27 May 2021
Dominic Cummings is no idiot, but his was a tale of sound and fury, signifying nothing. By that we actually mean nothing whatsoever. The consensus of political journalists in Westminster was that his rant yesterday was hugely significant. Apart from political journalists, nobody is paying attention to the events of the year 2020, when this government, and most other governments, were caught unprepared for the pandemic. Some handled it better than others. The UK did well on vaccinations. And from a party political point of view, that settled the issue. The public is focused on the end of the pandemic, not reliving the nightmare.
The latest YouGov poll, conducted May 19-20 had the Tories at 46% and Labour at 28%. A giant poll of 14,000 voters, on a constituency basis, has the Tories ahead by 122-seats - up from a current 81 seats. 40% prefer Boris Johnson as prime minister, 24% prefer Sir Keir Starmer.
Events will no doubt intrude that will push the numbers in one or the other direction. But Cummings' mammoth testimony was no such event.
What are the real issues to watch out for? We think it is a combination of the following: the post-pandemic economic performance; whether the authorities will be able to keep a grip on inflation, and if so at what cost; the future pace of innovation, which is absolutely critical to making Brexit work; a new business model for the north of England.
James Kirkup, the director of the Social Market Foundation, believes the big issue is gas boilers. This is not as unreasonable as it sounds. Part of the government’s green policy is the obligatory replacement of gas boilers in private homes by heat pumps, which he says would cost more than £10,000 to instal. There is understandable opposition to what constitutes a massive household tax. Unsurprisingly, the people who lead the opposition were also leading figures in the Brexit campaign.
These and the unforeseeable events that have yet to intrude are what will determine the outcome of the next elections. Johnson is a well-liked figure who will be hard to beat at the next election. The Tories would be mad to replace him with another politician. Sir Keir had a bad start. He is a decent parliamentary performer, but he struggles to communicate what he stands for.
Our highly unscientific crystal ball scenario is for an election in the spring of 2024, another Johnson victory, followed by a change in the Labour leadership from Sir Keir to Andy Burnham, the mayor of Manchester, who served under Gordon Brown as chief secretary to the treasury. This is obviously highly speculative. What we are sure of, though, is that the who-said-what-to-whom gossip from the palace of Westminster won’t matter.
26 May 2021
The frozen elephant in the room
At a recent meeting in Reykjavik, Anthony Blinken and Sergei Lavrov failed to rekindle Arctic cooperation. Russia is pushing for Arctic states to resume high-level military meetings, which have been suspended since it annexed Crimea in 2014. Washington is opposed. We are loath to agree with Russia on anything, but the Arctic will be a critical region for future transatlantic cooperation, and we think the military issue is too often overlooked. This poses a risk to European stakeholders.
We noted with interest a recent report published by the Centre for European Policy Analysis, in which Retired Navy Admiral James Foggo called for the creation of a transpolar bridge to address Arctic military issues. We agree with Foggo that military dialogue between Russia and other Arctic nations should be re-established.
The region is geopolitically significant because of its valuable shipping routes and natural resources.
At present, the Arctic route between northern Europe and east Asia is still too unpredictable to make it a mainstay of the global shipping industry. But this won’t be the case for long.
Goods transiting northern Europe to east Asia will travel 11,200 nautical miles using the Suez Canal, but only 6500 through the Arctic, saving between 12 and 15 days of transit time and fuel costs. Yet as Foggo writes, it’s not only the weather that is deterring shipping companies – Russian transit fees are also playing a role. Putin has targeted boosting cargo traffic through the region to 80m tons by 2024, up from 1.2m tons in 2020. By 2030, the transpolar route across the central Arctic, which links Europe, Asia and North America, is expected to be open for limited periods. This region holds the highest potential as a global shipping route, and it will be one of the world’s biggest geopolitical hotspots when transit is possible.
