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10 January 2022

Meloni's world

Amidst the wheeling and dealing of other Italian political party leaders, Giorgia Meloni has been keeping a fairly low profile. She hasn’t issued a grand call for unity, like Matteo Salvini. And she has also not been feverishly trying to bring her party into line, like Giuseppe Conte.

That belies, or perhaps confirms, that Meloni is in the best position of anyone heading into the next few weeks. Over the past two years, FdI has been steadily eating away at Lega in particular, and now typically poll as the most popular Italian political party. More importantly, FdI are the most popular party within their right-wing electoral grouping. If, or when, an election does happen, Meloni would be a good bet for prime minister.

Though FdI would probably benefit more from an early election, Meloni could also stand to win out from parliament’s term continuing to 2023. During the last year of Mario Draghi’s government, FdI have effectively been the opposition, and have done well from it. In this light, supporting Silvio Berlusconi for president, as FdI has formally done, makes sense. Another year opposing the government while keeping Forza Italia onside strengthens her electoral coalition, keeping it compact ahead of 2023.

At the same time, though, there are a couple of reasons why Meloni and FdI could prefer either Draghi or some other consensus candidate, like Giuliano Amato. One, pertinent to Draghi, is the increased probability of early elections. The other is credibility. The prospect of a Meloni premiership scares investors, something she is well aware of. A less divisive figure than Berlusconi could assuage at least some of those fears.

And this will continue to be a theme for Meloni even after the presidential elections: how she balances between two opposed positions. On the one hand, she needs to sound uncompromising, to take advantage of FdI’s decision to go it alone. A recent campaign ad saying that FdI and Meloni could look voters in the eye was a great example of this, showcasing her credibility to a right-wing populist electorate.

On the other, it will not help the right-wing coalition overall if Meloni’s strength sparks fears of a widespread political, economic, and social crisis. Meloni’s own voters probably won’t care, but more moderately-inclined Lega and Forza Italia voters might. And she still needs their numbers if she wants to ultimately win power.

7 January 2022

Pécresse wants Zemmour in the race

The race towards the French presidency has been dominated by a double act: Emmanuel Macron’s verbal insults, and Valerie Pécresse's pledge to clear the streets of thugs. She says they are the ones that should be harassed and whose civil rights should be restricted, not the unvaccinated. Macron, though, has already moved on, and is talking about poverty instead. His staff covered it up as a slip of the tongue after an emotional exchange with a nurse. Macron and Pécresse play a game of the hide and seek, writes Cecile Cornudet. Will this be the new game the two will play, using buzz words that catch media attention to discredit the other?

Behind the scenes, there are other forces at play to get Pécresse into the second round. We note a report in Europe 1, which suggests that Les Républicains give a silent nod to their members giving their signature to Eric Zemmour, with the promise not to sanction such tactical behaviour. The far-right shooting star has no problems raising money for his campaign, but he is still short of signatures from officially elected deputies to back his candidacy. At the moment, Zemmour has around 300, but needs at least 500 until the deadline in March.

For Les Républicains, the calculation is that they are better off if Zemmour stays in the race and splits the far right vote than if he were not to qualify. In the latter case, most of his votes would go towards Le Pen. This would raise the the bar for Pécresse to get through to the second round. They have thus a strong incentive to keep Zemmour in the running.

Zemmour himself wrote to the association of the mayors to propose a more radical reform of the system, where backing would be anonymous. This could increase his chances, but also those of Le Pen and other extreme candidates. It is one thing as an elected official to sympathise with them, but quite another to be officially seen as doing so. This tactical manoeuvre could turn out to be costly within the party, and it could backfire in different directions.

6 January 2022

Energy transition uses up raw materials

IFPEN, a French research institute for energy transition, has a sophisticated model that calculates the demand in raw materials arising from the energy transition. And it comes to the shocking conclusion that in order to limit global warming to 2 degrees, it would use up many of the currently available raw material sources, most notably copper. Their model predicts that in three decades this energy transition could use up 60%-90% of today’s copper sources, 50-85% of bauxite, 80% of cobalt, 60% nickel, 30% lithium and 4% of rare earths.

