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13 January 2023

Long road towards a NI deal

Negotiations over the Northern Ireland Protocol are intensifying but it is not clear yet how long it will take. The mood has changed not only between the negotiating teams of the UK and the EU but also between unionists in Northern Ireland and Leo Varadkar, the Irish prime minister, or Taoiseach in the Irish language. Varadkar recently came back to power as part of the Republic of Ireland's coalition agreement, and has a more mellow stance towards the unionists' resistance to the protocol. There have been some technical advances too, as we reported last week. But will this be enough to push a deal over the finishing line?

Sir Jeffrey Donaldson, the leader of the DUP, acknowledges that progress has been made, but he claims that there are still major obstacles to the DUP accepting a new version of the protocol. One example is border control posts in Northern Ireland, which the DUP totally opposed to. The latest technical agreement would allow the EU to access the UK’s database that monitors trade, allowing for differentiation based on whether it is destined to stay in Northern Ireland or exported southwards to the Republic, and thus the EU. For goods requiring EU checks, control posts are meant to be erected, though the DUP, when still in office, had stopped work on them.   

The clock for a deal is ticking though. Last November, the British government postponed the need to call elections in Northern Ireland to give negotiations more time. Under legislation that was introduced at the time a 12-week timer to hold elections starts on January 19. Northern Ireland has been without a power-sharing government since the DUP walked out last February because of its boycott of the Protocol.

12 January 2023

Let me be coal-free, but not just yet

Yesterday’s pictures of police marching in on protesters trying to protect a lignite field is symptomatic of the many contradictions of German energy policy. Here you have Green ministers, Robert Habeck among them, defending police action against protesters, most of whom are members or at least voters of the Green party. The lignite deal was negotiated by the Greens themselves. We are now observers of the absurd spectacle of the Greens defending the dirtiest version of coal.

The reasons this has became necessary is because the Green party has pushed the entire political class, Angela Merkel in particular, into an early exit from nuclear power. It is not just about the three power stations due to go offline on April 15. It is an entire industry that has been phased out. Coal constitutes a staggering 31% of German electricity production. In 2015, it was only 8%. If nuclear energy is phased out altogether, and gas become more expensive, coal is the fall-back position. The original plan had been to use gas-fired power stations to supplement electricity from renewables, and to address the intermittency problem. But despite the recent fall in gas prices, the return to that strategy is commercially not viable if only because liquefied natural gas, even at its current prices, is much more expensive than pipeline gas from Russia was. The alternative is active support for de-industrialisation. Not even the Greens advocate this. 

Police yesterday treated us to the spectacle of vacating the village of Lützerath, located in the west of Germany between Aachen and Düsseldorf. It sits on a lignite field, and is to be torn down and turned into a lake. The villagers have long been relocated and compensated. A sole farmer brought legal action and lost. Lützerath is part of Garzweiler II lignite extraction project, which the courts have approved in the final instance. A group of protesters have since squatted in that village, and have now been forcibly removed. There is a long history behind anti-lignite protests in this area of Germany.

The company in charge of Lützerath is RWE, which no longer lists coal as one of its main strategic activities. The official exit date for coal-fired power in Germany has been brought forward from 2038 to 2030, but that happened before the Ukraine war. We would not be betting on this timetable. The cheap Russian gas is gone, and will never return. Nuclear will be gone in April. Betting on the 2030 exit date is betting on the absence of shocks.

This Saturday, Greta Thunberg will appear in Lützerath, and will possibly remind the Greens of the many contradictions of their own energy policy. Now with the Greens firmly entrenched in government, energy policy is getting deeper and deeper into an unbelievable mess.

11 January 2023

European nuclear needs political will

Despite its various twists and turns, the German nuclear debate has nothing on the rows that have been going on for the past year and a half over the border in Belgium. While Germany’s own nuclear phaseout looks like it will go ahead, the Belgian phaseout has been paused, but there have been continual hiccups. As Europe’s energy crisis has increased interest in nuclear power across the continent, looking at what’s happened in Belgium is valuable. It highlights the importance of continued political will in developing and successfully using nuclear power, something that’s often been lacking in Europe.

Since 2003, there has already been a legal basis for a phaseout in Belgium, which generated more than 50% of its electricity using nuclear power in 2021. But efforts to phase out nuclear power took off in earnest in 2020, when a coalition including Greens from both Flanders and Wallonia came into power. The plan was to get rid of the country’s reactors as part of an energiewende-style strategy that would see renewables use ramp up instead.

