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19 February 2021

Why EU and UK won't align

James Forsyth makes the observation that there are pro-Europeans who believe that for the EU to succeed, Brexit has to fail. Unfortunately, there are also people in London who think the converse looking for an ex-post justification of Brexit by pointing out failures of the EU. British newspapers are obsessed with the EU's vaccination procurement errors. Some newspapers on the right continue predicting the EU's imminent political failure almost daily.

The EU will of course not break up, but nor will Brexit be reversed - or even become regarded as an obvious failure. We agree with the position now taken by Sir Keir Starmer, the Labour leader, to let bygones be bygones and not even to talk about it. As we saw in three consecutive elections and one referendum, there are no votes to be gained by Labour in trying to re-open that debate. Our expectation is that most of the economic cost of Brexit will be frictional, but that the economy will over time adjust to a new equilibrium.

Both sides conducted the Brexit negotiations in a hostile spirit, treating each other as systemic rivals rather than future partners. We argued at the time that this was a strategic error by both parties. It was without a doubt an unfriendly separation. It will take time - and certainly another set of political actors on both sides - for a new relationship to be rebuilt. We are talking ten, maybe twenty years.

In the meantime, we expect relations to become worse before they become better. The EU interprets the notion of strategic autonomy as an opportunity for a geostrategic break with the US, by seeking a closer relationship with Moscow and Beijing. On both, the UK's position will be more aligned with that of the US. We expect the UK to exploit some of the niches of 21st centuries technologies, and so might Germany, but the EU as a whole is likely to fall behind the US and China in terms of technological leadership and entrepreneurial energy. It is rational for the UK to exploit the regulatory opportunities Brexit offers - and that will invariably become a source of conflict. The EU's likely refusal to grant adequacy to the UK's financial companies is a good example of the systematic rivalry that is now starting. 

We have argued before that the EU has a strategic interest in an alliance with the UK. But we have a different interpretation of the EU's strategic interest. If you define your interest in terms of the preservation of the European way of life - or more prosaically the preservation of existing privileges - you will naturally come to different conclusions about a strategic partnership with the UK than we do. For that to happen, time will need to pass, and many events will need to intrude.

18 February 2021

I want this vaccine, not the other one

The EU has a new vaccination problem. The Franco-German smear-campaign against the AstraZeneca vaccine has succeeded to such an extent that the number of people willing to get vaccinated is falling. North-Rhine Westphalia, Germany's largest state, reports that people are refusing vaccinations from this widely available brand. Germany is among the countries that have already decided not to use AstraZeneca for the vaccination of the over-65 year olds because the tests result did not produce formal evidence of efficacy in that age group. But this is misleading information. Not enough tests were conducted in that age group, but the real-world data from the actual vaccination programme in the UK shows that this vaccine has been very effective in reducing hospitalisation and fatality rates. As so often, people confuse absence of evidence with evidence of absence.

The problem with a smear campaign against a vaccine is that this affects not only the use of this particular vaccine but vaccines in general. People don't have a choice between brands. If they fear that the widely available AstraZeneca vaccine is dangerous and ineffective, they choose not to get vaccinated at all. We noted a report from the Saarland where a quarter of people with a vaccination appointment did not turn up. The scepticism is fuelled by a warning from health industry representations against the safety of the UK/Swedish vaccine.

From a public health perspective, it is an absolute disaster that governments are feeding ill-founded rumours about the efficacy of individual vaccines. What we know is that AstraZeneca is effective against the original and now prevalent UK variant of the virus, but less effective against the South African variety, though effective enough to prevent very severe cases. But the big danger in Germany right now is the fast spread of the UK variant, which now accounts for about a quarter of all infections. 

There have also been reports of strong reactions. In Dortmund, a quarter of the emergency care workers who received the vaccine on the same day, reported in sick the next day. In most case the side effects wore off after a day or two, but the hospitals reacted by halting use of the vaccine altogether. Der Standard also reports that health care workers in at least two of the Austrian regions refuse to take the AstraZeneca vaccine for the same reasons. Reports of side effects of a vaccine are certainly worth pursuing. We have not heard such reports in the UK, where that particular type of vaccine has been used on millions people now.