In an interview with Les Echos, Emmanuel Hache, one of the institute’s economists, finds that Europe is lacks a consistent strategy. It is one thing to build giga-factories to produce batteries all over Europe. But how will they be provisioned with raw materials? Even if the industries know how to build batteries, they still depend on cobalt or lithium that comes from outside Europe. Autarky all sounds nice, but the reality is different. Some copper in cars may be replaced with aluminium, but that only relays the problem onto another raw material.

What we will see for sure is a rise in raw material prices that comes with their depletion.

5 January 2022

Watch out for inflation laws

One of the often ignored aspects about higher inflation is its impact on political discourse. The rise of conservative counter-movements in the 1980s was preceded by the inflationary 1970s. Margaret Thatcher, Ronald Reagan, even Helmut Kohl owed their ascent in large part to the economic instability of the previous decade. In today's age of de-regulated labour markets and de-unionisation, inflation would give rise to more income inequality than it did in the years when wage and pensions indexation at least produced some degree of compensation. We still remember the fierce debate in the Bundestag in the late 1970s and early 1980s. Inflation was one of the dominant political themes at the time.

We thus read with interest that the CSU has discovered inflation as a political theme. For its annual seminar, to be held tomorrow, the party is proposing what it calls a protecting shield. The shield would consist of legally mandated positive interest rates for all pension products, and a compensation for inflation effects in income tax calculations. It would constitute an attempt to control inflation through fiscal policy. What is politically interesting is that Christian Lindner, the finance minister, has also demanded what he called an inflation brake, in analogy to the debt brake. So, as the ECB is increasingly becoming a fiscal actor, member states have now taken it upon themselves to control inflation. What can possibly go wrong?

4 January 2022

Macron, president of the EU

France is running an EU presidency and a presidential election at the same time. Emmanuel Macron's EU agenda will be exploited by his opponents, one way or the other. Already we have seen a taster of that as far right and conservative candidates showcased their outrage over the European flag in the Arc de Triomphe to mark the beginning of the EU presidency. And there is the ever-present risk of a deteriorating pandemic. 

Symbolism matters, and so does what Macron’s EU presidency can achieve in six months. The EU presidency will benefit Emmanuel Macron on the campaign trail. After all, it gives him a platform, shows him in the international arena, and may even produce some tangible results. For example, it looks like he will get nuclear power into the green taxonomy. See our separate story above. But Macron may miss out on the benefits if he is accused of electioneering, and if the pandemic slows down progress in other areas.

Omicron will to some extent determine the success of the French EU presidency, and may also interfere with the first round of the presidential elections in April. Macron still commands a large advantage in the polls, as he is credited for his management of the crisis last year. But what voters will remember most when going to the ballot April 10 are the weeks before. As Dominique Seux notes, it would be a major challenge for Macron to generate optimism if the pandemic were to take a turn to the worse.

Macron still has an advantage as long as the pandemic justifies his vaccination plans. The far right and far left started to realise that courting anti-vaxxers won’t get them enough votes, as those numbers are dwindling the longer the wave goes on. And new subjects emerge.

Voters for Valerie Pécresse, Marine Le Pen and Eric Zemmour are particularly sensible when it comes to school reform, writes Cecile Cornudet. They want a merit-based system, a return to fundamentals and some even advocate school uniforms. Pécresse suggested two more French lessons and one more maths lesson in the curriculum. Eric Zemmour wants a Republican school reform, and will make it his theme over the coming weeks, just as he made immigration his theme in the autumn.

Children are to return to school next week, and Omicron is weighing on schools too. Some, like Pécresse, criticised the fact that the holidays have not been prolonged to cope better with Omicron. It is hard to find a single subject that is not affected by Omicron, one way or the other.

23 December 2021


This is our last briefing of the year. We will be back on Tuesday 4. We wish all our readers a happy Christmas, and all the best for 2022.

This is also not a regular briefing, but a look-ahead to the themes we think are going to matter in 2022, starting with the European economy in this short essay. Some of the trends we have highlighted early in the year - the rise in inflation - have come to pass. We were sceptical of Armin Laschet as CDU leader, as readers may recall. But like so many others we didn’t see the rise of Olaf Scholz. We retain our geekish interest in gas pipelines, crypto finance and business start-ups. Most of these themes will carry over into 2022.

