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20 September 2024

After the flood

Emilia-Romagna in Italy and Silesia in Poland have, historically, been two of Europe’s major industrial regions. Now, however, one of the Industrial Revolutions most pernicious side-effects is coming back to haunt them. As climate change makes global weather patterns more unstable, once in a generation floods begin to happen more often.

Major flooding this week has caused a crisis for Wroclaw, Poland’s third-largest city and the de facto centre of the Silesia region. Donald Tusk said, half-jokingly, that local residents should not be alarmed at the presence of German troops, since they were there to help. In Emilio-Romagna, flooding has displaced at least a thousand people so far, with several missing. A year and a half after major flooding hit the region before, it is back again. This time, Ravenna is the epicentre.

After emergency services respond to the floods, rescuing victims and searching for the missing, the cost will then be counted as these communities rebuild themselves. Ursula von der Leyen has already said that the European Commission will make €10bn available from cohesion funding to deal with the floods, both in Poland and elsewhere in central Europe. But even that can pale in comparison to how damaging these can be. Last spring’s floods in Emilio-Romagna alone cost €8.5bn, according to the region’s government.

That is going to have further knock-on effects elsewhere. One obvious problem is insurance: how the industry, and everyone in their nexus, deals with this too. Flooding insurance penetration in Germany, for example, has gone from 19% around when 2002’s then-once in a generation floods happened to 52% as of last year. If this happens while losses related to flooding climb too, it is an issue.

We may disagree with some of how Robert Habeck has gone about his climate policies in Germany. But it is hard to argue with his assessment of the floods that have hit us: that they show there is a cost to climate inaction as well as action. According to a report from earlier this year, from the European Environment Agency, one in eight Europeans live in flood-prone areas. This might also include about 15% of our industrial facilities, as well as 11% of hospitals. We cannot pretend that this is just going to hit Bangladesh or some pacific islands, devastating as the consequences are for them too. It’s a problem for us as well.

This may eventually be the case politically. Climate change is the classic boiling-frog problem: it’s hard to notice it until it is too late. Prevarication may seem like a clever strategy. But there will be a point when the water does boil. As that draws closer, we doubt it will be as smart as before.

19 September 2024

Escalating the war in the Middle East

The chances of an escalating war in the Middle East increased dramatically this week. A series of exploding pagers and walkie-talkies targeted Hezbollah members throughout Lebanon. The scale of the operation and its impact on the civilian population is unprecedented too. The message it sends to Hezbollah and its people is that wherever you are, we will find you. Officially, these two consecutive attacks killed 32 and injured 3150, though the real numbers are likely to be much higher. According to Al-Monitor, Israel planned this pager attack as part of a full blown war, but the action was expedited as two Hezbollah members got suspicious about the pagers.

The question is not whether but how the conflict will escalate. Hezbollah sees no choice but to retaliate. Iran is potentially getting involved too. The series of events can then be used by Israel to pull the US on its side in this all out war. Which country is next? Yemen? And who is going to finance this? Could Iran not count on the Russians to help them out in return for their weapons delivery? There are potential world war III scenarios.

What happened in Lebanon would fall under common western definitions into the category of terrorism - not war. Whatever you call it, it will trigger further radicalisation. If Israel aims to kill every Hezbollah member, what do Hezbollah members have to lose other than their choice of how to die? Hezbollah already threatens a return of suicide bombers. How does Israel count on making the country safe for its population if it radicalises those living around them?

International diplomacy was short-circuited by this pager attack. The US said they were not informed. And it comes after Europe and the US urged Iran and Hezbollah for restraint in their response in response to Israel killing two senior leaders in Tehran and Lebanon. This week’s attack makes a mockery of European diplomacy. Israel creates facts and the world follows suit.

It is not even clear what Israel’s goal is. Hamas is not finished in Gaza. They are just about to recruit the next generation of fighters. Now the focus shifts to the borders with Lebanon in the north, testing Israel’s deterrence capacity and the loyalty of its allies.

How long can Arab leaders keep on holding out a promise of normalisation with Israel, if it keeps on creating havoc in Muslim communities? Israel is playing out its formidable technological superiority. But as the 7 October terrorist attack reminded everyone, even the most advanced technology can fail in crucial moments. It should have been a lesson to reflect on.

18 September 2024

Crypto-Trump

What if there is a war, and nobody came? This was a 1970s joke in a US comedy. The idea did not work so well as a peace project, but it has other applications. Fiat money exists because we trust it. If we walk away, it will be gone.

