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9 November 2020

Dutch defence hawks bet on F-35

Like many European leaders, Mark Rutte was quick to celebrate Joe Biden’s victory. The Dutch prime minister and his peers are hoping for a transatlantic reset, especially on Nato's defence-spending target of 2% of GDP. As of 2019, defence spending in the Netherlands amounted to 1.36% of GDP, similar to Germany’s.

The Dutch defence ministry recently published a long-term vision document running until 2035. Defense News reports that plans to transform the country’s military into a multipurpose, highly-networked fighting force would force the government to nearly triple current levels of defence spending to hit $30bn annually. An additional $8bn of annual defence spending would be required just to meet the Nato 2% target by 2024. The Clingendael Institute described the plans as quite unrealistic, particularly given the Covid-19 pandemic.

Purchases of the US F-35 fighter jet have already offered one avenue to boost spending and placate American hawks, although concerns about value for money are growing louder. 

The Netherlands was one of nine original partners for the F-35 programme, and in September 2013 the Dutch government announced it would spend €4.5bn on the purchase of thirty-seven F-35 jets. In 2018 the Dutch defence ministry removed a spending cap on the F-35 programme and, in October last year, the government announced plans to purchase nine additional F-35s for €1bn, bringing its total order book to 46 aircraft. The first eight F-35s were delivered one month later.

However, problems arose in September this year during a single-day Nato mission called Allied Sky which involved flying strategic bombers over every Nato nation. The Netherlands' air force had planned to send its F-35s to escort B-52 bombers during the mission, but they were grounded because of inclement weather. A design fault in the jets’ fuel system could cause them to explode if they are struck by lightning, and F-35 pilots have been advised not to fly within 25 miles of a storm cell as a result.

Defence spending pressures are unlikely to ease under Biden. Also on Saturday Sjoeird Sjoerdsma, a D66 MP,  told RTL he expects Biden will take the same line on Nato as Trump. He warned that Biden will also encourage Europeans to spend more on defence. Unfortunately for Dutch pilots, the outlook remains cloudy. 

6 November 2020

EU vs the internet

A European Commission proposal to introduce fines and sanctions for platforms that fail to remove illegal content online could benefit from France’s upcoming separatism bill, which is expected to take aim at Islamist extremism by targeting online hate speech.

Euractiv reported Wednesday that EU’s upcoming digital services act might place certain companies under new obligations to prove they have addressed the spread of illegal content on their platforms, as well as information on their success in doing so. Fines and sanctions would be introduced in the event a company repeatedly fails to remove illegal content.

Although platforms will not be held legally responsible for hosting illegal content under the EU’s existing 2000 eCommerce directive, the new rules bring the EU more in line with Germany’s network enforcement act. That act provides for fines of up to €50m if a platform fails to remove illegal content within 24 hours of being notified of its existence.  

Plans to introduce measures like this had previously run into trouble in France. In May 2020, the national assembly approved the Avia law, which sought to fight the spread of hate speech by introducing a requirement for companies to take down illegal and hateful content shortly after they are made aware of its existence. In some cases, the deadline was set for one hour.

The legislation would have granted law enforcement authorities the ability to issue orders to remove illegal content. However, in June France’s constitutional council struck down the law because its provisions were deemed unconstitutional. The council cited lack of judiciary involvement in the decision to determine whether content published is illegal, strict deadlines for removal, and heavy sanctions which could be used to restrict legal speech. According to the council, only manifestly illegal content should be removed without a judge’s prior authorization. The NGO European Digital Rights reported its decision weakened pro-censorship hardliners’ position in European debates.

French law already applies a specific regime mandating the removal of online content that glorifies or provokes terrorist acts. But the political landscape in France has shifted since June. Expect law enforcement authorities to take a more active role in monitoring and removing online content in the future.

The Commission will publish the digital services act on 2 December.

5 November 2020

On media self-censorship in Europe

Emmanuel Macron is clearly concerned his message on Islamist separatism is not getting through. News broke yesterday that France is considering appointing a special envoy to explain Macron’s thinking on secularism and free speech, following weeks of a mounting anti-French backlash in some Muslim countries and in media outlets a little closer to home.

Anti-French protests in Turkey, Iran, Bangladesh, Pakistan, Kuwait, Israel and Indonesia have received significant recent media attention. Patrick Wintour reported that French officials are also concerned that some mainstream news agencies in Turkey and Qatar have recently carried opinion pieces claiming France is suppressing Muslims' rights. But European outlets have made similar moves. Two of the largest, Politico Europe and the FT, made headlines themselves by pulling commentaries critical of France's approach to Islam.