In particular, we will have to get used to central bankers proclaiming to be shocked, shocked that inflation will continue to exceed their expectations. We expect the ECB to overshoot its inflation target for more than just a short period, because too many central bankers in Europe are scared by what they see in the rear-view mirror. They are obsessed with avoiding the mistakes of past crises when they raised interest rates prematurely. What is different this time is that we don’t have fiscal austerity but the opposite. Monetary policy is operating more aggressively and on a broader scale, with asset purchases, long-term liquidity policies, and negative interest rates.

And what is also different is that most of the structural drivers behind low inflation are reversing. Free movement of people has peaked as countries are restricting immigration. The globalisation of intermediate production has peaked as European companies in particular are re-nationalising supply chains. When an economy priorities supply security, it is a shift of macroeconomic importance.

A seemingly endless labour supply was among the causes of disinflationary pressures in the world economy. The dominating factor of the period ahead will be the demographic decline, which will put pressure on wage costs. Germany registered a fall of 150,000 employees this year, and will need to raise net immigration to about 400,000, simply to keep current levels of employees and wage increases constant. This won’t happen. What we have in front of us is not just a few bad monthly inflation data, but a coherent inflation scenario. We did not have that in 2011.

We normally don’t worry about energy prices, and favour the core rate inflation as the better gauge of underlying inflationary trends. There are scenarios, however, in which extreme rises in energy prices could set off a chain reaction that leads to persistent inflation: a Russian invasion of Ukraine, if accompanied by further disruption of Russian gas exports, could have a crippling impact not only on the cohesion of the EU, but also on the euro area economy. See below for our separate story on energy. This is not our economic baseline scenario, but at least as plausible as the Goldilocks scenario, which is the baseline of all technical inflation forecasts.

What matters in the long-run is not monetary or fiscal policy, or trade agreements, or Brexit for that matter, but innovation. For Europe there is good news and bad news - oddly related. The good news is that the European economy is starting to innovate. But this is largely a northern European story. The UK is ahead of other EU countries in terms of high-tech business start-up, but Sweden, the Netherlands, Germany and France also witness their own versions of high-tech booms. In Germany, this is taking place in the existing economy, but in France, like the UK, we see an explosion of entrepreneurial start-ups. Germany has a new government that promises to deliver an agenda of modernisation. We hope, and believe, that this will set a trend for the rest of Europe. The UK is way ahead in high-tech business start-ups, and especially in financial innovation. We expect that innovation will become the big story of post-Brexit UK, similar but different to the Thatcherite revolution of the 1980s.

The bad news is that the productivity gap between the north and the south of Europe is likely to widen further. The techno-boom is a northern European one - though Spain is part of it too. The recovery fund and the associated economic reforms were intended to bridge the productivity gap. We have been, and continue to be, sceptical about its likely result. We see that Italy’s economic reform programme ticks all the right boxes. But it does not go to the deeper underlying issue of a secular productivity decline. The success of a programme of structural reforms is measurable in terms of its employment growth or productivity growth, or a combination of the two. In Italy, employment has fallen during the pandemic, and we doubt that we will witness sustained increases in productivity growth beyond year one or two of the post-pandemic recovery. Italy still requires deep reforms to the judicial system, and a reform of one of Europe’s most inefficient and self-serving public sectors.

We thought financial investors acted irrationally this year to rely on Mario Draghi as a guarantor of stability. In 2022, we expect they witness a return of politics as we know it. Party leaders have their own ambitions. It is not normal for large democracies to allow unelected officials, however well-meaning, to run the country. We make no prediction on what is going to happen to Draghi. The presidency is a plausible scenario. But we expect Italy to resurface on investors' radar screens next year.

We haven’t mentioned Covid for the simple reason that we haven’t got the foggiest. As we keep saying, events intrude. So do viruses. Whereof one cannot speak, thereof one must be silent.

23 December 2021

Those unpredictable French elections

Who will become the next French president in April 2022? The last elections in 2017 had its surprise moments and brought Emmanuel Macron into power out of nowhere. Will one of the newcomers have a chance to win the race this time? Or will Macron be the safe pair of hands?