The energy crisis has, however, prompted a rethink of the strategy, as has political opposition to building the gas-generated power capacity necessary to replace all of the reactors. Two of the seven reactors that were online when the 2020 coalition deal came about are supposed to stay online until 2035, as part of a deal the coalition agreed on in March 2022.

But the problems didn’t end there. The government had to negotiate with Engie, the French energy firm operating the reactors, to secure a lifetime extension. Earlier this week, they managed to reach a deal, but only to extend the two reactors’ operation until 2026. The sticking point has been the cost of managing radioactive waste, which Engie hadn’t accounted for beyond the phaseout timeline.

Belgium’s U-turn on the phaseout is partly a story of the energy crisis’s contingencies accelerating a longer shift in attitudes towards nuclear power, especially within the environmental movement. But it also highlights one of the big problems Europe’s nuclear industry has faced: a stop-start attitude to nuclear power from politicians.

The same phenomenon has had a bigger impact on Europe’s energy security in neighbouring France. Successive French governments have flip-flopped on the role nuclear power should play in the country’s future, driven by political contingencies. Emmanuel Macron has now re-set the course back towards nuclear power. But the result has been an ageing reactor fleet, with no imminent replacement. France has not brought any new reactors online since 2002. The latest one to be built, Flamanville-3, has suffered from continual delays and will not come online until at least 2024.

Building, operating, and decommissioning nuclear reactors are all complex processes, which take a lot of time to plan and execute. As in any technically advanced industry with high capital costs, long lead times, and stringent regulatory requirements, participants need certainty from policymakers. That has been lacking for nuclear power, and we should be wary of any nuclear renaissance until there’s a clearer indication that any newfound enthusiasm for nuclear power is here to stay.

10 January 2023

A no-legged leopard

We have heard from news reports that the UK government is considering sending Ukraine its third-generation battle tank, the Challenger 2. Sky News talks about 10. Spiegel has the number at 12. For Ukraine, battle tanks are critical in their quest to reconquer Russian-occupied territories. The significance of the UK’s rumoured delivery is that is has brought out into the open a debate in Germany especially about whether it should send its Leopard 2 tanks.

Robert Habeck said on German TV that this cannot be excluded. Various Green party politicians are openly calling for it. The official German position is still a clear no. When asked Olaf Scholz always gives the same non-answer: Germany does not take unilateral decisions but acts only in co-ordination with its allies. In this case, we actually believe him. Neither Germany, nor even Poland, are willing to act alone because most of our Leopard 2 tanks are effectively dead cats. If the Leopards are sent, it would be a joint European operation, where each countries picks the few Leopards 2 tanks that work.

There are 3600 Leopard tanks out there. Greece has the largest number of them. Germany and Spain have around 330 each, and Poland and Finland around 200-250. If there is a coalition, these four countries would be the ones. Rheinmetall is the producer. As this is a German-made product, Germany retains a veto right on third-party arms sales or deliveries as per the contractual agreement. Germany is not going it alone. Nor can anyone else.

Leopard 2s come in different models. The latest generation has a 120mm canon with a reach of 5km, and can run at a maximum speed of 63km/h. As FAZ’s defence analyst notes, only a fraction of them are operational and up-to-date. What has been happening is that armed forces have been setting aside some Leopard 2 tanks as sources for spare parts for others to save money. Of those that work, most have been assigned for Nato and cannot be easily withdrawn. So far, only Spain has even considered the delivery of Leopard 2, but it pulled out because their tanks were in a decrepit state, a danger to anyone who would use them.

The Polish government has come up with the only realistic idea: for European countries to assemble a joint fleet of Leopard 2. Even Poland is wary of unilateral moves, because the delivery of offensive battle tanks would clearly constitute a major escalation. Another possibility is for European countries to supply older Leopard 1, but these tanks, too, have similar technical problems. Quality problems abound in German-made military hardware, but we would caution against blaming the suppliers. This is what happens when you subject military spending to extreme cost pressures. In the past, we reported on a grounded fleet of Eurofighters. Recently the German defence minister pulled the purchase of the Puma infantry fighting vehicles, which were supposed to replace the older, but very solid Marder infantry fighting vehicles, of which Germany did deliver some to Ukraine.

From the information we have seen, the Europeans could put together a joint Leopard 2 unit, but do not take the politics as given. We see the Leopard 2 as a cautionary tale of the gap between aspirations of European strategic autonomy, and a much more sober reality.