On Sunday, Politico ran an editorial by Farhad Khosrokhavar, director of studies at the École des Hautes Études en Sciences Sociales in Paris. Khosrokhavar wrote that France’s extreme form of secularism and adherence to blasphemy have fuelled radicalism, and argued that moderate secularism has been supplanted by something more like civil religion. According to him, French intellectuals should have thought more carefully about their words when they unequivocally defended the right to free expression.

Khosrokhavar further criticised the government for enthusiastically encouraging blasphemy, and said blasphemy should be used in moderation in a country where between 6% and 8% of the population is Muslim. The article was the most-read on Politico Europe’s website before editor-in-chief Stephen Brown pulled it for failing to meet editorial standards. No further explanation was given.

Controversy continued on Tuesday when the FT’s Mehreen Khan wrote an editorial criticising Macron for stoking panic about the Muslim question. Commentators were quick to point out minor factual inaccuracies in her piece that were subsequently corrected. Khan wrote that Macron had delivered a speech promising to fight Islamic separatism, when Macron actually said Islamist separatism; and that Macron had mentioned the headscarf as a potential sign of separatism in France, when he actually ruled out a complete ban on headscarves. As with Politico, FT pulled the article hours later.

Macron then made an extraordinary intervention, publishing a letter to the FT late last night that stressed France is against Islamist separatism, not Islam. He accused the FT of distorting the facts and misquoting him. He noted that 263 people have been killed in terror attacks in France over the previous five years. And he argued that it has become clear there are breeding grounds for terrorists in France, writing:

"We say: ‘Not here in our country!’ And we have every right to say this, as a sovereign nation and a free people. Against the terrorists who want to break us, we remain united. We can do without media articles that divide us."

Macron is clearly worried about how his message on Islam is being received and reported. As the FT controversy demonstrates, the Élysée is going to some length to suppress critical voices. But Politico and the FT are not alone. The New York Times, The Guardian and Al-Jazeera have also run editorials critical of France’s approach to secularism and Islamism. Macron might need more than one new envoy.

4 November 2020

Still stuck

The two negotiating teams in the EU/UK trade talks have been peddling different messages. What you read in the newspapers this morning is pure spin. What we know is that the teams have been working out legal texts, but obviously there is no progress on the two outstanding issues of fish and state aid for the simple reason that these issues cannot be settled at the negotiating table. They requires political intervention from both sides, which hasn't happened yet. With a tentative deadline of November 19, the two sides are not yet running out of time. We don't think that Boris Johnson or the European Council are going to bend over backwards at this point, and both are likely to take things to the brink. We have argued that it would be rational for Johnson to wait until Angela Merkel intervenes in the standoff over fishing rights, which is not going to happen before the European Council on November 19. 

The dangers we see are: yet another miscalculation on the European side, or a realisation by Johnson that he has more to gain from a no-deal outcome. We note a comment by Andrew Duff, whom we have quoted often during the entire Brexit process. Duff said yesterday that Johnson would be hounded out of office in the spring if he agreed to a deal. Duff concluded that Johnson would not agree to one, and would rather spend his time in office railing against the EU. 

Procedurally, Barnier will brief the Coreper today while Lord Frost will brief Johnson. The language both sides are using is that there is no breakthrough in sight, and that differences remain on two big issues: fish and state aid. It does not really matter whether people describe these gaps as big or small, or what odds they put on a deal. What matters is a political willingness on both sides to close the gap. The one thing we are happy to predict is that a no-deal outcome would be the result of one or both sides not willing to pay the political price for a compromise. This is not going to fail for technical reasons or because the two negotiators have run out of time. 

In the meantime, we note that the UK missed the EU deadline to explain why it was intending to break international law. We thought this was an odd procedural step to take by the European Commission. The failure to respond means that the EU will be moving its legal action to the next phase. A deal would supersede the contentious clauses in the internal market bill, though. 

3 November 2020

Germany's transatlantic delusions

You know the feeling when you make a policy recommendation, and the same day a policymaker comes out pushing in the exact opposition direction? Annegret Kramp-Karrenbauer, outgoing CDU chairwoman and German defence minister, yesterday expressed her hopes of a return to the good old days of the transatlantic relationship under Joe Biden. She did not mention his name in her article but, on the eve of the US elections, her comments leave us with no other conclusion. Yes, the Europeans have to do more, she writes, but America is the boss. And then this.