The narratives from 2017 are forming our views of what to expect this time, but that does not mean we can see what is really happening. This is especially true as we enter another wave of the pandemic and an energy crisis in Europe.

A large survey for Le Monde of nearly 11,000 people gives the following snapshot of how results could look like if elections were held now: Emmanuel Macron is leading the first round with 24%, followed by Valérie Pécresse with 17%. The two candidates of the far right, Marine Le Pen and Eric Zemmour get 14.5% each. All left candidates stay below 10%, together they have between 24% and 29.5% if they were to regroup behind one single candidate. This seems unlikely given their differences - not only about candidates but also about fundamental beliefs. Christiane Taubira could inspire the left if she were to decide to enter the race mid-January, but even she will not unite those irreconcilable differences over energy, ecology, security and secularity that fragments the left.

A match between Macron and Pécresse in the second round is definitely not what Macron had expected. Until a month ago, he has been preparing for a standoff with Le Pen. 

They used to say that the French will vote with their heart in the first round and reason in the second. If Pécresse can keep her momentum going and the two end up in the second round, odds are that Macron would win. But there are a couple of reasons why this may not be the case. Here are some:

Pécresse is a newcomer on the national political scene and still has to prove herself. So far she benefits from having won in the primaries and to be the first woman to lead the Les Républicains. Can she bridge the centre and the far right end in her party, represented by Eric Ciotti. He was the other surprise candidate to have made it into the second round with her. Once the novelty effect wears off, we shall see what she is made off.

There are at least two further reasons why these polls tell us little. First is the high number of undecideds. The survey had 27% of the polled not yet decided who to vote for just four months before the elections. This is 9 percentage points more than last time in 2016. We saw a similar phenomenon in the German elections where an unusually high volume of undecideds decided to swing behind Olaf Scholz. Politics is becoming less predictable.

The second is the speed with which voters switch candidates. The times of loyal voters base is long over. But it is still impressive how Zemmour and Pécresse shot up in the polls once they declared themselves candidates. Will it translate into actual votes? The survey found that 30% changed their intentions to vote in the first round. Macron, Le Pen and Zemmour have the most solid voter base with over 60%, it is far less solid for Pécresse with only 51% declaring themselves sure to vote for her. One observation is that people might change their candidate but not the political family. The centre stays with centrist candidates. So do the left and the far-right.

There are five far-right candidates in the race at the moment. Zemmour and Le Pen together represent 30% of the voters. If one of them were to drop out of the race last minute, the other stands to benefit and could be boosted into the second round. Le Pen makes all the efforts to be as presidential as possible, while Zemmour tours through small villages and living rooms to promote the French way of living. It is hard to imagine that one of them would give up, but it is not a scenario with zero probability.

The subjects the French care about most is purchasing power, the pandemic, immigration and the environment. At least for now. This can all change if Omicron overwhelms the health systems. Only a week ago, Macron told the people that the worst is over. This week his government doubled down with vaccination pass and vaccination for the 5-11 year olds. These new realities will change the campaign, predicts Nicholas Beytout. There will be no large meetings to show enthusiastic fans electrified by their candidate at least until February. Campaign themes are also shifting.  While the first pre-campaign debates were dominated by immigration and security, Omicron could push health and social subjects at the front of the campaign. Macron stands to benefit from this, he is the one with the cheque book and the one considered to have mastered the other waves well.

But what if those restrictions turn out to be disproportionate to the Omicron challenge? What if Macron overshoots, rolling out mandatory rules and vaccination for something that resembles more of a cold? Will the French still hold him in high esteem for his crisis management? There are already little rebellions emerging, amongst employers who resist the vaccination pass in their companies on operational grounds, or in schools where teachers and parents organise petitions to oppose vaccination of their children. Just this week vaccination was opened to the 5-11 year olds, though it is not mandatory. These rebellions are not mainstream. But there is a delicate tipping point that could tilt public opinion against Macron if it turns out that he employs heavy machinery against small targets.

What about Europe? France is taking over the EU presidency in January which will then run in parallel to the presidential election campaign. Two of the main projects, the reform of the stability pact and securing European borders, are classic themes on the right. It is thus not surprising that Macron and Pécresse are putting forward the same proposals, a promise to reform the Schengen area and the commitment to launch a major development plan for Africa. Both identified immigration as a problem for which Europe has to find the answers. Those do not include the great replacement Zemmour warns about, but a well managed system for countries of origin and transit together with a better protection of common external borders.

