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30 July 2021


Our main story is about the German election rollercoaster - the trend is shifting once again; we also have stories on Lithuania's migration crisis as Belarus floods the EU with migrants; on Austria's veto of Turkey joining Pesco; on a warning by the Irish president of a flood of pandemic related laws; on how Hungarians might view Orbán as part of the elite; and, below, on parallels between the Remain campaign in the UK and efforts by western governments to raise vaccination rates.

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The new 48%

One of the great cautionary tales of the last five years is how to start off with what looked like a strong case and end up with 48%. What happened to Britain’s Remain campaign is now happening to the campaign to deploy vaccines: Tell the anti-vaxxers that they are stupid; exaggerate your case like the French education minister, who told the lie that vaccination means that you can longer infect anybody. Or lecture people that they should listen to experts; and when things get really bad, talk about compulsion. Compulsory vaccination is the second referendum of our time. If we can’t get what we want, we have other ways.

It is unsurprising therefore that the vaccination rate in the US is stalling at just under 50% - almost exactly where the Remain vote ended up five years ago. We have never seen a more misguided political campaign than that one - until now.

Vaccination is one of the great success stories of modern science. It is one of the great success stories of German and British science in particular. The focus should be to make vaccines available to anybody, anywhere in the world, and also to make all the information about them available. We are not going to fight anti-vaxxer lies with official secrecy.

Readers may well remember how the news of the AstraZeneca blood clots leaked almost by accident, when an independent German research lab raised alarm bells. At that time, many more doses of that vaccine had already been deployed in the UK. Why did the NHS, or the British government, not volunteer that information? They did only when the medicine agencies, alarmed by the German research, asked for it. Why not share the data voluntarily? Can the public not handle it?

And why not admit that there is logically a degree of uncertainty about the long-term side effects of the vaccines? Never before in history have vaccines been developed and deployed in such a short time. In the German debate about whether to give the vaccine to under-18 year olds and small children, that uncertainty is at least acknowledged by officials. It is logically also true that the risk of a side effect from a vaccine relative to the risk of severe illness from Covid-19 is different for children than for older adults.

There is also a lack of information about vaccine effectiveness. All the hard data we have seen in respect of the delta variant came from Israel and the Netherlands. How is that possible, when there are so many more delta variant infections in the UK? The Israeli studies suggest that the vaccine offers a high protection against severe illness, but a lower level of protection against becoming infected and against spreading the virus.

If that is so, what then is the logic of making vaccination compulsory for certain groups of people? Would testing not be more effective? The reason governments want to drive up vaccination rates beyond original targets is precisely because the vaccines are less effective. You need more of them to achieve the same degree of herd immunity.

Knowing how government communication works, the most plausible explanation we have is that information is deployed on a need-to-know basis. Governments don’t want awkward data to get in the way of the campaign. But remember that if you withhold information, you give the floor to the people on Facebook who tell us that the vaccines contain a microchip of Bill Gates' brain.

At that point you have lost the moral high ground. And you end up with another 50-50 division, like Remain-vs-Leave, or Trump vs Clinton. For the vaccination campaign to be successful, it requires a bigger margin of victory than Joe Biden’s over Donald Trump.

29 July 2021

Compulsory schooling vs compulsory vaccines

We are still in the summer holidays, but what will happen in schools once the children return in September is the next big controversy in countries where mandatory vaccination is already in place for health care workers. Should teachers have to vaccinate to protect the children? Should children vaccinate to stay in school? If so, from what age? How will compulsory education be compatible with various vaccination speeds?

The French government already released a new protocol: In secondary schools, once a case is confirmed, vaccinated students can stay in class while non-vaccinated have to go home for seven days. Teaching will then be delivered both physically and virtually. It did not take long for the first criticism to arise: How will this work in practice if half of the class is in the classroom, the other at home? Also, who is controlling the status of vaccination? What about classes with children aged less than 12 years? Will the entire class have to be sent home if there is a case in the older classes? 