9 January 2023

Sweden's red lines for Turkish requests

Sweden finally shows spine in the do-this-and-do-that game Recep Tayyip Erdogan has been playing with them over their Nato membership application. Ulf Kristersson, Sweden’s prime minister, said over the weekend that the country will do what it needs to in order to fulfil the tripartite agreement with Turkey signed last summer. But Sweden is neither able nor willing to fulfil conditions that go beyond the scope of the deal. Turkey has since requested the extradition of people living in Sweden, but the decision is a matter for the Swedish courts, not the government, according to Kristersson. The highest Swedish court, for example, stopped a Turkish request to extradite a journalist with alleged links to Islamic scholar Fetullah Gulen, whom Erdogan has blamed for an attempted coup in 2016.

Other desired concessions from Ankara are within the realm of politics, such as arms deliveries. There is no formal ban on arms exports to Turkey, but in practice there is. Sweden and Finland de facto have not issued any permits for weapons sale to Turkey after the Turkish attacks against the Syrian Kurds from 2016-2019. Sweden may have to adopt some legislative changes to find a solution to the arms export issue, as the Defence News puts it. This involves permitting Finnish and Swedish defence companies to compete for Turkish military contracts, and for the governments to process defence goods export applications under criteria reserved for so-called premier-tier export countries. How the latest diplomatic moves between Turkey and Syria play out is also relevant. A Russian-brokered meeting between Recep Tayyip Erdogan and Bashar al-Assad could happen soon. Whatever comes out of this new rapprochement of the two hostile states is likely to involve the Kurds living in Syria.

There are various other variables at play. Also, we would not expect Turkey to drop the ball before elections later this year, since the geopolitical leverage which Erdogan enjoys is too good to let go of. We are thus looking at a decision in the second half of 2023. Finland is ready to wait for Sweden, insisting it is important for both to join together. Where will public opinion be with regards to Nato membership then? That also depends on the war in Ukraine and the end of this war could be facilitated by Turkey, which is once again profiling itself as a mediator. It is a multi-stage game with various phases.

6 January 2023

Germany's next dependency

Germany’s energy strategy must rank as one of the least transparent policy areas in Europe right now. The big idea is blue hydrogen, a process that splits gas into hydrogen and carbon dioxyde, which is then stored underground in a process know as carbon capture storage (CSS). The Green Party always rejected the CSS technology on the grounds that the CO2 could leak. It is another technology trend Germany has missed in recent decades. The country that has not missed it is Norway.

In an ironic twist, Robert Habeck, the German economics minister, has travelled to Norway to strike a blue hydrogen deal with the Norwegian government. Yesterday, we were entertained to the spectacle of him pronouncing that CO2 was better in the ground than in the air. Quite. The big idea of German energy policy is to import blue hydrogen from Norway, and later to export German-made CO2, via another pipeline, back to Norway for storage. You could not make this up. Having opposed CSS technologies on ideological grounds, Germany is now exporting its surplus CO2 to third countries. This is the mess you get into when your energy strategy is based on red lines. As FAZ noted, Germany is now drifting into another energy dependency.

Green hydrogen is the big hope for the future - where water molecules are split through electrolysis into hydrogen and oxygen that can be safely released into the atmosphere. The big German idea is to start off with blue hydrogen and progressively replace it with green hydrogen as the technology matures. This will turn Norway into Germany’s most important energy supplier for a long time. The two countries yesterday signed two agreements, a pact on green industry and on blue hydrogen. They also agreed on measures to protect the security of the pipeline infrastructure.

At the centre of the co-operation stands RWE, the German energy giant. The company sticks to its plan to bring forward the end of coal production from 2038 until 2030. They are planning to build hydrogen power stations in partnership with Norway’s Equinor, previously Statoil. Equinor is currently planning a hydrogen pipeline with a capacity of 2GW, rising to 10GW by 2038.

5 January 2023

Turkish delights over Greece

In persisting conflict situations, small moves can ignite tensions outsiders find hard to understand. We have seen it recently in Kosovo, when ethnic Serbs used trucks to block off roads in their week long standoff with Kosovo-Albanians. The tension was eventually defused with the help of the present peacekeeper missions. But it was a close call compared to previous ones according to Tim Judah, who knows the playbook of recurring tensions in Kosovo rather well.

The recent tensions between Turkey and Greece are not as dramatic as in Kosovo and the underlying relations between the two countries are rather healthy. But the increasing saber rattling of Recep Tayyip Erdogan and his government is raising the spectre of a stand-off or an incident in the Mediterranean. Contentious subjects include maritime borders and the de-militarisation of Greek islands close to Turkey.