This is why we take crypto-currencies seriously – not because of what they represent. We see them as a symbol of the break in the social contract that underpins western democracies. It is for that reason that we read with interest that Donald Trump launched his own crypto venture, World Liberty Financial. There is an awful lot of me-too in the crypto world, and awful lot of intellectually lazy spivs. Trump may be one of the them. But it would be a silly mistake to dismiss the threat the crypto-verse poses to the fiat money system, just as it was a mistake to dismiss the threat of the new far-right to the centrist policy establishment.

As governments are resorting to the use and abuse of fiat money and financial networks in their foreign policy, we see a mechanism in place in which trust in fiat money can erode over time.

If the presidential candidate of one of two the large US political parties, a former president, launches his own crypto currency as a symbol of freedom, you would be delusional to dismiss the threat this poses to fiat money in the long run. You would be even more delusional to think that governments can stop this, or that the financial system will always support the fiat money system. 

Crypto has elements of a dot-com bubble on steroids. The bubble of the late 1990s produced a lot of premature business models that have long disappeared. But the survivors were its lasting legacy. The vast majority of current crypto ventures will also end up nowhere. But this should not deflect from its ultimate impact.

Crypto is by design a democratic construction. The reason why blockchains cannot be cracked even by quantum computers has to do with the decentralised nature of the network. It is not about cracking code. You would need to take physical ownership of more than 50% of the nodes, or computers, in the network. Like fiat money, crypto, too, is subject to trust issues.

Crypto is to fiat money what Trump is to mainstream politics. You would not have thought possible that seemingly stable western democracies are being eroded by rank political outsiders, as is happening everywhere in the US, and now in Europe as well. That’s what crypto does too. You might think of Trump and crypto as a match made in hell. Be it as it may, it is a match.

17 September 2024

Actions, not words on two state solution

Spain is leading efforts to deliver concrete actions towards a two-state solution, and to end Israel’s war in Gaza. Last Friday, Spain hosted a high-level meeting with several Muslim and European countries. In attendance were Palestinian prime minister Mohammad Mustafa and the foreign ministers of Egypt, Jordan, Qatar, Saudi Arabia, and Turkey, all members of the Arab-Islamic Contact Group for Gaza, as well as the heads of the Arab League and the Organisation of Islamic Cooperation. The European Union was represented by its foreign affairs chief Josep Borrell. The foreign ministers of Ireland, Norway and Slovenia were in attendance in addition to Spain.

José Manuel Albares, Spain’s foreign minister, said after the meeting that it is no longer time for talk but action. Spain's impressively effective government is leading by example. It recognised Palestinian statehood in May, together with Ireland and Norway. Yesterday, Palestine’s first ambassador to Spain presented his credentials to the Spanish king. Pedro Sánchez announced a bilateral summit between Spain and Palestine before the end of the year and various collaboration agreements between the two states. As domestic politics is gridlocked, Sánchez could be inclined to focus more of his energy on foreign policy, where Spain’s geopolitical role might grow.

Other EU member states are still grappling with the question of how to make a two-state solution work in practice. Everyone can agree that the two-state solution is the only way to guarantee peace and the end of terrorism. But how to get there is still subject to different interpretations, differences that reduce the pressure on the warring parties to end the fighting. Finland’s government said earlier this week that recognising Palestine is a matter of choosing the right timing. France’s foreign ministry said in June that recognition will come at a useful moment. Germany has its own self-conflicting language. We see a lot of tactics, but not much commitment from the Europeans. Everyone seems to be waiting for the US, or for something else to happen. At least Spain is finding clear words and taking action.

16 September 2024

Not a place for minority opinions

You can call it the hammer-and-nail problem, or a category error. The dominant discourse in Germany is about 20th century solutions to 21st-century problems. The discourse is one of cost-cutting and grand deals between industry and government. We think there can be no solution to Germany’s structural slump unless and until that narrative changes.

The problem is that the media, business leaders, and politicians have never known anything else. Nor have German economists. They divide into old-industry-focused free marketeers and old-industry-focused Keynesians.

We got a reminder of this problem in an interview with Wendelin Wiedeking, Porsche’s CEO from 1993 and 2009, who turned the company back towards strong profitability through cost cutting and the use of modern just-in time production techniques. That was indeed the secret of success for German industry of times past. The companies were technology leaders. That did not need fixing. They just needed to solve a production problem.