There will be strong incentives to get the children vaccinated, with vaccination facilities coming directly to the schools. Legally, vaccination remains the prerogative of the parents. There is strong pressure to vaccinate though. Jean-Michel Blanquer, education minister, hammered down the message yesterday: once you are vaccinated, you no longer contaminate others. This is factually not true, it depends on the vaccine and the variant. But if this message prevails, it will create a division between those vaccinated and non-vaccinated, despite reassurances to the contrary. Expect a messy school start, frustrated teachers and confused parents. 

In Italy the coalition spat over what to do with the education system is not over yet. Mario Draghi and Matteo Salvini met but could not agree on mandatory vaccination for teachers. Salvini insisted on freedom to vaccinate. What is then the difference between school personnel and health care workers? The plan is to meet next week and see whether data suggests a worsening of the spread or not. Time is pressing though. Schools and parents expect clear guidelines what to do in September when the schools reopen. The education ministry already has a plan out there, with staggered entries and a goal of getting 60% of the under 12 year olds vaccinated. President Sergio Mattarella weighed in on the debate, stating that vaccination is a moral and civic duty. The smooth running of the next school year is an absolute priority to fill the gaps that have emerged during the pandemic, so the president. 

In Greece, plans to make vaccination mandatory have been shelved for now. The government decided that forcing schoolteachers to get the jab or face suspension without pay would cause too much disruption. There were also concerns over pitting government and educators against each other while trying to push through an education reform.

28 July 2021

Elites vs elites

One of the changes that is happening in the UK is that elite universities are recruiting more students from state schools. One unsurprising response from the left is Andrew Adonis’sno more Borises comment. As observers but not participants of the British class wars, our take is somewhat perpendicular. We see the problem not only in the people Oxford recruits, but in what Oxford does. A three-year course in politics, philosophy and economics - that ends with a Bachelors' degrees and a masters degree thrown in for free, is hardly an elite education. Oxford is still great to go if you want to develop the next generation of vaccines, or study the classics. They are good at material science. But all these departments are in heavy competition with many others in the world.

There are two types of elites, the meritocratic and the privileged. The privileged is the one that seals itself off in places like Davos, in exclusive clubs, and in glorified finishing schools. We know of organisations in London that used to recruit from Oxford and Cambridge only. These organisations had similar characteristics of those universities. They used to be in the financial sector, like merchant banks, coddled oligopolies with a high capacity for rent seeking. Those businesses either no longer exist, or have changed so fundamentally that they can no longer afford to do this. Smart employers choose blind recruitment, not based on interviews or CVs, but based on performance criteria, a method pioneered by the Israeli army. Membership of an elite school no longer guarantees membership of an elite university. And membership of an elite university no longer guarantees an elite job - at least not in competitive industries.

Elite universities are one of the category errors of our time. Yesterday, we noted the annual publication of the list of the world’s top universities, with the usual suspects in the usual places. The US has five, the UK has four and Switzerland has one among the top ten. The best school in France was Paris Sciences et Lettres, on place 44. The best in Germany was the Technical University of Munich. For France and Germany, these categories mean nothing. When you graduate from high school in Germany, you don’t start by picking your university but the subject. In some subjects, prospective students have a free choice of universities. But not in others. In such a system, it makes no sense to compare universities. The right unit for comparison would be departments.

The world's most successful modern companies are not creatures of universities. Bill Gates and Steve Jobs were college drop outs. The founder of BioNTech, Germany’s most promising company for decades, studied medicine at Cologne university, which is not on the list. Real elites don’t live in lists.

27 July 2021

Where Cummings is right

The tragedy of Dominic Cummings is that he has a deep understanding of Britain’s political dysfunctionality, yet no way to impact this outside of government. When in government, he chose the wrong priorities, and kept too high a profile. His lasting claim to fame will always be the Vote Leave campaign. Without him there would have been no Brexit, we are sure of that.