And then there are the Arctic’s vast natural resources. These include more than 90bn barrels of oil, 1700trn cubic feet of natural gas, and 44bn barrels of liquefied natural gas, amounting to nearly 30% of the world’s conventional natural gas supply and 13% of undiscovered oil reserves. Russia estimates it holds 33 oil and gas deposits on the Arctic shelf. The region is also home to large reserves of copper, iron ore, nickel, zinc, platinum, cobalt, rhodium and gold. There will be a scramble for these resources in the future.
A military build-up is already happening, and Russia is pulling ahead. Its share of modern weapons and military equipment in the Arctic zone rose from 41% in 2014 to 51% in 2019, and it has invested heavily in a fleet of 40 icebreakers, more than 10 of which are nuclear-powered. In March this year it conducted its most advanced military drills in the region to date, surfacing three ballistic missile submarines within 300 metres of one another. China, meanwhile, has declared itself a near-Arctic nation and conducted dual purpose research missions in the region with its own icebreakers.
All of this led Foggo to argue that the Arctic Ocean is fast becoming a battlefield laboratory and proving ground for new weapons systems. He has called for high-level meetings between chiefs of defence to resume under the auspices of the Arctic Council. Joe Biden's upcoming meeting with Vladimir Putin in Geneva next month might give us an indication of whether that will be possible.
25 May 2021
Misfits, economists and journalists
We read Tyler Cowen’s criticism of academic economics with interest, not so much as yet another opportunity to point to the increasing irrelevance of this once-mighty profession, but as a wider phenomenon. It applies to our own profession of journalism as well, about which we wrote yesterday. What unites the two is institutional conformism. You don’t find the great journalists of modern times in the newsroom of large media organisations. They are bloggers who risk their lives. Their journalism prize is a prison sentence, or maybe a death sentence.
The biggest insights into economics are nowadays coming from outside the profession - from data science and behavioural psychology. More importantly, they are coming from outside the university sector. For all his many faults, Dominic Cummings got it spot on when he framed a job advertisement seeking weirdos and misfits. If you want to understand big data - anything from polling to disease statistics - you should not rely on the old methods you are taught in Statistics 101. If you seek a true understanding of the interrelationship between politics and economics, about the worst thing you can go about is to study politics, philosophy and economics, and then become an armchair commentator.
Both professions are largely in denial of the crisis that is facing them. This is normal. Journalists and economists are a thin-skinned lot, happy to criticise others, but sensitive to criticism themselves. They are also protective of their status in society. Their professional failures - the global financial crisis for economists, Brexit for journalists - went largely unexamined. In the rare cases when they are scrutinised, as is now the case with the BBC's Diana interview, they become defensive.
But what appears outwardly as a professional crisis is deep down an institutional crisis. Journalism and economics are still there. They're done increasingly in different places and in different forms. In the meantime, we live in a murky transitional phase, in which we see old world fading, but where the new world is not clear either.
24 May 2021
Some of the shifts in opinion polling are noise. But this one isn't. The popularity rankings of the three chancellor-candidates have reversed. Olaf Scholz is now the most popular candidate, followed by Armin Laschet and Baerbock last. This does not surprise us. Baerbock floated on a media bubble for a month, but people are now beginning to listen to the candidates themselves. She is the most knowledgeable of all the candidates, but may lack some of the qualities people are looking for in a chancellor. All the candidates have weaknesses - Scholz' eternal smirk makes him look deeply cynical; Laschet looks like he has nothing to say; but Baerbock's body language seems out of sync with what she is saying. Judging by the sure-footed chancellors of the past, this is not a particularly impressive lot.
In German politics, there is rarely a strong relationship between the popularity of the candidate and the popularity of the party, but we think it counts for a few percentage points, and so could matter in a tight race. The polls put CDU/CSU and Greens at approximately the same level. Two of the last three polls, Insa and Kantar/Emnid now have the CDU/CSU ahead, while Forschungsgruppen Wahlen has the Greens in the lead. The same is also true for Forsa, the organisation that first registered the shift to the Greens. We think Forsa is the least filtered opinion poll. It had the Greens at 28% during the Laschet/Söder wars, and is now at 24%. We are not at the point where the filtered and unfiltered have converged.