But Russia’s mobilisation at Ukraine borders and Europe’s energy crisis could change the agenda dramatically. If gas delivery from Russia is not enough to cover Europe’s demand, Macron will be in charge of a European coordinated response. Will there be common procurement as it happened for vaccines? As we write below, it also highlights Europe’s energy dependence and vastly different positions amongst EU member states. Macron advocated nuclear as the way forward in the transition, vehemently opposed by Germany.

How will this play out on the campaign trail? Nuclear is consensual amongst candidates from the right, but could be challenged from the left. This week EdF shut down four of the most potent reactors due to generic faults, with 15 out of 56 currently not operational. It forces France, usually an electricity exporter, to import from its neighbours and to restart its fuel-burning energy productions. The electricity crunch is expected to become most pronounced in January and February while price hikes will also hurt either the state budget and companies. This crisis is yet to play for. Four months can be a long time in politics.

23 December 2021

Are we running out of gas?

In 2022 energy will be all important. As Europe continues to wrestle with questions surrounding energy security and decarbonisation, we want to focus on two aspects of the energy equation in particular, which will come to the fore in 2022: gas and nuclear.

The first is Europe’s supplies of natural gas and what happens to them. Storage levels across the EU are already lower this winter than in the previous one. Avoiding price rises and, worse yet, energy rationing or rolling blackouts will depend both on the weather, and on what Russia decides to do.

Both of these are as yet up in the air. We don’t know whether this winter will turn out to be warmer or colder than average. Russia’s motives are inscrutable. As analysts at the Carnegie Centre Moscow recently outlined, Gazprom’s reticence to provide the rest of Europe with additional gas deliveries could be due to a number of different reasons. Some, like the need to prioritise domestic supplies, are more benign. Others, like a desire to strong-arm Germany and the EU into hurrying along Nord Stream 2, are less so.

If Russia invades Ukraine, all bets are off. At the very least, we would expect gas deliveries through the Ukrainian transit network to come to a virtual standstill, and for Nord Stream 2 to be put on an indefinite hiatus. Even if this does not happen, we don’t expect Nord Stream 2 to come online in time to make a difference to Europe’s gas supplies this winter.

We also expect these developments to have a lasting impact on EU-level policymaking. The European Commission has put voluntary joint gas buying and storage on the table. We expect support and political will for the arrangement to depend on the gas outlook. The worse it is, the more a sense of urgency will build behind it.

On nuclear energy: a multi-annual can-kicking exercise has ensured that the Commission won’t decide on whether to include nuclear energy in the taxonomy until at least January.

On one side, we have a group led by Germany that argues nuclear energy is unsafe, and that investment in reactors could crowd out more beneficial spending on renewables. The other, led by France, says that the safety concerns are overblown, and that nuclear energy is an essential always-on, low-carbon source of energy.

We can make a firmer prediction here than on gas: we believe that France will prevail. They are more determined to bring nuclear energy in than Germany is to leave it out. Their coalition is bigger.

And, maybe most importantly, they are with the zeitgeist. We have noticed that a newer, environmentally conscious generation has a much more positive attitude towards nuclear energy than their Green forebears. For them, decarbonisation is more important than denuclearisation.

Both the joint buying and taxonomy questions will also have substantial geopolitical implications. Any move towards union-wide gas buying would turn the EU into a hefty global player, thanks to its combined purchasing power. And it could catalyse a long-overdue convergence of external policy interests, as member states share a desire to obtain the best deal for the lifeblood of their economies.

On the nuclear side, there are obvious energy security implications from increased intra-EU investment in reactors. But longer-term influence is at stake too. Already, we have seen the emergence of a new great game in small modular reactor technology between the US, UK, France, China and Russia. We expect this trend to continue. Russia is ahead so far, with Rosatom having completed the world’s only existing, commercial SMR plant. But the technology is so new that it’s still all to play for. A space to watch in 2022.

