The US elections will be fountain of political analysis for years to come because it upended lazy political narratives. One of the big misjudgements was about the late change of a candidate. The purpose of primaries is for a candidate to survive bruising battles. Ronald Reagan and Bill Clinton would never have been picked by the party establishments. In politics, you don’t get appointed.

Germany is going through a similar phase as the Democrats did in late June and early July. There was a frenzy of reports yesterday that the SPD is about to launch a coup against Olaf Scholz, by installing the popular defence minister, Boris Pistorius, as the lead candidate. This is a Kamala Harris situation. It is a media-driven campaign. The media love him – a guy in a flak jacket who gives short, sharp answers. Unlike Scholz, he would like to send medium-range missiles to Ukraine. Bild published a poll that shows Pistorius at the top of the popularity rankings and Scholz at the bottom. Former SPD leaders weighed in, with two coming out in favour of Scholz and two against.

The problem with Pistorius is that he was appointed. Scholz plucked him two years ago from obscurity. He was an interior minister in the state of Lower Saxony. Defence minister was his first and only federal job. He is also not an MP. That does not disqualify him. But nobody knows anything about his views on fiscal policy. Does he even have a European policy beyond the usual platitudes?

Remember Martin Schulz, the former president of the European Parliament? He emerged out of nowhere – or rather out of Brussels – to become the challenger to Angela Merkel in the 2017 elections. The SPD party congress elected him with 100% of the votes. He was more popular than any other SPD politician ever, but during the campaign he totally bombed out – just like Harris did.

Olaf Scholz has made many mistakes. He is a terrible communicator. Firing Christian Lindner was a mistake. He should have held a national TV address on the day of Donald Trump’s victory and said that this is a time for Germany to show leadership in Europe, and shift the debate away from the petty themes of the FDP. We, too, can see the case for another candidate. But this is not the way to go.

There is a good reason why the euro area never managed to get a sovereign euro-based debt security: the idea died because it was always commingled with intra-governmental transfers.

Yesterday we read in a comment in Visegrad Insight that Friedrich Merz’s readiness to reform the German debt brake would be a victory for Donald Tusk. Astonished to hear about such a connection we read with surprise that the Polish premier wants Berlin to fund joint European defence bonds and other initiatives for military procurement. So does he think that this is where the money will go?

We think this is a giant misunderstanding. Merz said he was open to a reform of the debt brake in the next parliament to introduce a golden rule – which would allow the government to raise debt for investments only. We are talking about digital infrastructure or bridges, not defence. Defence is classified as consumption. Sophistry might lead us to talk about investment into our security, or welfare spending as an investment to further social peace. But this is not what a golden rule does. Its goal is to ring-fence investments from austerity programmes. That in itself would be valuable. The German economy would have been in a slightly better spot if such a rule had been in place.

If a chancellor Merz were to kick off such a debate in earnest, it would not change Germany’s fiscal planning in the foreseeable future. Such constitutional changes take years to negotiate and implement. And even then it will not generate a large fiscal windfall. Right now, Germany’s constitutional debt brake is the binding constraint on the government. With a golden rule, we would be closer to the position where the hard budget constraint would come from the EU’s stability pact.

We see no chance that Merz would agree to another recovery fund type instrument at EU level. He will insist that funding for Ukraine’s accession should be financed from a shift in the EU budget, as a result of which Poland would turn from a large net recipients to a net contributor. It is no wonder that Tusk would favour a special defence euro bond, based on a funding model similar to that of the recovery fund. It should also not come as no surprise that Germany rejects this.

In Europe, the left has totally changed over the past decades, when traditional left parties disappeared or weakened and new parties emerged. The voters base, too, changed fundamentally. Services dominate manufacturing. Identity politics has become a main theme. 

Then there are outside events like the financial crisis or the wars in Ukraine and Israel. We have seen Syriza, Five Star, and Podemos as parties that emerged during the financial crisis. But they seem to have reached their zenith, and all three of them are facing existential crises. Qui bono?

In the case of Syriza, the main governing or opposition party in Greece since the bailout years, the downfall was personal and systemic. The party already lost significance in opposition under Alexis  Tsipras. It splintered even more under Stefanos Kasselakis, its new leader. As a result, Syriza passed the baton as the main opposition party back to Pasok, the traditional social democratic party.

Syriza is now down to only 6.6% in the polls. The party lost its members and voters in troughs over internal turmoil around Kasselakis, the telegenic businessman from Florida, who was elected by the base as their leader but failed to change the party itself. What is left of Syriza looks like an empty shell of its former self after several rounds of defections. The three fringe parties that emerged from those splits - Course for Freedom, MeRA25, and New Left - even surpass Syriza now in the polls with 11.3% according to an opinion poll cited by Macropolis. SKasselakis's own new party is in this poll at 6.5%.

Pasok is once again the main contender against the governing New Democracy. The party shot up from its low of 6% in the 2015 election to as high as 20.4%. This is no longer that far off from New Democracy, which is at 29.8%. Pasok's leader, Nikos Androulakis, was recently re-elected and now ranks as the most popular politician with 45% ahead of PM Kyriakos Mitsotakis at 40%. Cost of living is the main concern for voters on the left.

Germany’s gas relationship with Russia has attracted the most attention. But Austria was the first western European country to buy Russian gas. Austria and the USSR signed their first gas contrast in June 1968, just over two months before the Soviet invasion of Czechoslovakia. This year may see that relationship end, either due to Ukraine not renewing its gas transit agreement with Russia or because of contractual wrangling.

