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23 November 2023

Brics take on Gaza

The Brics held a virtual meeting over Gaza yesterday in an attempt to mark their difference to the Western response. Vladimir Putin called for a ceasefire, as did Xi Jinping, who also warned against forced displacement and spreading the war into the Middle East. Cyril Ramaphosa, president of South Africa and host of the meeting, went the furthest, condemning Israel’s collective punishment of Palestinians as a war crime under international law. His government had filed a complaint against Israel at the International Criminal Court last week and shut down the Israeli embassy this week. Narendra Modi of India did not address the meeting at all, a silence which may reflect a shift in the country’s position on Gaza, suggests the NY Times. Luiz Inácio Lula da Silva tempered his words, describing the war as a humanitarian catastrophe, but avoiding the word genocide.

Their joint statement papered over the differences amongst members, calling for an immediate, durable and sustained humanitarian truce leading to a cessation of hostilities. They urged both sides to show maximum restraint, prevent destabilisation in the region, and release all civilian hostages. The statement also advocated the two state solution. Differently from Europe and US, the Brics countries do not designate Hamas as a terrorist organisation.

China suggested an international peace conference that is more authoritative, with the aim to produce a comprehensive, just and sustainable solution to the question of Palestine. Russia also saw a bigger role for the Brics in the conflict resolution phase, blaming the conflict on the failure of the West.

The Brics countries, Brazil, Russia, India, China and South Africa, were joined by the leaders of future Brics members Iran, Saudi Arabia, the United Arab Emirates (UAE), Egypt, Ethiopia, and Argentina. Another noteworthy intervention came from Saudi Crown Prince, and de facto ruler, Mohammed bin Salman, who called on the international community to cease weapons exports to Israel. Al-Monitor writes that its immediate effect is unclear. Some of the current and prospective Brics members have military relations with Israel. For example, Israel’s annual defence exports to India amount to an estimated $1.5 to $2bn, according to a December 2022 report in Haaretz. What is also not clear is whether Saudi Arabia is leading the response for Arab states with this statement. Saudi Arabia had called for a ceasefire early on and hosted an emergency summit in Gaza for the Organization of Islamic Cooperation. Before the war the Saudis had started to normalise their relations with Israel.

22 November 2023

Linking Israel's war to immigration

Psychologist Albert Bandura coined the term moral disengagement to describe people selectively engaging and disengaging their morality depending on who they are facing. Group identity is the defining factor for selective moral standards. Political parties constitute such groups.

We see signs that parties are using the context of Israel’s war in Gaza to magnify their case on immigration, using war-like language to describe very different events at home. Linking Israel’s war in Gaza to the immigration debate may serve their group identity, but leads to more political polarisation, and risks exacerbating tensions on the ground.

Two assaults in France last week were used by political parties for morality-signalling purposes. A village party in Crepol ended with the death of a 16 year old boy, named as Thomas, after a group of people entered the scene. While the identity of these people has yet to be confirmed, parties of the far-right were quick to blame the attack on youths with immigrant backgrounds from public housing estates. They described the killing as an act of anti-white racism. On X, formerly Twitter, there is now a hashtag #francocide. Marine Le Pen even claimed that armed militia were organising raids. Eric Zemmour talked about a war of civilisations, and called Thomas an innocent victim and martyr. Even conservatives jumped on the bandwagon and made an immediate link to immigration.

In the south-west of Paris, meanwhile, a young gardener, named as Mourad, was attacked Friday with a craft knife by a 75-year-old man, who shouted racist insults. The left immediately seized upon this event to decry the Islamophobic atmosphere in France.

Two events, two reactions. None of the parties commented or even acknowledged the other event, observed Cecile Cornudet. It was as if it did not happen in their world. And the media propelled these stories as if they were the truth. The problem with such stories is that even if investigations find out later that these allegations were wrong, the story will continue to live and thrive to serve the group identity. Only those events are registered that confirm what parties have been preaching all those long years.

Islamisation versus Islamophobia has been a dividing line in France for decades. Israel’s war in Gaza now gives politicians and commentators a new moral context that amplify a single event into a bigger theme. Using phrases and narratives from the war to describe what has been going on amplifies an emotional response, stretching sympathy for Israel or Gaza to a local event near you. The French hard-left MP Francois Ruffin spoke out against a heavy atmosphere in media and social networks, as if one had to take a side. In this hour, we lack politicians with the capacity to refrain from using the war to suit their own purposes, which risks inciting violence between various groups at home.