The party that is really doing well right now is the FDP, which is polling at 11-13%, similar to the AfD. The party that is doing really badly is the Left Party. Forsa and Insa have them at 6%. In a high-turned election, they could be squeezed. We noted that their recently elected co-leader called parliamentary democracy much over-rated. While such talk resonates with some of the party's core voters, it might persuade voters on the Left/SPD margin to shift towards a more left-leaning SPD, especially if it becomes clear that the SPD will go into opposition, which we think would be the best course of action.
It's still early days in the German elections, and the outcome in the race between CDU/CSU and Greens is wide open. But some of the coalition options are now becoming less likely - like Red/Red/Green. There are polls in which even CDU/CSU and Greens together have no majority, and would need the FDP to govern. The post-Merkel world will be different. But it may not be a radical departure.
21 May 2021
Short-haul flights won't go gently
This falls into the be-careful-what-you-wish-for category. It is easy to think - or demand - that short-haul flights should become a thing of the past. The price of airline fuel will rise, and flying will thus become less competitive relative to other modes of transport, and especially trains. The pandemic has added to the complexity of flying. Speaking from our own experience, the check-in times at Heathrow Airport in London this week were about an hour because every passenger had to be questioned personally. The passport queue on the way back were 90 minutes. But it would be wrong to extrapolate this week’s snapshot.
The only viable alternative to short-haul flights are high-speed trains. When the Eurostar launched its first connection from Brussels to London in 1994, it took four and half hours. At that point, flying was still faster. Today’s travel time is two hours. In each case, it is the faster connection that is more expensive. In the US, the journey time between New York and Washington has been cut by the Acela Express to such a degree that it is now faster than flying. But it, too, is an expensive means of travel.
The viability of short-haul flights thus depend on two related factors: the relative cost and the relative time. Governments can influence the former through taxes immediately, but the latter only through infrastructure policies.
Now look at the reality on the ground in the EU. This week we heard Andreas Scheuer, the German transport minister, announce a cross-border high-speed link to reduce the journey time from Berlin to Vienna. The current travel time is almost nine hours. He wants to cut it down to five hours by the year 2030. The distance is only 680km - by road - and 524km taking a direct line. A French-style TGV could cover such a distance in less than two hours. But that is not going to happen because the German government, unlike the French government, does not have the legal power to expropriate land. This is the reason why German rail lines are wiggly, and French rail lines are straight. France managed the transition from air to rail a long time ago - and even in France there are still short-haul flights to connect Paris and Nice. The obstacles to do the same at the European level are bigger, and the legal and political scope small. You can do the maths.
For professional travellers, a five-hour journey time between the two German-speaking capitals would still be too long. From our experience, the threshold is around 3 hours, give or take an hour. Frankfurt-Paris is 4/5 hours for some 570km. The distances between Munich and Milan is only 350km, yet it takes between 8 and 11 hours by train.
Air travel is currently also impaired, but we expect this problem to reverse completely. The long queues at check-in and immigration are necessary because of checks for Covid-testing and pandemic-related travel documents such as passenger locator forms. It will be only a matter of time until this process is automated. The so-called advanced passenger information, that holds passport details for travellers, will simply become a longer document, covering vaccine status, for example.
We would not bet on the end of short-haul flights in Europe just yet.
20 May 2021
Franziska Giffey has become the third minister in Angela Merkel’s cabinet to resign over a plagiarism scandal. The German minister for family and women had written a thesis about the inclusion of civil society in EU decision-making. There is a lot of third-rate academic nonsense going on in political science in Germany, but also in other disciplines. We have yet to understand why politicians feel the need to complete a PhD that adds nothing to the state of our knowledge. While Helmut Kohl and Angela Merkel held PhDs - real ones - none of the three SPD chancellors did. There is no evidence that it furthers your political career.