"Illusions of European strategic autonomy must come to an end: Europeans will not be able to replace America’s crucial role as a security provider."

This is a direct attack on Emmanuel Macron, who has been calling for exactly that. Years of Franco-German convergence on foreign policy and security have essentially been cast aside by a sloppily argued op-ed. Yet we are not surprised to read this. Germans cannot deal with the notion of strategic autonomy because it would require them to raise their defence spending, change their constitution which gives the Bundestag veto rights over the deployment of troops, and take part in military campaigns that Germany would normally prefer not to get engaged in. 

Specifically, AKK wants the US to keep the EU fully under its nuclear umbrella, which requires Europeans to accept US leadership as a quid-pro-quo. Germany in particular will need to stay inside Nato's nuclear sharing programme, which is a controversial issue in German politics. SPD, Greens and the Left Party, which together have  a majority in the Bundestag, are in favour of withdrawal. This means that the transatlantic co-dependence culture is de facto being challenged by both sides. We noted Ulrike Franke, a German defence expert, speculating that AKK had surrounded herself by atlanticists, a still influential group in German politics. Germany's atlanticists are fighting on two fronts: against the pacifist left and against non-pacifist Europeans like Macron. We expect they will lose the fight. The only way for the German left to accept fair burden-sharing in defence is for Europe to do the exact opposite of what AKK is advocating: to replace America as security provider.

We have commented on this before, but AKK is the most un-European Saarlander we ever came across. She is very much in contrast to Heiko Maas and Peter Altmaier, the other Saarlanders in the German cabinet. Both of those politicians are pushing in the exact opposite direction, in favour of more European strategic autonomy in their respective fields. The EU and the US have overlapping but not identical interests in their respective dealings with China, for example. We take issue with Altmaier's industrial mercantilism, but agree with him that Germany and the EU have to define their own industrial policy, rather than let the US do it for them.

We look at the US election with a mindset similar to that of William Hague, the former Tory leader and foreign minister, who writes this morning that the UK should not hanker after its long-lost special relationship with the US, either. We think his concluding words addressing Biden sum it up well:

"We don’t need to be first with every phone call. You need us to play our part in the world and we need you to heal America."

2 November 2020

Merz wins

Friedrich Merz won an important battle over the weekend. The CDU has decided to hold its leadership elections in January, only five weeks after the now-cancelled party congress in December. Merz' allegations of a conspiracy have rattled the CDU in a way we cannot recall since the 1980s, when a group of politicians tried to mount an unsuccessful coup against Helmut Kohl. To be absolutely clear, we think Merz would be a poor choice for the CDU leadership and especially for the job of German chancellor. We regard him as a throwback to a different age. But we also think he was right to accuse others of foul play. Angela Merkel and Annegret Kramp-Karrenbauer clearly want to prevent him from taking the leadership. Covid-19 served as a convenient excuse to postpone the leadership election. Die Welt made the point that, if you can hold an election in January, what does it tell you about the December cancellation? Covid-19 will still be there in January. 

Behind the postponement stands the notion, popular in Germany, that the pandemic is a gift for incumbent politicians like Armin Laschet, who is trailing in the race. That notion will be tested in the next few weeks. Germany is not as hard-hit by the virus as France or Belgium, but cases and deaths are rising too. Our expectation is that the second wave will be a great equaliser. The lazy pseudo-statistical cliches of the first wave will be turned upside down in the second. 

The CDU's dilemma highlights another rather typical problem. The reason the CDU cannot hold its party congress via Zoom is that digital voting is illegal in Germany. This leaves the CDU leadership with three options: find a way to circumvent the rules and squeeze 1000 people into one room; a mail-in vote; or a change in the law to enable digital voting. The CDU rejected mail-in voting, on the grounds that it would take too long with three candidates. You would need two rounds. They have not yet wrapped their brains around preferential voting, which would solve the problem completely. For a digital vote to be possible, the Bundestag would need to pass a law. But it is not clear that the other parties would agree to fast-track legislation aimed purely at saving the CDU from an embarrassment it has created for itself. We think that mail-in voting is the answer.

30 October 2020

France pledges €20bn to keep economy afloat

To protect and work is what this second lockdown will be about in France. Protect against the virus and its spread, and protect the health care system. Protect against terrorist attacks like the ones we saw yesterday in Nice and Avignon. Protect the economy from the effects of lockdown by offering another €20bn for the next two months. Work continues. Businesses allowed to remain open include garages, food shops, launderettes, opticians and newspaper vendors. Hotels will be allowed to maintain reduced activity for work-related trips. Working from home will be mandatory except where it is not possible. And children will go to school. 