21 November 2023

Abolishing a central bank near you

Political analysts or journalists in the west have been underestimating the rise of populist figures for years. The reason is that the political framework in which they have trained has no frame of reference for this type of politics. When they misjudge the situation, they keep on doubling down. It happened with Donald Trump, with Brexit in the UK. And it is now happening with Javier Milei, the president-elected of Argentina.

There is one aspect of the politics in Argentina with ramifications for our own reservation. What interests us is his election promise to abolish the central bank and to dollarise the economy. For a country with over 140% inflation, this is not as crazy as it sounds. The public's trust in the central bank has broken down. We are not ourselves fans of the idea that a country adopts the currency of another country. This will not be a sustainable exchange-rate regime, but the central-banking governed peso wasn't either. Remember, the unsustainable always ends. That goes for unsustainable monetary regimes too.

Fiat money is the most vulnerable part of our economic system. We in the west have been using it to bail out banks after the global financial crisis, to bail out governments in the sovereign debt crisis, to stabilise economies during a pandemic, and to impose sanctions on our opponents. The economic consequences of our abuse of the fiat money system are not nearly as extreme as they are in Argentina. Not yet at least. Nor is the backlash. But we should not be surprised to see the German AfD at over 20%, or the UK's Conservative Party being taken over by right-wing extremists. If we continue with the same macroeconomic policies, we could end up in a scenario where political outsiders are no longer focused on immigration as they are now, but on the abolition of money.

The real danger for fiat money systems is not a scenario where Argentina falls into an economic hole, but one in which Milei appears to succeed, and where his ideas catch on. It will come as a total shock. 

20 November 2023

Germany's moral debt to Israel

Germany's historic guilt over the Holocaust and its declared responsibility towards the security of the Israeli state prompted a strong show of solidarity after Hamas's attack on 7 Oct. But what does this responsibility for the security of Israel mean moving forward? Where does Germany stand when the protection of the state of Israel comes into conflict with international law? If Germany really cares about the long term security of Israel, would its role not be to question how successful the strategy of the current government is towards this goal? We-stand-by-Israel declarations won’t make Israel feel any safer. What they do, however, is open the gap between how people feel and what is collectively permissible to express.

The war in Gaza puts Germany into a bind. It means that it cannot take a balanced approach towards its Jewish and Muslim communities in its own territory, without risking being seen as disloyal to Israel. President Frank-Walter Steinmeier called for Muslims in Germany to officially distance themselves from Hamas. Muslims living in Germany now, all of a sudden, have to declare themselves at work or in school, while not being able to mourn the loss of life in Gaza. People get fired for being openly against the war, as it happened to Anwar Al-Ghazi, a player in Mainz 05 football team, who had expressed his solidarity - not for Hamas but for the people in Gaza. 

And yet, there is a thriving Muslim community in Germany as witnessed in the football game last weekend, where Turkey won against Germany in a friendly game. Most notably were the fans in the Berlin stadium, the majority of which supported the Turkish team, and booed the Germans. This has never happened to a German team on German grounds, and it triggered an anguished debate about integration. Berlin has a large community of people with Turkish roots who came to Germany to help rebuild the economy after World War II. Now they are cheering the team of their roots, not the country they have been living in since. A visit from Recep Tayyip Erdogan shortly before the game did its bit to remind fans of their roots. In a joint press conference with Olaf Scholz, he said that Turkey, unlike Germany, can speak its mind freely. ZDF described Erdogan’s visit and the football game as two away games that Turkey won.

If this war in Gaza continues at this pace, Germany will eventually be at odds with the rest of the European community too. So far, Europeans have covered their disagreements and collectively called for humanitarian pauses. Only Ireland and Spain have openly called for ceasefires, and reminded the EU of its moral double standards. Whether this position will shift and how depends on the US, which just brokered one of those pauses for five days in exchange for hostages. A first step.

It is not a far-fetched scenario that the war continues for months or even years in Israel's pursuit to eliminate Hamas. Will the US and the Europeans be ready to embark on another long-term war commitment with an unconditional supply of weapons that is financially costly and morally difficult to justify? Emmanuel Macron seems to have gotten the message from his ambassadors in Arab states to calibrate his politics, which has prompted his offer of humanitarian aid to Palestinians in Gaza. It is first of all a question of language. Then one of action. Germany has not even began to recalibrate its language, still morally justifying Israel’s right for self-defence on a land that is not theirs. The two-state solution is sliding back from Germany’s public discourse.