Behind this victory lies a deep understanding of the failure of successive UK governments - a lesson of importance for the rest of Europe as well. In the final consequence, it is a failure to harness productive growth through innovation. In the flood of his recent tweets we discover a thoughtful reference to an author who puts this in a nutshell: civil servants and ministers prefer to be in control of mediocre processes, rather than be out of control with super-productive processes. We completely agree with this. If only he had focused on this stuff and kept his head down, he could have had a chance to implement some of this.

The trend towards mediocrity is the bane of modern governments in general. When people stop marvelling at Angela Merkel’s political longevity, they will find a country that has no functioning systems in place to evacuate people. Or a system that can't manage a nationwide vaccine rollout. Or a system that doesn’t know how to pick winners. The German government invested €300m in Curevac, the German vaccine that didn’t make it. The Wirecard episode is ultimately a systems failure - one based on a wrong understanding of good vs bad innovation. German energy policy has been a random walk - that ended up with a dependency on Russian gas.

The UK has had a more strategic approach to vaccination, financial regulation and energy policy, but it is in danger of failing in the post-Brexit world. Brexit is an event that can only work if you drop the business-as-usual mindset. It is anti-conservative in nature. If nothing happens, all that is left of Brexit will be the predictable and predicted fall in the trade in goods with the EU. Brexit comes with a certain downside and an uncertain upside. Cummings understands this issue at a much deeper level than Johnson and his people. It will take some creative destruction for the UK to yield positive results from Brexit.

We expect Cummings will eventually return to politics because he knows how to campaign and because he has something to say. This, not what he thinks about Johnson, is much more interesting and likely to be impactful.

26 July 2021

How to deal with a dictator

The EU seems helpless to act, but Norway, Lichtenstein and Iceland are not. The three European economic area members have suspended grants to Hungary due to rising concerns over democratic backsliding.

Hungary was set to receive €220m from the EEA and the Norway Grants Scheme under a programme meant to address social and economic disparities, of which 11% was allocated to civil society organisations. But the funds are frozen because authorities were unable to agree on who should distribute that portion of the money.

Norway’s foreign affairs ministry stated that while donor countries have set an absolute requirement that funds must be administered by civil society, independently of authorities, Hungary had not accepted the best qualified candidate for the task.

Gergely Gulyás, the Hungarian foreign minister, was not happy, telling media that Norway owes Hungary the money because it benefits from single market membership even if it is not part of the EU. Norway retorted that the funding is a voluntary contribution, and expressed dismay over the hardships a loss of funding would entail for many civil society organisations.  

Norway has been one of the most vocal opponents of Viktor Orbán in recent years, and clashed frequently with the Hungarian government over civil society funding. This is not the first time it has suspended funding – it also turned off the taps in 2014 after the government used an audit and police raid to harass an organisation managing the disbursement of Norwegian funds.

The European Commission has taken steps in the same direction in recent weeks, launching an infringement procedure over a recent anti-LGBTQI bill. This prompted Orbán to announce he would hold a referendum on the law, after accusing Brussels of holding up approval of Hungary's national recovery plan - and billions of EU money - over the law. The Commission has said delays are owing to concerns over lack of anti-graft measures in place in Hungary. 

We are not sure how long this delay will go on, but we think this proactive approach will prove much more effective than simply responding to the inevitable.

Under a weak compromise negotiated during last year’s budget deadlock, a rule of law procedure can only be brought to protect the EU’s financial interests. As we argued at the time, this means the rule of law mechanism cannot be used for cases of human rights violations. A lack of anti-graft measures for EU money does put its financial interests at risk, and the EEA's move is interesting because it raises the possibility that financial interests can include funding to civil society groups that are fighting for human rights. A crackdown on these organisations could be argued to be damaging those interests.

But this does not mean the mechanism would offer any sort of a speedy resolution. The Court of Justice must give its judgment on any such procedure, and it is not exactly known for moving quickly. By acting before a problem occurs, the EEA has set a good example. The EU should follow suit and stick to its guns. 

23 July 2021

Poland looks to China

One unintended consequence of the US climbdown on Nord Stream 2 could be to push some of the EU’s eastern periphery closer to China.