Bruno Le Maire said yesterday that measures to support French companies would cost €15bn per month of lockdown. There is still some money left from the summer that was not spent.

How will they spend it? €20bn are  being allocated for two months, even if the lockdown is for one month, at least for now. About €6bn will be in the form of grants. This is a boost compared to the first wave, where the same amount covered the period from March to October. Another €7bn go towards active employment schemes, €1bn to help lowering rents, and wnother €1bn goes to relieving social charges.

Olivier Blanchard tweeted that the government needs to be more generous and aggressive in the second wave compared to the first. In the spring, the support package focused on credits and guarantees. This time the economy needs grants, not credits. Otherwise companies will end up with a huge pile of debt and consecutive bankruptcies. We have been sceptical of the usefulness of guarantees right from the start. Guarantees make sense in a V-shaped recovery, not if there is a double, triple or quadruple dip.

Blanchard also makes the point that, even if people were to work more this time, uncertainty is rising about how quickly the spread of the virus can be contained and whether business will be able to return to normal. We still do not know much about this virus, its mutations or its spread. The naivety with which we entered the first lockdown made it look like a holiday. But this time it is different. Uncertainty is real, and people are starting to think how the virus will affect them in the medium term. We still do not know how to live with the virus nor what impact it will have on our economies.

This uncertainty is likely to affect investment and consumption. Blanchard said it is time for governments to be bold in action and to accept the higher public debt levels that will come with this. After all, interest rates will stay low for quite some time, keeping debt-service payments at bay. This is not a time for pinching pennies, says Blanchard. We shall see whether €20bn is enough.

The lockdown has been ordered for one month. The goal is bringing infections down to 5,000 a day, but this is unlikely to be achieved by the end of November according to some experts. The run-up to Christmas is a critical period especially in the retail sector. How much will be lost? Tough choices lie ahead. 

29 October 2020

Mark as spam: Google's EU lobbying campaign

To the annoyance of EU officials, big tech is ramping up lobbying efforts in the lead-up to the digital services act. But some of its strategies are working.  

Yesterday Le Point broke news of Google’s DSA 60-day plan update. This internal document highlights lobbying efforts the company is undertaking as the EU moves closer to setting new rules for big tech. 

Meetings with key supporters and detractors are one priority in Google's action plan. The company sought, unsuccessfully, to secure an audience with Roberto Viola, who heads the European Commission department responsible for communication, networks, content and technology. It also sought a meeting with Franz Fayot, Luxembourg’s economy minister, early this month. On 19 October Fayot told Paperjam magazine the entire government supports Google, in an interview that was also published on the ministry’s website. Other PR efforts include launching an advertising campaign in Politico’s Brussels Playbook last week, and enlisting the support of allies including online fashion retailer Zalando, travel platform Booking.com and two major French multinationals, Ubisoft and Carrefour.

Perhaps more alarmingly for European lawmakers, the document includes plans to mobilise the US government to lobby against the DSA via trade representative offices and embassies, with the argument that the legislation threatens transatlantic relations. Sowing internal discord is another priority, and Google’s lobbying strategy also includes efforts to encourage dissent within the Commission’s directorate general for competition.

This is not the first time big tech lobbying has gone overboard. Geoffroy Didier, an MEP who was member of a legal committee that worked on an earlier big tech copyright directive, recounted that during the drafting process he was subjected to unacceptable harassment. This included sending 100,000 emails to his European Parliament address, as well as a variety of threats.

Some in the Commission have had enough. Thierry Breton, internal market commissioner, is mentioned several times in Google's action plan. He told Le Point that major platforms have a vested interest in weakening and silencing those who are determined to defend the public interest. In a separate interview, he said that, under certain conditions, the Commission should consider imposing structural separation. This means breaking up big tech companies into smaller units.

Breton’s position puts him at odds with Margrethe Vestager, competition commissioner. She surprised some observers yesterday when she said that, while breaking up large tech companies would be doable under current EU law, there would be unintended consequences and potentially lengthy court battles between regulators and large companies. Vestager said the EU should be very careful with this type of remedy, because no one knows how it will actually work. Euractiv’s Samuel Stolton tweeted that Breton and Vestager’s cabinet members met yesterday to discuss their positions on a potential break-up of big tech, agreeing that such an option should not be discounted but considered only as last resort.