Germany is about to become morally one-sided due to its historic debt towards Israel. Moral debt without a set price can never be paid back. There is simply no redemption possible if its form and shape is not fixed. That is why debt contracts always specify end dates and payment terms. So that the debtor can eventually be free of its debt. If the terms are not clearly defined, the debt relation is prone to take over other relations too.

17 November 2023

Xi back home

It is good that the US and China have established high-level military communication. The Cold War may not have stayed cold had that not been the case, without diplomatic back channels, and the famous red telephone. That example should also serve as a reminder. The fact that we are talking with one another tells us nothing about the true nature of our bilateral relationship.

As Lingling Wei observed, China's strategic goal remains unchanged: to replace the US as the global economic leader. She summarises President Xi Jinping's view in terms of a simple statement: the east is rising, the west is declining, whilst recognising that this process is not a straight line. Where the situation with China is different to Soviet Communism is that by the time the Cold War started, communism had already started to become a diminished global force. Unlike Russia, China has a much more diverse economy. Frank Dikotter writes in his book China after Mao that one of Xi's lasting impressions during a lengthy stay in Russia was the country's industrial backwardness. 

Another observation we have made is that China, and to some extent Russia too, are more skilful than western governments in alliance building outside our own immediate turf. Africa and Latin America are turning to China as a strategic partner. We once cited an African source as saying that whereas the Chinese just invest, western investment is usually accompanied by a sermon.

Herein lies the other big difference to the Cold War. The non-aligned world was closer to the west than it is today. The most persistent delusion in the western discussion, especially in the UK and the US, is that everybody wants to be like us. That is no longer so.

In view of those trends, it would be a folly to assume that the west is going to prevail. As always, the future holds many possibilities, including that of a backlash against Chinese communism, externally and internally. But the future also holds the possibility of a decline of the west, and its economic and geographical retrenchment. The current western policy consensus, which favours secondary economic sanctions as foreign policy instrument, an abrogation of responsible monetary and fiscal policies, an increasing readiness to engage in simultaneous proxy wars, and a values-based foreign policy, is making this possibility more likely.

16 November 2023

Will the UK withdraw from the ECHR?

The consensus view in Westminster last night was that Rishi Sunak would not drop the ultimate bombshell and withdraw from the European Court of Human Rights, the favourite bogeyman in the UK's debate about refugees. 

We recall that people gave similarly optimistic views about Brexit in 2015 due to a lack of imagination when it comes to the powers of intruding events. 

After yesterday's unequivocal and unanimous ruling by the UK Supreme Court against the government's policy to send refugees to Rwanda, Sunak briefly appeared to open the door to ECHR withdrawal, only to close it shortly afterwards. Withdrawing from the ECHR is not plan A. At the same time, we know that plan A will not achieve the ultimate goal, which is the actual dispatch of refugees before the next elections. Withdrawal from the ECHR would then emerge as a last-ditch effort. Moreover, given the totally irrational debate about immigration and asylum in the UK, we don't think that the Labour Party would be in a rush to rejoin the Council of Europe after they come to power. 

So there is an accident waiting to happen on a scale similar to Brexit. Our sense is that UK political observers seriously underestimate the consequence a UK withdrawal from the Council of Europe would have for EU-UK relations. It would kill, in an instant, any plans for a renegotiation, or even prolongation of the current bilateral trade agreement. Forget any notion of single market association. The EU will not cut deals with a country that has legally put itself on the same level as Russia and Belarus, the only other two countries that are no longer in the organisation.

Brexit, too, was not the government's plan A. Plan A now is for the government to introduce legislation that would declare Rwanda a safe country. Such legislation would constitute an absurdity. How can you legislate statements of facts?

The most authoritative legal comment we read on this matter was from Lord Sumption, a former Supreme Court judge himself, who said the prime minister's legislation would constitute a clear breach of the UK's obligations under international law, including the refugee treaty, which Sunak may also end up withdrawing from. Lord Sumption also said the House of Lords would delay the legislation, denying the government the ultimate prize: TV images of the first plane taking off for Rwanda. Lord Sumption also made the obvious point that you can't overrule facts through legislation. If the supreme court believes Rwanda is not safe, no legislation can force the court to think otherwise. 

If there had been a workable alternative, Sunak would for sure have taken it. We might get to a point where the only political option left for the government would be a blame game to deflect from policy errors. That's how it could happen. For a government that has nothing to lose, desperate in the search of an issue that unites the party, the withdrawal from the ECHR could be too tempting to miss out on.