17 February 2021

Lockdown opposition moves to courts

Drama in the Netherlands yesterday after a court struck down a curfew that was implemented to halt the spread of Covid-19, exposing a growing rift that has implications for the rest of Europe. The curfew was back in place by the end of the day, but the speed with which the government was able to overturn the decision has agitated not only the far-right parties, but others in the mainstream.

Mark Rutte’s government imposed a 9pm to 4.30am curfew last month using an emergency law that allows it to act without consulting parliament. The curfew sparked protests and riots in several Dutch cities, most notably Eindhoven, where vehicles were burnt and the train station smashed and looted. Hundreds have since been arrested.

The rioters were not alone in opposing the curfew, and AFP reports that a judge in the Hague ruled that the government had breached people’s rights to privacy and freedom of movement, prompting a bitter legal tussle. The government launched an appeal, and the appeals court suspended the decision with the argument that the state’s interests weigh more than that of the virus truths.

De Telegraaf, meanwhile, reports that the court’s decision came down to the legal basis of the curfew, which was said not to be in order. An emergency law is now being prepared to reinforce the curfew. The king signed the bill last night and sent it on to the council of state, the Netherlands’ top advisory and judicial body, which can urgently advise that it move to the Dutch house of representatives. It could be sent to the lower house of parliament as soon as this morning. The appeal, meanwhile, will be heard on Friday with a verdict to follow on the same day.

The decision to uphold the curfew prompted fierce criticism from far-right parties including the PVV and FvD. Geert Wilders, PVV leader, tweeted that the Netherlands is not a constitutional state but a very scary Rutte state, while FvD leader Thierry Baudet wrote that the controversy is an example of class justice, and that the Netherlands is a corrupt country. They were not alone in opposing the quick reversal, and other parties including the SGP, Party for Animals and Denk have also voiced opposition.

The case is important for the rest of Europe because, as AFP noted, it is symbolic of a wider disenchantment over curfews, lockdowns and travel restrictions that have crushed economic growth around the world. In France, some business owners and municipal leaders have defied government orders to open museums and restaurants, and as we reported yesterday, a sustained lockdown in Germany is beginning to split the CDU. A wave of anti-lockdown protests on 31 January saw demonstrations and arrests in Belgium, Austria, Hungary, France, Spain and Denmark, among others.

Events in the Netherlands are also significant because they show that the anti-lockdown movement is not limited to protests. As the one-year anniversary of the first-wave lockdown approaches, governments could increasingly find themselves facing legal challenges to pandemic restrictions. For countries like Germany and the Netherlands that are in an election year, the political implications could be serious.

16 February 2021

Laschet vs Merkel

Armin Laschet, the new CDU chairman, has positioned himself against Angela Merkel and Markus Söder in the lockdown debate. We think of this as the first big strategic move in the upcoming election campaign. Bild quotes him as saying at a recent CDU meeting that it was popular, but wrong, to treat citizens like children, and that we should not allow infection rates to turn into sole determinant of policy. The German government has recently reduced the level of Covid-19 infection rates from 50 to 30 per 100,000 people as a lockdown trigger. Readers outside Germany should note that these numbers make no sense in an international comparison as they largely reflect national testing rates - which vary across countries.

In his criticism of the current policy, Laschet focused in particular on schools. He said small children who did not go to pre-school or school for months would suffer lasting damage. He expressed particular concern for children in pre-school age, who had not yet learned to read and write. Bild quoted Merkel from her last conference with state premiers as saying that the risk was simply too large to open schools right now - which prompted Laschet to accuse her of causing lasting damage to children. The decision that was taken is for the states themselves to decide.

What we are seeing here is that the lockdown is becoming a political issue in Germany. Merkel is facing a mutiny from some federal states, including the SPD-run states of Rhineland-Palatinate and Mecklenburg-Vorpommern, and Laschet's North-Rhine Westphalia. Opinion polls still register a narrow pro-lockdown majority nation-wide, but we caution against misreading those polls. Laschet is tapping into what we perceive to be a growing discontent with Merkel's policies, and is sharpening his own political identity around this issue, ahead of the CDU/CSU decision to nominate a chancellor-candidate.

