successive UK governments have been unwilling to make the trade-offs that come with lowering immigration. But the response from both the government and Labour has been very harsh.

The Conservative government said that it would not negotiate with the EU, preferring bilateral deals instead. These are not going to happen anytime soon. Every time the British government has tried, the member states in question have insisted on kicking the matter over to the Commission. Allowing the UK to pick and choose its mobility arrangements would be so bad for your relationship with the EU countries that are left out that it would not be worth any benefits. It would also pose complications for negotiations on other areas, like trade, that are strictly EU competencies.

Labour’s line has been even harder. A spokesperson for the party said that it had no plans for youth mobility to figure as part of a Labour government’s relationship with the EU. One unnamed official from the party told the FT that it was, in their words, synonymous with freedom of movement. Obviously, this is not objectively true. But it shows how determined Labour is to correct, and maybe over-correct, its own mistakes from the run-up to the 2019 election and the second referendum debate.

One thing we will note, however, is that if you wanted to try and avoid having an even bigger re-set of your relationship with the EU, agreeing to youth mobility would be one way to do it. One of the major grievances with Brexit afterwards has been that young people have lost their right to work and study in the EU, denying them something their own parents were able to do. Partially restoring that would be a good tactic for defusing some of the tension.

But not being able to meet this group halfway makes it more likely that they will push for a solution that goes all the way. One thing we noted is that Mark Francois, one of the old-guard Brexiters who gave Theresa May so much trouble when she was prime minister, seemed more open to the idea in principle than Labour did. He may know a thing or two about which side the Brexit project's bread is buttered on. 

18 April 2024


The Letta report is leaking - unfortunately. Whenever you leak a report, you gain publicity, but you lose control of the narrative. We only will be writing about what this proposal is today - on the basis of what we read in Frankfurter Allgemeine. It tells us, essentially, that it is a very boring report, full of worthy suggestions, that mercifully stops short of calling for a eurobond. Their take, not ours. We are not sure that this is the message the authors wanted to get across, or that the report deserves, but this is what happens in a culture where we communicate through leaks. 

The Letta report appears to stress the importance of a capital markets union, but we feel it is important that we no longer use that expression because it means different things to different people. We could not care less that the markets in Frankfurt and Paris have the same regulations. The problem with our fragmented capital markets is not regulation, but the lack of a joint debt instrument. A eurobond is a capital markets union. 

It is deeply unfortunate that all the discussions about eurobonds conflate them with spending programmes. This is not why we want it. We see its primary role as being to serve as sovereign debt collateral in financial transactions, between the ECB and banks, but also amongst financial institutions. 

This is the fiscally conservative version of a eurobond, for example, the one that mutalises the first 40-60 percentage points of each country's debt, and turns the remainder into a quasi-sovereign subclass that is neither backstopped by the ECB, nor by the ESM. If a member state defaults, it won't bring down the house. 

If you mutualise a portion of the national debt - the safest tranche - you have created a eurobond without any fiscal transfers. Special provisions can be made for countries with a lower debt-to-GDP ratio than 40% or 60%. Since these are small countries, they can be fully compensated. Even a 40% threshold would be worthwhile. It would be a sufficiently large debt instrument that it could act in this way. If you restricted the eurobond to the EU's own resources, it would be tiny, unless member states were willing to raise the EU budget. 

Programmes like the recovery fund give the eurobond a bad name, especially amongst fiscal conservatives. There is never going to be a majority in the EU for a eurobond if you conflate with spending. It is a shame that Brussels-based report writers always stop short of calling for a eurobond. It appears to be a form of self-censorship. You don't even propose because you know the Germans will reject it. Our recommendation would be to proceed amongst a coalition of the willing. 

Trying to erect a capital markets union in name only, without a common denominator bond, would be a waste of political capital. We would be ending up with something utterly useless, like the EU bank resolution regime. 

17 April 2024

Kickl leading Austria?

Could Hebert Kickl become the next Austrian chancellor? His FPÖ party is consistently leading in the polls, at around 30%. It is under his leadership that the far-right party managed to leap ahead of the ÖVP and the Social Democrats in 2022. It has consistently remained in the lead since then.

If the polling results are confirmed in the upcoming elections this autumn, he would theoretically have a right to this job. But whether he will get it also depends on Austria’s president and the ÖVP. There could be a coalition of three or four parties to prevent the FPÖ from leading the government. This seems to be the preferred scenario for Alexander Van der Bellen, Austria's president.

In the past, when the FPÖ was part of the government, it was always assumed that the top position goes to the ÖVP. At national level, the FPÖ was part of a coalition five times since Jörg Haider assumed leadership and turned the party into what it is today, but never before did it come ahead of the ÖVP in the polls. This time, it stands a real chance of coming first.  

The media is now also looking into whether Kickl has what it takes to become chancellor. A recent book by the two journalists Gernot Bauer and Robert Treichler tried to shed some light on who Kickl is by interviewing people who have known him throughout his life. The profile that emerged is that Kickl has been a loner since early childhood. He used to say about himself that he is good at nothing, but can learn everything. Kickl did not finish either university or his military service, but once he met Haider, he slowly rose inside the party.