15 November 2023

Poland's parliament changeover

The Law and Justice party, or PiS, may be tasked first by Poland’s president to find a majority, but the first session in parliament confirmed that they are not getting anywhere.

Last week both houses, assembly and senate, chose their speakers in the first session since the elections. For the assembly, former TV host Szymon Holownia won comfortably against the PiS candidate Elzbieta Witek, who used to hold this position since 2019. The PiS did not even get her into the job as one of the chamber’s six deputy speakers, as the opposition accuses her of running roughshot over parliamentary procedures in the past.

Holownia has been elected only three years after he entered politics and without ever holding any seat. In his speech Holownia admits that he does not know all political tricks but promised to build a parliament of respect for the country. In a first move that things are about to change he removed police barriers that had prevented the public to enter parliament for years, Politico reports. He also promised to make the assembly more accessible to journalists and remove the so-called legislative freezer, a procedure which allows the speaker to refuse to move forward inconvenient laws and which was used by his predecessor. The Senate’s vote for their speaker went to Malgorzata Kidawa-Blonska of the centrist Civic Coalition, the largest opposition group which held the Senate since 2019 but increased its share even more in this year’s election.

The speakers’ election is the first signal that the three-party opposition under Donald Tusk, which has a majority in the house, is effectively in charge of the legislative agenda. When they get the chance to form a government is only a matter of time. But also be prepared for the PiS to get much more virulent in its pushback against this loss of power and influence.

14 November 2023

Another long war scenario

As Emmanuel Macron is making yet another U-turn in his communication about the Israel-Gaza war, European leaders do well to prepare for the long haul. It is not an unlikely scenario that Europe has two long lasting wars at its periphery, in Ukraine and the Middle East. The reason is that neither Vladimir Putin nor Benjamin Netanyahu have an interest for their wars to end. As long as the war goes on, they keep their image as powerful war lords. And they keep their jobs. Their fate once the war ends is more obscure.

International pressure did not deter Putin to continue his war in Ukraine, on the contrary. Will pressure on Israel help to end its war in Gaza? Foreign minister Eli Cohen estimates that they have another two or three weeks before being forced to cease their military operation. But as Alon Pinkas warned in his oped for Haaretz, Netanyahu is gradually setting the scene for a political showdown with the US as he continues to ignore ideas or requests coming from Washington.

Most notably is Netanyahu’s reluctance to specify any post-conflict solution for Gaza except to say that Israel would assume full security responsibility over Gaza for indefinite time. What does this mean? Full occupation of Gaza? Everyone is guessing, but no one knows. Sounds familiar. Remember when everyone was trying to figure out what Putin’s plan for Ukraine was? Last weekend Netanyahu added another condition that once Hamas is out, Israel needs to make sure that Hamas does not happen again. What that means is not clear either, but it sounds much more hands on. Netanyahu dismissed outright US ideas for a post-conflict plan when he said that Israel would oppose any governing role for the Palestinian Authority in Gaza. Neither does he want a link between Gaza and the West Bank or an interim force present with an Arab element, as Anthony Blinken suggested last weekend. 

So we know what Netanyahu is against but not what he is for in a post-conflict solution. That kicks the can down the road and distracts from all the problems his government had before Hamas attack over the constitutional reform and settlers policies in the West Bank that split the nation. As Pinkas writes about Netanyahu:

“A lengthy war, he believes, will alleviate the criticism and keep him in power. More importantly, it will enable him to acerbically spread the blame, shedding all and any responsibility and accountability from himself.”

Any post-conflict solution will require Israel to distinguish between Hamas and the rights of Palestinian civilians. This lack of distinction between the two is what costs Israel sympathies around the world since Hamas terrorist attack on Oct 7. It raises questions whether Israel’s military operation into Gaza with 40,000 or more civilian dead or injured and tens of thousands currently fleeing to the south, is really about Hamas or about to get Palestinians out of Gaza. The latest escalation in the North with Hezbollah in Lebanon also raises the prospect of a wider conflict in the region that could draw the US into a confrontation with Iran and the wider Arab world.

We would have been in a different situation if Israel had distinguished between Hamas and Palestinians right from the beginning, and pursued diplomatic avenues alongside the fight against Hamas terrorism. With its unconditional support for Netanyahu, the west now allowed itself to be drawn into another proxy war it cannot win. 