Wiedeking now lashes out against politicians. They are to blame. He says the current generation of politicians have no industry experience.

Should he not hold his own industry responsible for the mess, at least in part? We recall Ferdinand Piech, another representative of that generation, declare proudly a decade a ago that there was no space for electric cars in his garage. The German car industry as a whole failed to take the electric car seriously because they were all trapped in the same consensus.

To blame politics is absurd. German politicians were, and still are, excessively friendly to that industry. They looked the other way when VW and other car companies installed emissions testing-cheating devices. After the pandemic, the German government re-routed the bulk of its subsidies to support the production of semiconductors in Germany with the explicit argument that the car industry needed a safe source of supplies. The car industry accounts for an oversized proportion of German R&D spending.

The German-banking system is part of the same consensus. Only consensus projects get funded. Research and development, too, is tied to existing industries. Politicians sit on supervisory boards of companies and banks. This arrangement has worked surprisingly well for a long time – until it didn’t. When this tanker got in trouble, there was no one on deck who cried iceberg.

We would expect a government led by Friedrich Merz to double down on helping the car industry. He will push for the postponement or abolition of the 2035 target for the end of production of fuel-driven cars. The economic cycle may finally turn up as interest rates fall. Optimism will briefly return. Narratives will change. But none of the problems will get solved. The structural slump will persist for as long as this is the narrative.

13 September 2024

More for parents, less for pensioners

Falling birth-rates often end up having a double fiscal impact. One side of the coin is that pension expenditures relative to revenues rise, as you have more retirees per worker. The other side is that governments often try to dig themselves out of the demographic hole through taxes, subsidies, and serviced designed to try and convince people to have more children. Managing the balance between the two then becomes critical.

Before now, the poster-children for trying to manage this balancing act in the developed world have arguably been Japan and France. But now Italy is taking its own demographic crunch more seriously. Part of the idea so far from Giancarlo Giorgetti is to orient Italy’s labyrinthine system of tax breaks more towards encouraging children.

This would involve setting ceilings on how much one could claim from deductions. These ceilings would be variable both according to both one’s income and how many dependent children they have. In this respect, it would be similar philosophically to France’s approach, where having more children cuts one’s income tax liability.

On the other hand, it looks like the pension regime will continue its slow tightening. Lega, Giorgetti’s own party, had pushed for a more generous regime, the so-called Quota 41. It would allow workers to retire with 41 years of contributions no matter their age. Now the government is looking at ways of making its current regime, the so-called Quota 103, more sustainable. This currently entails retiring at 62 with 41 years of contributions. It is a step back from the Quota 100 introduced by the Lega-Five Star coalition, which allowed retirement at 62 with 38 years of contributions.

It would not be surprising to see Italy continue this trend in the coming years with Giorgetti still as finance minister. He has both stressed the severity of the demographic situation, and been prepared to fight battles with his own party on finances, including pensions. From this perspective, pro-natalist spending is money saved, and handouts to pensioners is money wasted.

But we have our own doubts about whether this can turn Italy’s demographic tide. Similar measures in Scandinavia and eastern Europe have often been expensive. They have also failed to return countries to a so-called replacement level fertility, which is necessary for a stable long-term population. Another point we'd make is that French-style tax measures in practice shift the tax burden from those with children to those without them, including young people yet to have children. If a lack of resources is a barrier to starting a family, we fail to see how this would solve the problem, rather than making it worse. 

12 September 2024

E tu felix Austria?

The Austrian elections are on 29 September. Given the polls, which seem pretty stable over the past several months, government options could be as complicated and curious as they have been in other EU member countries this year. A straightforward coalition on the right may not take off due to personality issues and divisions over Ukraine. The alternative is another bric-à-brac centre-right coalition. Not the luckiest of choices.

Looking at the poll of the polls, the far-right Freedom party is leading with 27% ahead of the conservative ÖVP with 23% and the Social Democrats with 21%. The liberal Neos and the Green party run at 10% and 8% respectively. Two new parties could be entering the assembly according to the polls: the beer party (4%), led by the leader of the punk group Turbobier advocating the de-politisation of politics, as well as free beer fountains in Vienna, and the communists (3%). Two smaller parties may or may not make it over the threshold, the List Madeleine Petrovivc, founded by a former member of the Green party opposed to supporting Ukraine and Keine von denen, another anti-establishment party. There are also three more parties that run in some states but not all.