22 December 2021

What you can and can't regulate

We recently had some fun with the German discussion about how to regulate Telegram, the messaging app. Telegram has become a popular communication channel for anti-Covid protestors and criminals. But to their own shock, the German authorities got nowhere because they were unable to find the company.

The Telegram debate is symptomatic of a widespread misunderstanding of how the modern, decentralised digital world works. Telegram, for example, is a company that exists in a virtual space. It has a nominal headquarters in Dubai, but it is not a normal company.

Dubai is also the favoured place for the crypto industry. Some of the crypto businesses ended up in regulatory control, for example stablecoins, or areas of crypto finance that interact with real-world financial and legal processes like the sale of real estate. But there is, and always will be, an unregulated side to the crypto business. 

The goal of bitcoin was never to become the world's only currency, but to create a means of payment not under official control by governments. The Russian founder of Telegram created the service as a means to bypass the control of Vladimir Putin. Pavel Durov refused to grant Russian security services access to encrypted messages. Russia threatened to block the services, but couldn’t. It turned out that even Russian state agencies and government official were using Telegram. Russia has since given up the effort to block it. There are parts of the modern digital infrastructure that even Russian hackers simply cannot reach.

It is interesting to note that this message does not appeared to have arrived in Germany. This morning we noted an article in FAZ written by a legal scholar in corporate law, who correctly recognised that German efforts to regulate Telegram are going nowhere. But then he goes on to express hope that the EU’s digital market act will provide a solution. The reason why this argument is wrong is not legal but technical. If a company is based in the EU, it is, of course, subject to EU and national laws. But German law is not enforceable in other jurisdictions, and clearly not enforceable in crypto-protected virtual environments.

If Putin cannot close it down, the EU will not be able to do it either. We expect it will become harder for authorities to regulate crypto as crypto-only mini-economies emerge. In such a closed mini-economy all transactions are based on crypto-money. Think of a service provider who only accepts bitcoin for payment, and who pays staff in bitcoin, and who transacts with customers who do the same. That provider may not even have a physical address. Authorities will not only struggle to regulate such a service but also to tax them. At the end of a chain, the crypto-business owners and their staff will interact with the real economy. The computers consume energy, and virtual people become real when they eat food, which is priced in dollars and euros. But this notwithstanding, it is possible that a rising proportion of wealth creation escapes the grip and even knowledge of the authorities. Europe’s digital market act is in this sense a rather analogue-age construction.

21 December 2021

Mandatory vaccination for all?

The French government prepares a draft bill to transform the green pass into a vaccination pass, and kicked off its consultations about whether or not to extend mandatory green pass to all sectors in the economy. So far, the green pass is only necessary where there is contact with the public, in bars, hotels etc. Would it still be considered a proportionate response if they were to extend mandatory vaccination to all professions, including roofers, for example? 

Mandatory rules for all enterprises are clearly on the table. But not all is vaccination only. According to Les Echos, the government still included free tests as an alternative to vaccines in its discussions with employers and trade unions. So it seems there are still some choices.

The Employers’ concern is about how to control and sanction those who do not comply with the new rules. New mechanisms are costly, especially for small and medium enterprises. Then there are sanctions. Those sectors already under mandatory rules face fines of up to €45,000 for non-compliance. The senate already excluded the possibility for companies to lay off those who refuse. The only option is to suspend an employee. Deprived of their salary the employee has then the choice whether to sit this out or change jobs. If every job were to have mandatory rules for vaccination, there is not much to choose from. So will mandatory rules only apply to a selection of companies according to size or sector?

According to latest statistics there are 5m non-vaccinated in France. Even if mandatory rules for all sectors won’t be implemented in the end, the announcement already had its effects. The numbers of those who registered for vaccination have doubled. This is on the top of the surge since the start of mandatory vaccination in the health sector and the introduction of the green pass in the hospitality sector.

There are other countries with mandatory rules. In Europe, the green pass is mandatory for all sectors, private and public, in Italy, Greece and Slovenia. In the US, Joe Biden’s mandatory rules for companies above 100 employees are still pending legal scrutiny. New York’s mayor, meanwhile, created facts: as from December 27, all 184,000 companies operating in the city need to make sure their staff is vaccinated. Those who refuse can either be sacked or work from home. For non-compliance companies will have to pay a $1000 fine.