We noted an interesting article by China Observers highlighting Poland’s perceived rapprochement with China. Bronislaw Komorowski, the former Polish president, visited China in 2011 to sign a document establishing a strategic partnership, and Poland was one of the first countries to sign a memorandum of understanding with China to join the belt and road initiative in 2015. It was an enthusiastic member at first, but as has been the case with many BRI signatories, imports from China swelled in the following years while promised Chinese investment failed to materialise. By the end of 2017, Chinese foreign direct investment in Poland was estimated at just €1bn, most of which had been channelled into Chinese acquisitions of Polish companies rather than new infrastructure projects.

The Poland Asia Research Centre writes that enthusiasm turned to scepticism by 2017 when Antoni Macierewicz, the former Polish defence minister, blocked the sale of a parcel of land for a logistics hub that was meant to be part of BRI. By 2018, Poland was the second-largest importer of Chinese goods in Europe after Germany, with imports reaching $31bn, against just $2.5bn of exports. Poland began taking a tougher stance on China, adopting 5G security rules that effectively banned Huawei from its networks, and arresting a former security officer and Chinese Huawei employee in Warsaw on spying charges. This was viewed as a strategy to improve its military relationship with the US to hedge against Russia.

Under Donald Trump, Poland’s relationship with the US thrived, but circumstances have changed since Biden took office, and so has Poland’s strategy. When the Biden administration began signalling it would drop its opposition to Nord Stream 2 last winter, Polish authorities were outraged. Zbigniew Rau, the Polish foreign minister said he learned about the decision from the media and that the country had not been consulted, and Poland was reportedly left dissatisfied with the results of the Biden-Putin summit in Geneva.

This has translated into a new strategy designed to get Washington and Brussels' attention. In January this year, Rau discussed closer bilateral cooperation with Wang Yi, his Chinese counterpart, and Andrzej Duda joined a virtual summit for the 17+1 cooperation format, a pre-cursor to the Belt and Road, the following month.

Duda spoke with Chinese leader Xi Jinping in March to discuss purchasing Chinese Covid-19 vaccines, and Rau later visited China to express support for the EU-China comprehensive agreement on investment (CAI), despite Poland’s earlier protests against the deal, which was largely spearheaded by Germany and France.

Having witnessed its relations with Europe deteriorate over the previous year, China has been quick to trumpet its closer ties with Poland, but as China Observers writes, tangible outcomes will be more important for Warsaw. The same could be said for its relations with the EU.  

Eastern European countries like Poland are in a better position to push back against China because they gain nothing from CAI and export very little to China compared to Germany and France. The US and larger EU member states continue to ignore these countries’ investment needs and security concerns at their peril. Members of the eastern flank are just as susceptible to economic coercion as Germany and France have been, and Poland is in a uniquely vulnerable situation because it is one of the EU’s most carbon-intensive economies - the upcoming green transition will be more expensive for Poland than most other member states. The EU does not have much to offer in terms of securing Poland’s borders, but green investment is a viable alternative.

And yet, the two are locked in an increasingly tense dispute over human rights and rule of law: just this week, the EU threatened financial sanctions if Poland refuses to suspend a controversial disciplinary chamber for judges. Poland-China rapprochement may be diplomatic showboating right now, but Poland is becoming increasingly alienated from its most important western allies. This is a risky situation.

22 July 2021

Orbán escalates battle with Brussels

Viktor Orbán made another cynical play yesterday with a plan to hold a referendum on Hungary’s recent anti-LGBTQ legislation.

The law bans promoting or portraying homosexuality or sex reassignment to minors, including in schools. The European Commission already said this legislation is in violation of a host of EU laws when it launched three proceedings against Hungary and Poland over violations of fundamental human rights last week.

After accusing Brussels of withholding approval of its national recovery plan in response to the law, Orbán has now upped the ante. Brussels claims delays in recovery plan approval are stemming from a lack of anti-graft measures in place in Hungary. As we argued last week, it could also be that a large group of member states will not receive any funds until at least September because it will take that long to raise the funds. 