Kickl is very different from the previous leaders. Haider and Heinz-Christian Strache were charismatic, social, and communicative. Kickl is disciplined, controlled and mistrusting. He built his inner circle of reliable allies when he was leading the interior ministry. He has no scandal-ridden past like his predecessors, but likes to disappear to do some climbing in the mountains. An escape that he may not find the time to do if prime minister.

Is Kickl an extremist? Not as much as one might think, according to the authors, even if he embraces extremist ideas. Kickl wants to weaken the EU in order to strengthen the nation-state. If he were to become prime minister, he would govern with referenda even if the results were be in contradiction with EU legislation. His belief is that law has to follow politics, not the other way around. Kickl has supported Viktor Orbán in the past. He also did not distance himself from the re-migration crowd, which held its most infamous meeting in Postdam, where they discussed the forced eviction of millions of migrants from Germany, including people with German citizenship. Kickl knows how to polarise and use the us-against-them formula.

Unlike the last two times, when the FPÖ came to power without a real plan, Kickl will come prepared. He is already looking into personalities who could fill the jobs. Even if he will not be Austria’s next chancellor, he will use his position as the main leader of the opposition party to bide his time. A bit like Marine Le Pen, whose support only grow since her party came first in the 2022 legislative elections to become the main opposition party.

16 April 2024

von der Leyen - game set?

Don’t take Ursula von der Leyen as the next president of the European Commission for granted, writes Politico after interviewing various people. The mood seem to be turning against her in Brussels. Every mishap she made in the past, as well as her appointments is brought up against her.

Partly this wave against von der Leyen is due to her assertiveness, as if the job is already hers. Power does something with people, and it prompts a backlash. One such reaction already happened. A cross-party initiative in the European parliament, including her EPP group, against the Commission’s decision to pay out €10bn from the EU budget to Hungary, which was frozen over the rule of law disputes, has started. Another is a rebellion of four top commissioners against the nomination of German MEP Markus Pieper to a lucrative job of as representative for small and medium-sized enterprises. He resigned yesterday even before he could even start the job due to mounting pressure. Then there is the investigation of the European Public Prosecutor’s Office into how von der Leyen negotiated big vaccine contracts during the pandemic, and her use of text messages.

Von der Leyen is currently the only candidate there is for the job as president of the European Commission. The German government felt it had no other choice but to support von der Leyen, despite being from the opposition party. This reminds us of the time when the conservative José Manuel Barroso was supported by the Spanish Socialist government for a second term. To support a candidate for this top position in the EU just because they come from the same country, or region in the case of Barroso, is a poor reason for such an important choice. She was the only candidate on the ballot list when the EPP endorsed her as their candidate with 400 out of 499 total votes. Some made the point that this is a lukewarm endorsement, given that there are 737 delegates that had voting rights and 591 that were registered to vote. But an endorsement it is for now.

There are also some other hurdles that von der Leyen still has to overcome. The French decided to reserve their judgement and keep their cards for themselves. Michel Barnier refused to back her at the EPP congress, while Thierry Breton, the internal market commissioner, stirred up a kerfuffle with a snipe tweet shortly after the vote. More importantly, Emmanuel Macron refrains from endorsing her, keeping the maximum leverage until the last moment. France is a vote she cannot do without.

She needs a qualified majority amongst countries in the European Council to win her second term. She is most likely to get support from the 12 conservative leaders, but how far can she mobilise beyond that? Her staunch support for Israel is not going down well in Ireland, Spain and Belgium. Hungary and Slovakia have been critical in the past. 

Another even more formidable challenge will be the next parliament. Von der Leyen was narrowly endorsed last time, winning with just 383 votes, slightly above the minimum of 374. The next parliament will turn further to the right and far-right. How does this affect her chances? The EPP is largely expected to win the elections in June. This would confirm von der Leyen as the natural candidate for the job. But the EPP alone will not be enough to get her the nomination. According to the poll of the polls, the EPP, the S&D and Renew could do it but only if nearly all of them voted to back her. This is unlikely. The winners in this election will be the far-right and the eurosceptics, according to the polls. This means her nomination could get more difficult also because she is so strongly invested in Ukraine against Russia, and engaged in a polarising rhetoric. She made no friends with the AfD in this campaign, referring to them as Putin’s friends in our societies that need to be defeated. Could Giorgia Meloni become crucial in negotiating a way forward? And what will her price be in return?

It may be easier for a new candidate without a past to get their backing. Names like Roberta Metsola or Croatian Prime Minister Andrej Plenkovic have been put forward. In the end it will be the result of power-brokering between member states once the election results are known and the candidates for European Commission, European Council and European Parliament.

15 April 2024

From uni back to trades

How is AI changing the job market? The US media reports of rising job losses in the tech sector, 33,000 in two months this year alone. A PwC's Global CEO Survey finds that 25% of chief executives expect to reduce headcount by at least 5% in 2024 due to generative AI.