The issue will become more pressing in the lead-up to 2 December, when the EU will introduce the digital markets act. This includes the DSA, a list of prohibited practises by digital gatekeepers, and a new investigation tool that will examine market failures. As Google’s action plan demonstrates, one such failure could be occurring at the political level. 

28 October 2020

Arctic power plays

The Guardian reported yesterday on scientific evidence that frozen methane deposits called gas hydrates have begun to be released in the Arctic Ocean over the continental slope off the east Siberian coast. Methane gas has a warming effect 80 times stronger than CO2. The triggering of methane release from east Siberian gas hydrates likely marks a tipping point for Arctic warming.

It’s easy to overlook the region, but the Arctic is set to become one of the most important theatres of future geopolitics.

The EU has skin in the game. Denmark, Finland and Sweden, as well as Iceland and Norway, have territories in the Arctic. Although the European Commission’s 2021 work plan is thin on external action initiatives, drafting a new Arctic policy to replace a 2016 joint communication is on the list.

The EU’s current policy identifies three priorities: climate change, sustainable development and international cooperation. Most Arctic multilateralism has focused on the same priorities and avoided military planning. The Arctic council is the world’s leading intergovernmental forum for the region, and its members include the US and Russia. Its mandate specifically excludes military security. However, Arctic warming will improve access to trade routes and new mineral and hydrocarbon resources, meaning security could become the region’s most pressing concern.

Russia, for example, has moved to bolster its Arctic military presence by reopening abandoned Soviet-era military installations, building new military bases and icebreakers, and launching Arctic military drills. The Russian security council recently established an Arctic commission, and at a meeting two weeks ago, former president and prime minister Dmitry Medvedev told the commission that Nato’s efforts to restrict Russian activities in the Arctic would be the focus of Russia’s upcoming Arctic council presidency, which begins in 2021.   

The Arctic institute, meanwhile, reports that Alaska’s permafrost coverage is declining more rapidly than Russia’s, and that the difference in projected permafrost coverage can be strategically applied to US military interests. At the 2019 Arctic council summit, US secretary of state Mike Pompeo caused an outcry when he attacked Russia for militarising the region, as well as its development of the Northern sea route.

Rising tensions in the Arctic expose the EU’s geopolitical weaknesses. This is an area where the EU has very little trade leverage, and even less of a military presence. The US and Russia are clearly unwilling to exclude military buildup from future Arctic strategies. In the absence of EU support, some member states are going it alone. Sweden, for example, recently announced plans to boost military spending by 40% over the next five years, and double conscription into its armed forces. A consultation period for the EU’s new Arctic policy was launched in July this year, and closes November 10. As Arctic warming accelerates, the EU may want to consider adding a fourth pillar to its next strategy.

27 October 2020

On the greening of central banking

We have not yet written about the European discussion on green central banking, which will undoubtedly be at the centre of the debate on central banking in the coming decade. A comment by Gerald Braunberger, a conservative German economic journalist, triggered a lot of angry responses, undeservedly we think. Advocates of green central banking will need to address some of the points he raises, and some that he does not. The main issue for us is whether a central bank that has been failing to meet its price stability mandate should take its eyes of the ball at this time. The other issue is how to make sure the green central banking is not another green deal. We have been writing for some time now that the European Commission's green deal is largely based on a series of dubious accounting rules. The recently-agreed reform of the common agricultural policy also missed an opportunity for a green revolution by cementing the current system. In a scenario where politics fails, it is perfectly legitimate to question the role central banks should play.

We do not agree with Braunberger's static legal arguments. As Lucas Guttenberg keeps pointing out, German conservatives are always coming up with rash legal views. We have observed that the ECB has developed a finely tuned antenna for the legal perimeter within which it operates. German conservatives clearly interpreted the Maastricht Treaty differently. European law does set limits to the ECB's mandate. And green central banking will undoubtedly test the limits just as asset purchases did. The ECJ gave a ruling on the latter that might at one point cause problems, for example the instruction on the ECB not to roll over debt indefinitely. Green central banking is not illegal, but it won't be unconstrained either.

There is, however, one institutional issue Braunberger is right to address. Central bank independence was premised on a societal consensus about the big-picture goals. Usually this was some combination of price stability and full employment. The more you add to those goals, the weaker that consensus will be. This means we have two separate issues to discuss here: What is the scope of green central banking? And, if there is one, is it still compatible with the notion of central bank independence? We believe there is scope, but we are not sure that green central banking and independence go together. This debate is to be continued, undoubtedly.