No specific date has been set for Orbán's referendum, though the results might to be a foregone conclusion given the questions citizens will be asked, which include:

Do you support the presentation of sexual media content to minors that could affect their development without restrictions?”

On making the announcement, Orbán recalled a similar referendum initiated in 2016 in response to the EU’s migrant relocation plans. He asked citizens to say no now, just as they did five years ago. It’s a clever move because a no vote would give the law a veneer of democratic legitimacy, allowing Orbán to argue that it reflects the will of the people, no matter who it hurts.

We recall that Daniel Kral, a European economist, recently flagged the EU funding set to flow in Orbán’s direction – it’s not just €7.2bn of recovery fund spending, but more than €20bn of structural funds. Orbán has a lot to lose, particularly given that he will be running against a united opposition party in next year’s elections. If there was ever a time for the EU to turn the screws, now would be it.

21 July 2021

How not to stop bitcoin

You can always tell hypocrisy when somebody predicts that a certain event won't happen, and then calls for rule changes to make sure it won't happen. For example, you forecast that inflation won't be a problem, and then you call for an overshooting inflation target.

The same goes for the crypto-debate in Europe: if you think that bitcoin is a bubble that will eventually burst, why worry? Hardly a day goes by without a central banker hyperventilating their views that bitcoin is not money. Yesterday the EU proposed to regulate it. Remember the words of Herb Stein, President Nixon's economic adviser. If something is unsustainable, it will end. You don't have to end it. Or put it the other way around: if you think you need to regulate it, then surely you think it is a problem.

We take no views on whether current or past market valuations of bitcoin are sustainable or not. So far, the technology behind bitcoin has proved remarkably stable. The anonymous Satoshi Nakamoto created bitcoin as a means of payment that bypasses the control of governments and central banks. It works even in regimes like Russia that have made it illegal to use bitcoin, and that have criminalised all bitcoin-related activity. Alexei Navalny's campaign has been funded by bitcoin transactions, for example. But even Russia's highly skilled hackers couldn't break blockchain. Yesterday the European Commission proposed that Europe should follow the lead of Vladimir Putin and regulate crypto - as part of its new anti money-laundering rules.

What this is telling us is that they are worried. What we are certain of is that they can't conceivably succeed. Technically, as Reuters reports, the EU proposes the so-called travel rule, which applies to ordinary wire transfers, to crypto transactions. If a bank handles crypto-assets, they must include the customer's name, address, date of birth and bank account number, along with information about the person receiving the money. It will also become illegal to own anonymous crypto-asset wallets. The idea is to stop the use of crypto assets for the purposes of money laundering.

Europe is a very bank-centric place, and officials may well harbour the illusion that German Sparkassen or French mutual banks are the go-to places for secret crypto-transactions. The internet does not exactly start in Helsinki and stop in Athens. All that will happen is that people use off-shore wallets not subject to EU regulations. The EU cannot stop anonymous internet transactions - just as the Russians can't.

The Commission is, however, aware that there is a great danger of driving the market underground. It said that in order to balance the risks, the new rules would be limited only to transactions for €1000 and over, with a number of stated exemptions in both directions. 

The crypto regulation reminds us of a debate in the German Bundestag in the early 1990s, when MPs thought they could curtail email in order to save what they thought was a well functioning telegraph network. We wish the European Commission good luck.

20 July 2021

Lords warn about QE

The House of Lords is known for producing high quality reports. This one on quantitative easing piqued our interest in particular.

QE started off as an unconventional policy, and is nowadays the mainstay of monetary policy globally. The Lords' report refers only to the Bank of England, but many of the points it raises have direct relevance for the ECB as well.

We highlight only two points here: the long-term impact on government financing and an explicit climate change mandate as a secondary goal.

Regarding the first, the Lords are particularly worried about a scenario where a persistent rise in inflation combined with stalling economic growth would impact government finances. The Lords take a much more sceptical view of the inflationary outlook because of the combined impact of QE, strong government spending, large savings, and supply bottlenecks in the global economy. In the scenario of persistent inflation, government finances would be in danger. Britain's office for budget responsibility calculated that a 1pp increases in short- and long-term interest rates would increase debt interest spending by 0.8% of GDP by 2025-26.