Yesterday we noted a new element in the debate that was absent during a previous plagiarism scandal. A widespread attitude of indifference in the media. SPD-supporting journalists were even trying to characterise her resignation as a cunning move because she took the step before the publication of a damning report by the University of Berlin. As the SPD is unlikely to participate in the next government, she would have lost her job anyway. We are told that she now has the opportunity to focus her political energy on local politics in Berlin, and may be considering a bid to become the city’s major. Good luck to her. But we doubt very much that it will pan out like this.
We see this resignation differently - as one of the fin de siècle events that characterise the final moments of government past its prime. This is very much like the sleaze scandals of the Conservative government in the UK in the 1990s; or the graft and corruption scandals at the tail end of Helmut Kohl’s long reign. Not one of the incidences is significant in its own right, but together they add up to a sense of malaise. Note the three PhD scandals span the entire grand coalition. These scandals are not the main reason why the two big beasts of German politics - CDU/CSU and SPD - are now polling together around 40%. That used to be considered a bad result for any one of them not too long ago. If the Greens and FDP gain voters far beyond their traditional base, this is one of the reasons why.
19 May 2021
Biden to waive Nord Stream 2 sanctions
Axios reports that the Biden administration is about to waive sanctions on Nord Steam 2 and its chief executive. It adds the implausible comment from an administration spokesperson that it remains US policy for the pipeline not to go into use.
Angela Merkel and her government have been playing hardball on the pipeline, and calculated correctly that the Biden administration would fold. The project itself is going full steam ahead, having just cleared the legal hurdle for the remaining part of the German section of the pipeline still to be completed. Once the pipeline is physically connected, which we expect to happen before the September elections, it's game over.
The sanctions waiver relates to the Nord Stream 2 entity itself and Matthias Warnig, its CEO. The Axios story talks about a shift in strategy. The Biden administration apparently concluded that it would be more effective to sanction German end users of Russian gas. We think this is implausible, as those type of sanctions would be far greater than the more targeted sanctions currently in use. Also, the existing US sanctions legislation do not cover this type of retaliation.
The pronouncements thus do not make sense. What we see instead is that the US wants to co-opt Germany into its China policy, and is willing to drop its opposition to Nord Stream 2 as an advance. But it is far from clear that the Germans will go for it. The Greens are the party most closely aligned with US policy on China and Russia. But it is not a given that the Greens will be strong enough in the next coalition to force this issue, nor that they will want to pay the political capital needed to do this, given their domestic policy priorities.
Our conclusion is that this decision is based on a misjudgement of German politics, which bodes ill for the chances of a successful Biden administration foreign policy.
18 May 2021
Germany's position on China is shifting
More evidence of a gradual shift in Germany’s position on China emerged yesterday, as the president of the International Chamber of Commerce in Germany suggested the EU may need to partially disengage from China.
Writing in Handelsblatt, Holger Bingmann argued that Uighur repression in Xinjiang, crackdowns on democracy in Hong Kong, and risks surrounding Huawei’s involvement in 5G network development do not provide a favourable framework for an intensified economic partnership with the EU.
Belief in the credo of change through trade has proved to misguided, and is quickly being replaced by a more realistic assessment of China as a systemic competitor.
Europeans are often unaware of how well-prepared Chinese companies are when they compete with Europe, he wrote, and of how fierce competition in China is among domestic market participants. Now a global leader in 5G development and artificial intelligence, China will soon be able to do without European products. Subsidies for state-owned companies offer a further competitive advantage, leading Bingmann to conclude that partial disengagement may be necessary if differences between the two become so fundamental that compromise is impossible.
His comments are significant because Bingmann speaks for German businesses, and because the disengagement he speaks of may not be optional.