A concrete bone of contention is the prospect that Greece could increase its territorial waters around Crete to 12 nautical miles. According to Ibrahim Kalim, representing the Turkish government, an extension would mean that a Turkish or a foreign ship leaving the Black Sea, the Marmaras or the Aegean will reach the Mediterranean Sea from Turkey only by passing through Greek territorial waters.

Then there is increasingly aggressive rhetoric. Erdogan is assuming his role as the one with the upper hand in this contest with the narrative that Greece will not get hurt if it behaves well. Erdogan assured that if Athens remains still, Turkey won’t hit it with its missiles. Adding to this, Erdogan emphasised that Turkish missiles currently have a range of 510km, which is not enough. He wants to increase the range to 1000km. This is all to whip up support for his re-election chances.

Athens may continue to play the ball low, but who knows how close they could get to a hot incident. The pressures are expected to rise this year until the elections. But it is not necessarily a foregone conclusion that those tensions will abate afterwards. If Erdogan wins, he will emerge with his power strengthened. Is the EU prepared for a power savvy Erdogan?

4 January 2023

Baguette - fame and decline

The French baguette was recently granted heritage status from Unesco, but despite the international fame, some of its bakers are now struggling to survive as their production costs soar under renewed energy contracts. They have already seen a sharp rise in butter, flour and sugar over the past year. Could 2023 see an exodus of rural bakers as their energy bills soar?

France capped their energy prices for consumers, limiting the rise for energy prices to 4% in 2022 and to 15% for 2023. No such protection exists for companies. Existing schemes of state aid and price reduction mechanisms could cut energy costs by 40% for some businesses. But the procedures are not straightforward and in some cases may not be enough to cover the price hike. A local baker in the village of Bourgaltroff is making his case in the media, after his energy bill increased 3.5 times forcing him to close down in December. Some in his social media groups of bakers even report a rise in their energy bills of 10-12 times.

Bakeries are an institution in French society and culture. It is the last shop in French villages faced with a declining population over the past decades. It still is the local go to place for young and old. Closing bakeries would be a social rupture, which could mobilise widespread support from across the country. Is this the next gilets jaunes movement in the making?

The French government is keen to show that it is doing everything to help its 35,000 bakers and croissant makers, according to AFP. Elisabeth Borne announced yesterday that bakers with cashflow problems could delay their tax and social security payments. Bruno Le Maire invited the baker association for talks to the Bercy - the finance ministry.

Just shortly after Emmanuel Macron heralded the baguette as 250 grams of magic and perfection, his cabinet needs to make sure the ovens are still running in 2023. This task will be helped by an improved energy outlook for 2023, but the public anger needs to be addressed before it gets legs.

3 January 2023

Goals from a different era

Croatia has become the euro area’s 20th member state and at the same time joined the Schengen zone of passport-free travel. The combination of the euro and Schengen, as we recall well ourselves, was the most forceful answer ever given to the question of what the EU ever did for you. That was especially true if you lived in a small country like Belgium, or Croatia, where neighbouring countries are never far away. Schengen plus euro increased your radius of operation like nothing ever did.

We noted a revealing comment in Südddeutsche Zeitung that essentially used the opportunity of Croatia’s euro accession as an excuse for an article on the failure of the euro as a project. It concluded with the assertion that European political integration were the goals of a different era. It is true on one level. The pragmatists, the kicking-the-can-down-the-road club, clearly prevailed. But it does not answer the bigger question how a deeply integrated monetary union is viable without political integration, no matter from which era this aspiration might originate.

You can tell yourself many stories about the euro area. Südddeutsche’s story is that of weak economies - the list of which, interestingly, includes Ireland and Spain - were simply not ready for a monetary union with strong countries like Germany. You can tell the story, as we often did, from the perspective of current account imbalances, and arrive at very different conclusions: that Germany’s industrial business model and the economic prosperity of the EU and the euro area are not compatible in the long run. Conservative German economists told each other the story that a monetary union can be viable if member states were allowed to default on their debt. They believed their story until they discovered, to their horror, that the money market relies on national debt as a collateral.

We have rotated through all euro sustainability scenarios more than most people and concluded that those goals from a different era were indeed the only condition that could render a diverse monetary union sustainable. This still does not mean that a political union has to happen right now, but to abandon the idea would be foolish, and put the euro area at risk in the long run.