For young people, these are daunting prospects when they are to decide which path to take after school. If graduating from universities no longer guarantees a stable and life-long income for certain careers, how to pick the right path?

Could we see a return to high-skilled manual work? We noted an interesting story from Axios that the number of US students enroling in vocational programmes jumped 16% last year, while college enrolment has been declining continuously since 2019. The number of university students shot up in 2008 as the millennial generation was sitting out the recession. But studying in the US is expensive, and students end up with a pile of debt once they left university.

The EU is not the US, and in most EU countries studying is not expensive at all. But costs are only one factor. The prospect of earning capacities is quite another. Are white-collar jobs losing their safe-income reputation as blue colour jobs once did with the advent of automatisation of production? These expectational shifts will have a structural impact on the labour market when people choose their career path and lead to misallocation of labour.

There are already labour shortages in certain sectors in the EU as well as in the US. This is also doe to low population growth and the looming retirement of the baby boom generation. One way to fill those vacancies is by relying on migration of foreign workers. As we have seen in the EU, this is easier said than done for most countries, except perhaps Spain.

Another way to fill the gap is through a qualitative shift of skill sets inside a society. Shifting to vocational training is one way this could happen. There are also good reasons to see trades as more future-proof. The environmental challenges and changes our economies are facing not only needs architects and engineers, but also highly skilled trades people to implement new techniques and improve on it. When we went to university in Germany in the 1980s it was not uncommon for people to have completed a 3 year apprenticeship first. This got out of fashion in the fast pacing 1990s. But perhaps these career choices are coming back? We noticed in our surroundings more young people who are ready to make that conscious choice not to go to uni and learn a trade first with their hands-on approach to their career path.

12 April 2024

Israel - end of the bi-partisan consensus

Could the attack on the aid workers from World Central Kitchen in Gaza, with the formidable José Andrés as its advocate, lead to a real policy shift in US politics towards Israel?

The State Department and leading pro-Israel Democratic voices in Congress have suggested that the US should put conditions on military aid to Israel going forward. A letter written by Democrats from the House of Representatives called on Joe Biden to reconsider his recent decision to authorise the transfer of a new arms package to Israel, and to withhold this and any future offensive arms transfers until a full investigation of the World Central Kitchen attack is completed.

Whether it will change US politics remains to be seen. It is still only a letter, signed initially by 40 Democrats in the house, but the list has been growing since. It includes staunch pro-Israel supporters like Nancy Pelosi. If this were to succeed, it would be a first action to signal to Israel that there are consequences for defying US requests for military restraint and its call to increase humanitarian aid.

More could come from a vote in Congress on the support bill that Speaker Mike Johnson still has put forward. Whether support for Israel is packaged together assistance for Ukraine and Taiwan, a bundle that already passed the Senate, or each package is voted on separately, the number of Democrats to oppose backing support for Israel is likely to grow.

Will this prompt Benjamin Netanyahu to rethink his Rafah operation or increase humanitarian aid into Gaza? That depends how biting those threats are, and how Netanyahu can gain political leverage from Biden turning against him.

Support for Israel is becoming a dividing issue between Democrats and Republicans ahead of the November elections, suggesting that the end of a bi-partisan support for Israel is beckoning. Donald Trump recently suggested that Democrats hate Israel, his way of attracting Jewish voters. A Gallup poll finds indeed that support for Israel has fallen significantly amongst Democrats since 2001. The party's voters are now more in favour of Palestinians with 49% in March 2023, while support for Israel amongst Republicans has risen from 59% to 78% over the same period.

But there are important generational differences. A New York Times poll found that 46% of registered voters between the ages of 18 and 29 sympathised more with the Palestinians, compared to the 27% who sympathised more with Israel. By contrast, 63% of those over 65 sympathised more with Israel, while only 11% sympathised more with the Palestinians. The same poll found that 34% of Democrats sympathised more with the Palestinians, while only 4% of Republicans sympathised more with the Palestinians.

A lot of this has to do with access to information. News reporters are not allowed into Gaza, and we see TV hosts walking on egg shells to stay politically correct. Young people though get their information from videos on social media and the internet. Their access to the Palestinian narratives is less filtered and controlled.

We still have our doubts that Biden will put into action his increasingly critical rhetoric. This is a generation that grew up with Holocaust stories and fears for the security of Israel. The generation of millennials and Gen-Z, however, see a modern Israel as a powerful nuclear-armed nation that is capable of defending itself. Also, after the black lives matter movement sharpened their sense for social justice, they have come to see Palestinians as the oppressed group. The high death toll and disproportionate response only fuels that perception of power imbalance. Another factor is religion. Evangelists are still a formidable force and a staunch supporter of Israel. But the number of believers is falling.

Anger over Biden’s lack of action may not be enough to cost him the vote in November. After all, the alternative of a Trump presidency is more chilling for Democrats. But expect the bi-partisan consensus on supporting Israel to come to an end eventually once a new generation of politicians come into power.