14 November 2023

Foreign policy - the end of the consensus

In contrast to all the elections that took place since 2015, the British electorate will next year choose between two relatively centrist candidates and top teams. Yesterday's reshuffle, and the return of a big beast, are headline-grabbing, but will not change the election odds. What has not changed is that Rishi Sunak still does not know how to connect with people, and that he lacks a popular mandate. That in turn translates into a lack of a distinct political agenda. The Conservatives never transitioned from Getting Brexit Done to Making Brexit Work. David, now Lord, Cameron's biggest political misjudgement was not Brexit, but the belief that the EU referendum would settle the deep divisions in the Tory party. 

Foreign policy is not the field of action on which the next election will be fought or decided. But what will happen once people start to realise that there is no glorious victory at the end of the Ukraine war? That moment could well arrive before the next elections. Will they still want a safe pair of hands, like Lord Cameron, when they realise that politicians of his generation got themselves into a Vietnam-style foreign policy trap?

The Labour Party, or indeed any opposition party in Europe, does not offer new fresh ideas on this point either. For now. They disagree on housing and infrastructure, but share a mind-numbing consensus on foreign policy.  

The one prediction we dare make is that this consensus is likely to break down at some point in this decade, in the UK and elsewhere. Foreign policy will cease to be a field dominated by technical experts and re-animated by political grandees. Yesterday's events were in this sense a bit of a retrograde moment. But there is nothing quite like a war that you are losing that has a capacity to rock your political consensus. 

13 November 2023

Too many toys

Governments never have enough money. There is always something else. The art of governing is setting your priorities, starting with fiscal allocations. The EU has overreached, and so has the German coalition. There is now a very serious risk of policy failure at the heart of Europe.

Of all the decisions taken by the Scholz government so far, the electricity subsidy reveals the most about the coalition's strategic direction in the next few years. They are doubling down on their industrial model, for it is the only one they know. We have been following the debate in Germany over sectoral diversification for a couple of decades. Germany built a formidable industrial infrastructure after the second world war. The only game in town is to preserve it, against the odds.

The electricity subsidy is enormous. It will cost €12bn a year. What struck us when we reported on the story last week was the relatively low cost for the most surprising element of the package, the near abolition of the electricity tax, which will cost €2.75bn. People interpreted this broad-based tax cut as a victory for Christian Lindner over Robert Habeck. But what about the other €9.25bn? This is money that will go specifically to high electricity-consuming industries. It will not be funded out of the budget, but from the climate transition fund, an off-budget facility to help with the climate change transition. Nobody would have dreamed two years ago that this government would use the green fund to finance gas-guzzling chemical and steel companies. The idea was to help out citizens to cope with the rising costs of climate change compliance. 

As Germany and other EU countries return to the fiscal rules, current spending priorities reveal a lot about political priorities, both at the national and EU level. Hendrik Kafsak writes in FAZ this morning about the budget fights that lie ahead at the next EU summit. The EU says it cannot support Ukraine, back Israel, enact migration policies, and fight climate change with its current budget. That is indeed so. The EU will in the long run have to make a strategic choice whether it wants to endow the Commission with revenue raising and debt-issuing power, or fund the EU in the present way, mostly through national contributions. If it is the latter, it is a zero-sum game: Ukraine versus the farmers. We believe that the EU is trying to do too much right now, and is in danger of ending up doing a lot of things badly.

The Commission says it needs an extra €65.8bn to fund its various projects. The interest rate increase is now driving up the costs to finance the recovery fund. We struggle to see how member states will agree to pay for this when they themselves are sailing close to the wind with their own budgets. 

Germany has given itself harder fiscal constraints than other countries through the constitutional debt brake. The climate transition fund was the last big slush fund still available. We will learn later this week, from the Constitutional Court, whether the government was entitled to redirect the Covid fund to climate change. But even if the Court says yes, we have reached the end of the road. This is the last big spending project of this coalition. We know what we need to know. Defence spending will continue to be below 2% of GDP for the indefinite future, and Germany pays high subsidies to large companies, but remains a virtual desert for start-ups. That won't change.

The bottom line is that we are doing too much, and are not focused on the few things we need to do really well. One can defend a co-ordinating role for the EU during the pandemic and the European response to Russia's invasion of Ukraine. But was banking union not the all-important project at one point? Or the capital markets union? The have been abandoned like last year's toy ahead of Christmas. Remember the Green deal: will this go the same way?  Or Germany's industrial transformation. We are setting ourselves up for disappointment because of a generalised failure to focus.