Mario Draghi taught us that the central bank can keep the show on the road, but only for as a long as its primary policy target does not conflict with bond market support. In a time of high inflation, it is Draghi’s pragmatism that looks a like a goal from a different era. The scope for inter-governmental fiscal transfers - which is what the recovery fund constitutes at its heart - is limited by politics. Germany is a richer country, on average, than, say, Italy. But Germany, too, has poor voters, who fail to comprehend why they need to support infrastructure projects in other countries when their own infrastructure is so neglected.

When the next euro crisis comes, you will need to tell yourself another story. It could be a crisis of a German industrial model that is no longer viable, and that limits Germany’s willingness and ability to bankroll fiscal transfers. Or inflation persistence that limits the central bank’s room for manoeuvre. In the end, you will have to solve the problems, and you may run out of cans to kick down whatever road you will be on at the time.

History has taught us that federations were created because it was politically not viable to solve the collective action problems of its members through complex systems of fiscal transfers and co-operation. They are not aspirations.

21 December 2022


In our last briefing of the year, we look at the interacting developments we think will impact Europe's economy in the next year - starting with the war in Ukraine.

Here at Eurointelligence, our boldest decision this year has been not to join the cheerleaders in premature celebrations of an early end to the war. Our solidarity is with Ukraine, but we have to acknowledge a brutal reality, which is that western sanctions have failed to achieve their stated goal: to deny Vladimir Putin the resources to fight a prolonged war. China has aligned with him strategically. The alliance with Belarus is deepening. US sanctions against China, and Nancy Pelosi's extremely ill-judged visit to Taiwan, are bringing China and Russia closer together. You can either drive a wedge between China and Russia, or subject both countries to sanctions. But you can't do both at the same time.

The sanctions had the undesirable side effect of fragmenting global energy and commodity markets, which translated into higher headline inflation rates, with dramatic consequences for people who live at or below the poverty line in western countries. They have economic consequences, and thus political consequences. We should expect that support for Ukraine to become an election issue, especially in the US.

We are no military experts ourselves but note that military experts have got almost every aspect of the war wrong. Many were complacent of Putin's threat ahead of the invasion. But perhaps their biggest and repeated failure has been to exaggerate the time it would take for Ukraine to defeat Russia. We heard a former general speculating that Ukraine would succeed in defeating Russia within two weeks. That was in March. When Ukraine managed to regain Kherson in November, we heard similarly optimistic predictions. What has surprised us is Ukraine's resilience to continued Russian bombardment of its infrastructure. Russia has managed to damage Ukraine's electricity and water supplies, but the lights usually came back on after a few days. As the west is stepping up supplies of air defence systems, including possibly Patriot missiles, Ukraine's ability to withstand Russian missile and drone attacks will improve further.

We see therefore no chance that Russia will achieve its military objectives. But nor do we see that Ukraine will defeat Russia. Since neither side has an overwhelming advantage, we would be irrationally optimistic to see the war ending in a military victory in 2023. The continuity of western support for Ukraine beyond the next year will depend to a large extent on the outcome of the 2024 US presidential elections.

We would expect the Biden administration, with strong support from France and Germany, to pursue a diplomatic settlement. Joe Biden once talked about both sides licking their wounds, which, to us, sounded something an equidistant observer might say. Emmanuel Macron said that any peace deal would have to respect Russian security interests, a comment that triggered angry reactions. Olaf Scholz used similar words. The time is not yet right for a peace agreement. But if and when a peace deal is agreed, we would expect many in the west to be bitterly disappointed, especially those who believe that the west's strategic goal should be regime change in Russia.

From a Franco-German perspective, the ideal outcome would be one that respects Ukraine's pre-February borders, and that keeps Russia down, but not out. Europe will not revert to the bad old days of Gerhard Schröder and Angela Merkel. The physical destruction of the Nord Stream pipelines, and the construction of liquefied natural gas terminals have created facts that will not be easily reversed.

The EU is trying to make itself less dependent on China, too. You lose output when your supply chains are no longer optimised for efficiency but for robustness. Here too, we think the best strategy is to strike a balance. Remember that the opposite of black is not white, but "not black". The opposite of German Neo-Mercantilism is not isolationism.

Here is a final thought. The loudest voices in Europe during the war are the Anglo-Saxon commentariat and northern and eastern European politicians. Do not mistake them for the EU's policy consensus. France and Germany remain the European policy debate's centre of gravity. This crisis is rekindling their difficult relationship. What they have in common with each other, and where they both differ from the eastern Europeans, is that their strategic interests focus on the wider Eurasian continent.