We keep an open mind on whether this will work for him. Going against Merkel has so far never worked for any CDU politician. By carving out a distinct position on this issue, Laschet turns the chancellor-candidate decision into more than just a popularity contest. He is telling his party that he has a different view about the relationship between state and individuals than Merkel and Söder.

It is too early to draw strong conclusions from this shift, but this is one development to watch out for.

15 February 2021

Germany saves on innovation

Among the long-run economic effects of the pandemic, the biggest one is the effect on innovation. This is where we expect the US and Asia to outpace Europe - and the eurozone average to outpace Germany.

Our biggest concern about the German economy right now is the fall in spending on innovation - a barometer for future productivity growth. FAZ has the story of a survey according to which German companies spent 2.2% less on innovation last year than in 2019. FAZ says one of the factors is Brexit, which has added to the uncertainties of the pandemic. Another factor - which is not reflected in the data - is a reduced efficiency of the investments. ZEW, which conducted the survey for the federal education ministry, produced a metric that ranks successful innovations relative to turnover. There are no data available for 2020, but the metric already showed a 6.4% decline in 2019. The reason for this is increased global competition. Our suspicion is that the growing gap in digital infrastructure is a factor.

What the ZEW data show is that large companies kept investing. Virtually all of the decline is due to small and medium sized companies, where investments in innovation fell by 9%.

The rise in innovation investments from 2.4% of GDP in 2005 to 3.1% in 2019 was one of the engines behind Germany's strong economic performance. But one-third of that was due to the car industry alone - another indicator of Germany's vulnerability to that one sector.

Another problem is the lack of digital investments. Germany's tendency to double down on analogue technologies, like diesel cars, and the failure to invest in digital technologies is showing through in the data. Just as it took a long time for the misallocation to affect investments and productivity growth, it will take a long time for catch-up investments in digital technologies to reverse.

What we expect to see in Germany is a period of relative economic decline ahead - relative to the world, but also relative to other countries in the eurozone.

12 February 2021

What if Merkel is wrong?

The mood in Germany is shifting against Angela Merkel. Yesterday we had a story on Emmanuel Macron making a politically risky bet against lockdown, and asked the question: what if he succeeds?

Today we ask the corollary of that question. Merkel has made the exact opposite bid. So what if she gets it wrong? We see quite a few signs of rising discontent in Germany. The Germans had a relatively mild pandemic in 2020, which reinforced their sense of superiority, and certainly their sense of having a superior government. But all that has disappeared.

We noted a well known journalist, a strong supporter of Merkel, now turning against her. Lockdown scepticism transcends traditional political allegiances: the vaccine procurement mismanagement is one, but not the main issue. What really seems to be jarring with people is Merkel's failure to acknowledge her own mistakes. She talks about mistakes of others, but not her own. This worked for a surprisingly long time. Not any more.

FAZ, a paper that supported Merkel through thick and thin, noted yesterday that there was a lot of ill-tempered hostility towards her in the Bundestag - and also among state premiers, with whom she co-ordinates the pandemic response. Dietmar Bartsch, the normally soft-spoken leader of the Left Party, accused her of a mindset of papal infallibility. Several speakers bemoaned a lack of self-criticism. Alice Weidel, the co-leader of the AfD, talked about the arrogance of power. A common theme is emerging. The opposition parties do not agree on much, but this is something they agree on.

And this raises the question: what if they are right? There is immense lockdown fatigue in Germany, coupled with rising anger. Polls suggest that a majority still backs the lockdown, but we warn against drawing the wrong political conclusions. Those who oppose it, oppose it vehemently. No political party can afford to lose that group. An increasing number of state premiers are now sensing that the mood is changing.

One of them is Malu Dreyer, the SPD leader of Rhineland-Palatimum, who has now openly attacked Merkel's role in the co-ordination of the pandemic response. Dreyer is not normally known for her criticism of Merkel. But she said that several states have proposed a phased exit strategy, but met with short shrift from the chancellor. The frustration, she said, was massive. She also accused Merkel of leaking confidential information to the press, so that it has become impossible to speak openly during those conferences. She said the lockdown had broken many lives.