As Süddeutsche Zeitung reported yesterday, citing the research arm of the Bundestag, Germany’s upcoming supply chain act would oblige German companies to restrict their activities in the Xinjiang region. This is because the supply chain act prohibits working with suppliers who use forced labour. Companies that fail to comply could face fines – up to 2% of annual turnover – and the act also includes provisions for individual criminal liability of company employees. We recall Volkswagen’s CEO telling the BBC that he could not be 100% sure employees at VW’s factory in Xinjiang had not been victims of China’s re-education camps.
The act was drafted by the Greens, who have taken the lead on pushing back against China in Germany, but they are no longer alone: as we reported yesterday, the FDP recently announced they had abandoned the one China policy, adding their voice to the Greens’ opposition to human rights violations. Angela Merkel and the grand coalition have been extremely reluctant to adopt a similarly principled position, but if it proves popular with the electorate, Germany’s shift against China will accelerate.
17 May 2021
Poots, the NI pragmatist?
The DUP in Northern Ireland elected a new leader, Edwin Poots, agriculture minister in the Northern Ireland executive. This vote signals a change in direction and style for the leading DUP party, though it was close call. Poots was elected with 19 votes against 17 for his contender Sir Jeffrey Donaldson. This is too close for comfort, suggesting that the party itself may remain divided, and complicating his task to reform the party.
The press coverage in the UK and twitter focussed on his religious beliefs as a creationist. We are in no position to judge whether this will help or hinder him in his quest to scrap the Northern Ireland protocol. In an interview with the Belfast Telegraph, he said that the protocol can only be scrapped if there is a unionist majority in the assembly after in the elections in May next year. Is this his pragmatism shining through?
At the moment the four Unionist parties hold 44% of the votes in Westminster parliament and in the Northern Ireland assembly. Poots plans to increase this share. His chances are not negligible. After the Brexit grace period there will be 15,000 checks on goods and border checks will affect about 95% of the drugs and medical instruments coming from the UK. This will be visible in everyday life, not least through prices, which will reflect those additional burdens eventually.
The protocol is a reality that cannot be argued away. How will Poots square reality with the strong desire among unionists to scrap it? Loyalists already have vowed to escalate protests against the protocol during the traditional summer marching season. The Ulster Unionist party is in the process of choosing a new leader. And Sinn Féin is pushing for a unification referendum.
Poots is known in the Stormont assembly as a pragmatist who can work with everyone. Is he the man to sell a compromise to unionist hardliners? This conflict can go either way.
14 May 2021
Fairy tales from Finland
Is the recovery fund hanging by a thread? All parliaments have to approve it and the Finnish one seems to be the most determined to resist. First the approval threshold was increased to a two-thirds majority. Then in the plenary, the Finns party delivered a 20-hour filibuster to delay or even suspend a vote on the recovery fund in the first session. The second one is ongoing.
During the 20 hour marathon of the first session, True Finns MPs took to the floor to bless the audience with excerpts from the Little Red Riding Hood, as well as church hymns. They had come prepared, with a consistent backlog of 15 requests for speeches in the queue, according to STT news agency.
At 10am on Thursday morning the parliamentary speaker suspended the session due to other obligations. By that point deputies had listened to 160 speeches. The session resumed at 8pm last night and to our knowledge it is still ongoing. We have yet to learn the latest highlights: a telephone book perhaps, or the princess and the pea? The discussions will continue until there is no further request for comment. This could easily drag on until next week!
Finland's parliament still needs a two thirds majority to approve the recovery fund. The coalition parties alone will not be enough to secure this majority. Opposition parties intended to vote against the package. Only the pro-Europe National Coalition Party (NCP) leadership has given its MPs free rein to vote as they wish. The party is known to have both supporters and opponents of the package, according to YLE.
If even one EU member state does not accept the package, the recovery plan will not be rolled out. The recovery fund does indeed hang on a thread, though not one that turns from hay into gold, like in Rumpelstiltskin.