The Freedom party, or FPÖ, has clearly been on track for some time to come first in those elections. Their programme Fortress Austria, Fortress of Freedom is focused on migration along the lines of the RN in France. It seeks only the most basic provision of social services to migrants, and wants to end family reunification for migrants that are already in Austria. On foreign policy, they insist on neutrality in the war between Russia and Ukraine, promising to end support for Ukraine immediately once in power and voting against sanctioning Russia. On economics, the programme focusses on reducing corporate taxes and wage costs, which also features in the ÖVP programme.

A coalition between the Freedom party and the ÖVP seems the most straightforward one and would guarantee a majority. They have governed together a couple of times in the past. But there are several obstacles and grievances this time, especially after the last coalition did not end well. Karl Nehammer, the outgoing ÖVP chancellor, does not want to cooperate with Herbert Kickl, the leader of the Freedom party. Kickl is seen as the most radical amongst the FPÖ leaders, and is currently implicated in another scandal about influence peddling, though that does not seem to hurt him in the polls. Nehammer may also know one or two things about how Kickl operates from when he took over from Kickl the interior ministry in 2019.

President Alexander van der Bellen already indicated that he does not have to nominate Kickl as prime minister, and that he could nominate another personality from the FPÖ instead. Whether this would do the trick for Nehammer, or whether the ÖVP would fold in the end, as Kickl expects them to do, will be part of the cat-and-mouse game the two parties will be playing after the elections.

The alternative to a right-wing coalition between FPÖ and ÖVP is that the latter enters into coalition talks with other partners from the centre. A coalition between ÖVP the Social Democrats and the liberals could get a majority together. A coalition including the Greens could be tricky. Their current coalition is not a happy one. Then there is the entry of new parties that could change the results and mess with the possible coalition options.

The Austrian parliament has 183 MPs elected by a majority vote in Vienna and Vorarlberg, and by proportional representation in the remaining seven states. To enter parliament, a party running candidates nationwide must get at least 4% or a direct mandate, that is 25% of the votes in one of the 43 regional constituencies.

11 September 2024

Meet the Conservative Progressives

“The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of Conservatives is to prevent mistakes from being corrected. Even when the revolutionist might himself repent of his revolution, the traditionalist is already defending it as part of his tradition. Thus we have two great types -- the advanced person who rushes us into ruin, and the retrospective person who admires the ruins.”

G.K. Chesterton, a British writer and philosopher

A new party group may soon be formed in the European Parliament that combines Chesterton's two forms of ruinous politics in a single party: the Conservative Progressives. Its main constituent is the Sahra Wagenknecht party - straddling the left and right, and busy trying to prevent mistakes from being corrected. One of Wagenknecht's main policy ideas is the resurrection of the Nord Stream 2 pipeline, and the strengthening of old industries.  

There are three parties so far - not enough yet to form a group: there is Wagenknecht's BSW, Robert Fico's Smer and the Czech Stacilo! (Enough!). They want to the group up and running within a year, and hope to define their political space against the progressive left, focussing instead on traditional values such as worker rights, peace and economic stability. The three together have 13 MEPs. To become a group, they need at least 25 MEPs from seven different member states. They are confident that this can be achieved. And given that the wheel between progressives and conservatives is always turning, they may just have to wait their moment. So we could end up with a traditional left group other than the S&D, while fragmentation continues.

Politics always has its progressive or conservative forces. This is a new variant. They two run circles around each other, each of them having their go before being taken over by the other. In the past, those currents would run inside big parties. But with the emergence of new parties this tendency has expressed itself more outwardly.

Over the past decade, we have witnessed the creation of new parties in Europe and fragmentation of parliaments. Progressive new left wing parties rose on the back of the financial crisis, motivated to strive for more fairness in societies with increasingly complex identities, and to act against climate change. Amongst the progressive forces, there was also the centrist revolution of Emmanuel Macron in 2017. He came to power with the promise of bringing an end to the old left-right divide. But instead of uniting, he is now likely to leave behind a more polarised political landscape with a stronger far-left and far-right. Elsewhere in Europe, far-right parties claimed back political space and even rose to power in Italy and the Netherlands with their family values and chez-nous identity against migration, coupled with a touch of nostalgia. 

 

 

10 September 2024

Germany suspends Schengen

It is almost comical that as Mario Draghi presents his report on the future of Europe, Germany has the brilliant idea to re-impose border controls and suspend the Schengen system of passport-free travel. The German government has come under pressure to crack down on immigration by trying to stop refugees at the border. Nancy Faeser, the interior minister, said the reason was to protect Germany against Islamic extremism, following a series of murders and attempted murders committed by immigrants in the last few weeks. The Schengen rules require an over-riding national security interest.