Merkel and Markus Söder have taken the most consistent pro-lockdown position of all German politicians, lately joined by Laschet. Merkel was proven right last November when case numbers soared and when state premiers refused to follow her lead. With the arrival of the UK and South Africa mutants - that are beginning to spread in Germany as well - she may be proved right yet again. But this is a political bet that could go wrong. And if it does, the election dynamics will be very interesting.

11 February 2021

If you can't beat them, join them

This story may not amount to much, but this is the first time we see some forward-thinking in the German government about the future of cars. Andreas Scheuer, the transport minister and CSU politician, is preparing legislation to allow self-driving cars. And he wants to ensure that there are enough charging stations on the motorways for electrical cars to become viable.  These two different pieces of legislation have been agreed by the cabinet. 

So far, the law does not allow self-driving cars. Cars emit annoying beeps when you go off-track, or when you appear to fall asleep at the wheel. We noted German newspapers citing accidents involving self-driving cars in the US as evidence that the whole notion is dubious, and making the unsubstantiated claim that there would be no demand in Europe for such cars. Germany may also slowly escape from a long period of denial about the rise in electric or hydrogen-powered vehicles. Over the last decade the German government and the EU's strategy has been to support the car industry through a policy of active forbearance on emissions testing, thus indirectly encouraging the industry to use high-tech cheating devices.

We think the legal change is significant, and no doubt intended to give the domestic car makers an incentive to invest in technology. But we should also be aware that they are not anywhere close to where they need to be. The Tesla is designed from the outset as a self-driving device. It is a completely different design from that of a German luxury car. They are as different as desktop PC and a mobile telephone.

The German legislation is recognition of the old adage that if you can't beat them, join them. German will initially designate certain areas for self-driving, for testing, off the motorways at first. But most important, they are planning to draw a regulatory framework. The goal is to become the global leader in automation.

10 February 2021

Germany's life-and-death fight for Russian gas

Eurointelligence readers will probably not be surprised to read about the leaked document Olaf Scholz last year sent to Steven Mnuchin, the former US treasury secretary. We already reported in September that Scholz proposed a deal to co-finance the construction of terminals for liquid natural gas (LNG) so that the US could increase its gas sales to Germany. The leaked document now tells us that Germany was ready to commit €1bn for this project, in exchange for the US giving up its opposition to Nord Stream 2. Yesterday, Germany's president, Frank-Walter Steinmeier, pulled the ultimate weapon in the defence of the project. He said that Germany owed this to Russia because of the 20m Russians killed in World War 2. Steinmeier's comment triggered an immediate protests from Ukraine's ambassador in Berlin, who accused the German president of putting forward, as he diplomatically put it, questionable historic arguments. 

What all this is telling us is that Germany is desperate, very desperate, to commission Nord Stream 2, and that the coalition will go to great lengths to make it happen. Tagesschau is reporting that if the project were cancelled, Russia would retaliate by reducing existing exports of oil and gas to Germany, which would trigger an immediate energy emergency. This explains the desperation. You do not want the lights to go off in an election year. The vaccine procurement delays already highlighted incompetent management. When people realise that CDU/CSU and SPD also mismanaged energy policy, voters may end up deserting them.

What is also evident from Scholz's document is that Germany misjudges the nature of the US opposition. The Germans think this is all about money - that the Americans want to sell them their own gas. We are sure that the LNG-lobby in Washington is active and makes representations to Congress. But it would be a fundamental mis-characterisation of the US position to reduce this debate to US gas exports. That was even true under Trump. A further consideration is that existing LNG terminals in Europe are not working at capacity. Another terminal is not going to make a lot of difference. 

What is not understood in Germany is that the US position is geostrategic. The US wants to prevent Germany and Europe from becoming dependent on Russian gas supplies and to agree a deal with Moscow that would damage Ukraine. The Germans look at this in purely mercantilist terms. Angela Merkel's decision to switch off the nuclear power stations put Germany into a position where it had no choice but rely on fossil fuels - with the cheapest bulk supplies available from Russia. Without Nord Stream 2, Germany would have to make a series of unpopular policy choices, that would invariably involve reducing demand for energy from large industrial companies through higher prices. What is at stake here is the future of the German industrial model. This is why the German government, and the president, treat this issue as a life and death fight.