If the Bank of England were to raise base rates, it would have to buy government bonds at a correspondingly higher rate too. In the UK, the Bank of England purchases government bonds at the base rate, which is now 0.1%. The Lords say they are concerned that the Bank of England will come under political pressure not to raise base rates in order to guarantee the flow of asset purchases on which the UK government depends.

In the hearing preceding the report, the Lords were told that the Bank of England and the Treasury could reduce the impact of potential interest rate rises by not paying interest on commercial bank reserves. This would effectively constitute a tax on the banking system. The Lords noted that the response of the treasury on this important point was ambiguous - which is telling us that this idea is clearly under consideration as a rainy-day defence.

The Lords argue that the Bank of England's credibility rests on its operational independence. Once this is lost, it would be difficult to regain. They noted dryly that the central bank's enthusiasm for QE did not correspond to its understanding of the economic effects. They also noted that central bank research tends to show QE in a more positive light than the academic literature. We see exactly the same happening at the ECB. Central economic research is used increasingly as an ex-post vindication of policy. You don't get much self-criticism from the economic research departments.

The other point we would like to draw attention to is the addition of climate change to the Bank of England's secondary mandate. The UK government has left it to the Bank of England to implement the policies. That's pretty much what happened at the EU level, where the ECB has now made it its job to control the carbon footprint of banks - which we think is plainly ridiculous. The Lords are asking the government to set out a clear policy of what the government expects the Bank of England to do. We think that would be useful in the EU as well.

19 July 2021

Vaccination and the quest for safety

It is not hard to see how vaccination is becoming the new dividing line in our societies, prone to radicalisation on both sides. As the delta variant sweeps over the continent, not getting vaccinated seems like a personal choice, to the detriment of the community that wishes nothing more than to get the pandemic behind it. Vaccination though is not a full insurance against new variants. Much of what we know about the virus and its effects is based on past variants. Inferences of what it means for the next wave will be prone to error. 

Yet, politicians are pressured to create facts that help society to move on. France and Greece are the first EU countries to make vaccinations mandatory, not only for health staff. Vaccination or recovery will be required for visits to restaurants and bars or other entertainment. If the situation worsens, vaccination may become mandatory for other groups as well. France already announced a vaccine pass for teenagers as from autumn on. Given the little we know about those vaccines and how long it normally takes to approve vaccines for children, it is quite a fast track.

This public discourse is pitching personal liberty against social responsibility. The desire to control risks jumps hoops and equates vaccination with liberation from the virus. How far will it go against personal freedoms? The two countries will impose sanctions for health workers if they refuse to get vaccinated. They will have the choice to get vaccinated or quit their job. That is a personal choice to take for a public service worker.

What we find extraordinary is the way politicians and commentators frame it. This is where it gets murky. Gabriel Attal pitches the vaccinated as the ones ready to work against a capricious minority that prefers to protest against it. Last Saturday about 110,000 protested throughout France against the new sanitary rules. A mix of people against vaccination, or the way it was imposed as a mandatory rule? Maybe this will become the new gilets jaunes movement, as some suggest. Will they get the backing from a vaccinated population? We have our doubts. This is the new dividing line, defining majority over minority. There is a responsibility for a fair discourse here too.  

Social pressure to get vaccinated is likely to increase. Those not wishing to get vaccinated in the healthcare or social care sector will have to prepare to change jobs, and those who enjoyed socialising will have to change life-styles. Vaccination could redefine normative values of our societies. How effective the vaccination is to deliver safety and a secure return to normality is almost irrelevant, as those studies takes time while the meaning of vaccination is decided in the immediacy of the situation. And what normality is there to return to? If life with the virus has taught us anything, it is that the future is more uncertain than ever, and we may chose how much more we accept this or not. The floods in Germany, Belgium and the Netherlands are a stark reminder that we need to prepare for radical uncertainty.