The collateral damage will be huge. Austria already said it will not take in any immigrants rejected by Germany. So Austria will almost surely do the same and close its border. Nobody to the east and south-east of Germany has the physical capacity and political willingness to absorb immigrants. The Czech Republic, Slovakia, Hungary, Slovenia and Croatia will all do the same. We assume that Switzerland, not a member of the EU but a member of Schengen, will follow. Italy has no border to close, but France does. Germany has now become an active participant in the beggar-thy-neighbour refugee policies of EU member states. Except that when Germany plays this game, it has much more serious consequences. This is a serious threat to the whole idea of Schengen. This is where the unravelling of Europe could be starting.

Annalena Baerbock, the foreign minister, warned her colleagues not to endanger the EU’s migration deal, and not to succumb to the illusion that European countries can solve the refugee problem at a national level.

The border closures do not come with a change in current laws. The German border guards will have to take in anybody who mentions the word asylum. But a majority of immigrants do not. FAZ notes that Friedrich Merz wants to go much beyond the current rule. He wants the police to be able to even reject people who claim asylum. The argument he uses is that Germany’s borders only with safe countries, so it is technically impossible for anyone to claim asylum at a German land border. He also maintains that law and order within Germany have a higher priority than Germany’s obligations under international law. The man most likely to become Germany’s next chancellor appears to have a low regard for international law. We recall his comment about the arrest warrant for Benjamin Netanyahu by the International Criminal Court – that it was not meant for advanced countries.

The present government already stepped up border controls over the last years, as a result of which the number of immigrants have already fallen. FAZ writes asylum applications at the Polish-German border were down from 2268 in Q1 2023 to only 450 a year later. Asylum applications were also down at the Czech border. Whatever problem the border controls solve, it does not appear to be the problem of immigration. But it causes massive collateral damage to the rest of the EU.

9 September 2024

My Big Fat Greek Divorce

Stefanos Kasselakis was ousted as leader of the left-wing Greek Syriza party by its central committee yesterday via a motion of no confidence a year after he won the leadership contest by surprise. After a tense two-day session, Syriza approved the no confidence motion with 163 to 120 votes. A relieved Kasselakis steps aside, and a new round of leadership contest beckons for a party that is at risk of losing its role as Greece's main opposition party. An extraordinary party congress will have to be organised within the next three months where the leadership is to present its candidates.

What can we learn from this episode? Kasselakis took over the leadership of the party as an outsider from Miami with no connection to Syriza whatsoever before the elections. He posted on social media a four minute video where he told his life story and immediately became the voters’ frontrunner. When he then arrived in Greece, the 34-year-old presented his husband to a country that was not accustomed to this kind of openness. The party's rank-and-file supporters idealised him. By voting him in as their leader, they hoped he could rejuvenate a party that had just lost elections two times in a row. His insistence on absolute transparency exposed some crucial lies in Greek society, where he called out matters in justice, the economy, as well as inside the party and power.

But Kasselakis was a one-man show and did not work well within the party’s leadership and institutions. Ideologically, he also was out of sync and shocked his party with policy proposals like stock-options for employees, his constant social media posting, and his lavish lifestyle replete with mansions and swimming pools.

This is a cautionary tale of what can happen if a party has loose election rules. Syriza voters just turn up on election day, declared themselves a friend of a party, and paid a fee of two euros to vote. Syriza’s story showed that in today’s world with its social media possibilities, any candidate can show up last-minute and take over with no party credentials whatsoever if he or she looks like a star and hits the right tone with the crowd. It is reminiscent of how Jeremy Corbyn swept to Labour's leadership in 2015, thanks to similarly relaxed voting rules. But he at least came from within the party, and had support from one of its traditional factions. Kasselakis didn't. 

It is also a tale of cultural differences, however. Kasselakis, with his openness over his personal life, became a sensation overnight. And there was hope that openness and transparency could become the big thing on the left in Greece too. But this is not how it works in Greece. We are reminded of the film My big Fat Greek Wedding and its story of how a Greek family, proud of its history and role in the ancient world, is eager to preserve its historic values in the much more liberal US they were living in. It is even harder if not impossible if an outsider tries to break up those historic norms in the country itself, even if he is Greek.