A question we have been asking ourselves is whether there is scope for compromise. For example, could Germany agree to split the difference - buy half of its gas imports from the US and the other half from Russia. Or some other split. That would be hugely expensive because Germany would presumably have to compensate Gazprom for the losses, and agree a side deal with Vladimir Putin.

9 February 2021

Not money? Really?

We were reminded this morning by René Magritte's famous painting about the pipe that is not a pipe when Christine Lagarde said:

"le Bitcoin, ce n'est pas une monnaie"

She also talked about funny money. We singled out this comment because it goes to heart of the misunderstanding of the economics and central bank professions about the nature of bitcoin. It will not be up to them to decide whether or not it is money. That question will be settled by those who use it. Fiat money is a social contract that exists because people trust it. The betting on bitcoin, including Elon Musk's €1.5bn investment, constitute a bet that this might not always be so.

Following on from our lead story yesterday about the impact of excessive stimulus, we may only be a couple of policy mistakes away from an environment in which the use of digital money, Bitcoin and others, could become more widespread. We live in an age where the sharp contours between public sector debt and money are blurred. One economic theory even equates the two. That's how the bitcoiners see it too, except that they want to protect themselves from it. Bitcoin is not only a bet against inflation like gold or silver. It is a bet against a system in which money is used as a policy tool. It is no surprise that the launch of bitcoin, in 2009, coincided with the advent of quantitative easing.

The widespread misunderstanding of policy makers is that the intention of bitcoin was never to create a rival to the euro or the dollar but to create a device that protects from economists and central bankers or governments that want to track electronic payments. The group of techies who started the project with an article in 2009 saw bitcoin as a device to protect individuals from state control of all kinds - by creating a stateless currency that could be used in transactions and a store of value. Bitcoin was never intended to fulfil the third function of money in modern society - that of a unit of account. In that narrow sense, Lagarde is right, but that does not tell the whole story.

The German poet Christian Morgenstern once caricatured a person driven over by a car, in denial of his imminent death:

"for, he reasons pointedly, that which must not, can not be."

8 February 2021

From Russia, not with love

During the weekend a string of German politicians, including Angela Merkel and Peter Altmaier, said it was important to separate Nord Stream 2 and the response to Alexei Navalny's imprisonment. Separation means: let's pretend we care about Navalny and continue to do business with Vladimir Putin. We can only hope that Nalvalny did not bet on a strong international response to his arrest. It won't happen.

We agree with the assessment by Dmitri Trenin, from Carnegie Moscow, on the future of the EU-Russia relationship. It will be purely transactional. What's more, Germany sees it exactly the same way. 

In view of this depressing reality, it is unsurprising that Josep Borrell's visit to Moscow did not go well. Moscow concluded some time ago that it is in its best interest to deal with member states directly, rather than the EU - unless it has no other choice. Sergey Lavrov, Russia's answer to Metternich, left no doubt about his contempt when he told Borrell in public that the EU was not a reliable partner. 

We agree with Borrell's post-mortem analysis that the situation requires deep reflection within the EU. But we are less optimistic than he is about whether that will happen. Borrell discovered that you cannot raise human rights issues, even in a one-to-one conversation with senior Russian officials, without triggering a hostile response. The same is true for talks with Chinese officials. Borrell writes that he returned to Brussels with deep concerns over Russia disconnecting from Europe.

We should read Borrell's comment as directed to EU member states, not Moscow. The EU is only in this position because it allows Russia to exploit EU disunity, as it so successfully did with the Nord Stream 2 project. The EU only has itself to blame because at no point did it put up enough resistance to the project. The EU had the power to frustrate Nord Stream 2 by imposing onerous regulation. The compromise reached with Germany assured that the project would go ahead. We noted that Emmanuel Macron has now come out against the project, but we doubt that he has the will do what it takes to stop it - which is encourage the US to impose sanctions on the German government directly.

In the meantime, we thought that Borrell's visit was useful, if only as a reminder of what needs to be done.