After Nord Stream went out of action, Austria has become one of the last EU countries to rely on Russian gas. Through the first half of this year, flows from Russia accounted for the vast majority of Austrian imports. This gas reaches Austria via the Ukraine transit network. It has miraculously continued operating throughout the war. But the contractual agreement underpinning the flows between Russia and Ukraine expires at the end of this year, and Ukraine says it does not want to renew.

The end of imports might come even sooner than that, however. OMV, the biggest gas supplier in Austria and a major buyer from Russia, has said that they could end earlier because of an arbitration case OMV won against Gazprom. The International Chamber of Commerce awarded OMV €230m in compensation. If Gazprom doesn’t pay that, OMV would effectively deduct it from what it would pay Gazprom for shipments. That could cause Gazprom to stop deliveries after the next payment due date, which is this coming Wednesday.

We cannot predict exactly what the energy relationship with Russia might look like after the war does end. But we can say with more confidence that it will not look like what it does now. OMV’s current contract with Russia is supposed to last until 2040. Long-term take-or-pay contracts like this were Gazprom’s preferred way of doing business with its European buyers.

We do not believe these will return, for a couple of reasons. One is the financial and legal carnage the last two years has caused. Gazprom is currently stuck in legal battles for around €17bn in claims from angry buyers who want to be compensated for their losses when Gazprom couldn’t, or wouldn’t, deliver to them. When Gazprom stopped deliveries to Uniper, Germany’s largest buyer, via Nord Stream in 2022, the impact was so bad that it risked wrecking the whole German gas market.

Another is uncertainty over future gas demand in Europe. Even since the energy crisis, growing renewables generation has eaten into gas demand for power use. Some other major sources of gas demand in Europe, like domestic heating, will also gradually be electrified in the coming years and decades, reducing it further. Being stuck in a contract that forces you to buy minimum volumes in this kind of scenario is not exactly ideal.

OMV has said that it has sourced enough gas from elsewhere to cover off its losses from Russia. But we still expect this will exacerbate an energy crisis in Austria that has caused its gas demand to drop significantly, and has hit its manufacturing sector. Austria’s economy is currently stuck in recession. The Wifo institute expects it to contract by 0.6% this year. Partly, this is due to weak external demand. Germany is sneezing, and Austria is catching the cold. But it is also because higher energy costs have crimped firms’ abilities to invest.

We are not sure whether de-bureaucratise is even a word, but you know what we mean. It probably will become a word now that the incoming Trump administration is setting up a department of government efficiency. To simplify procedures and laws is the hardest thing. If you want to save even $1 trillion dollars from a $6.5 trillion administration, this will not happen through efficiency drives. It will happen by cutting entire government agencies.

It is not for us to analyse whether Elon Musk and Vivek Ramaswamy will succeed. But one thought that immediately sprang to our mind is where a successful doge would leave the EU. Friedrich Merz, the closest the EU will ever come to a Trump-like leader, is also talking about cutting bureaucracy. In Europe, the crippling bureaucracy faced by companies is not due to bureaucrats, but due to laws passed by governments and especially the EU in the last five to ten years. The problem with EU is that you cannot bring in a strongman like Musk to undo them. You have to find qualified majorities both to pass them and to destroy them.

We ourselves think that every single corporate law passed by the EU – GDPR, corporate social responsibility directive (CSRD), digital markets act, digital services act, AI regulation, crypto regulation and many more – should be redrafted from scratch with a view to facilitating entrepreneurialism. The combined effect of this legislation is crippling, as was graphically outlined in the deeper sections of the Draghi report. The EU is starting from a position that is much worse than that of the US. And yet it is the US that is de-bureaucratising.

For a graphic narrative of how the EU’s laws have translated into practice we recommend this article by Luis Garicano on a serious consequences EU regulation has on the corporate sector. He cites several studies, including one by the European Investment Bank, which puts compliance costs of CSRD for mid-caps at 12.5% of total investment volume.

The deforestisation-free products regulation forces importers to trace coffee beans, for example, cutting off many small farmers in Africa and Latin America, as they cannot prove that they are not operating on de-forested woodlands. 

What the EU has built up here is a real doom loop that ends up killing economic activity. This stuff is not yet reflected in GDP-measured performance, but this is the stuff that reduces innovation and productivity. Garicano offers a lot of detail of this absurdity. One of our favourite is that Spanish AI agency, the first in Europe, in a country that has no AI industry. This is a modern windmills story.

The US, too, has grown more bureaucratic over the years, which is in part the result of the complexities introduced by digitalisation and globalisation. But we would not be surprised if the US were faster than the EU in reversing this trend. And then what?

One of Giorgia Meloni’s signature policies is the aphorism that insanity is doing the same thing over and over again but expecting different results in action. Like the British Conservatives’ doomed Rwanda scheme, Meloni’s Albania model is failing to clear legal hurdles. If courts at the national and European level continue to block the initiative, she will have choices to make that may determine whether this becomes a serious political liability for her and her party.

The reason why the plan to send some migrants who arrive by boat in Italy for processing in Albania is hitting obstacles is because of the issue of what is a so-called safe third country. These are countries migrants who arrive and claim asylum can be sent back to if their claim isn’t accepted. Italy’s government has drawn up a list of designated safe countries, whose nationals can be sent to Albania by the Italian authorities.

But a recent CJEU ruling tightened the conditions by which EU countries can designate safe third countries. On two occasions, separate Italian courts have decided that the migrants’ countries of origin do not meet these criteria. A government decree which trimmed the safe third countries list after the first ruling did not stop the second from happening earlier this week. In both instances, they referred the question up to the CJEU itself.

If Meloni continues to have nothing to show for her scheme than some very expensive barbed wire and portacabins, she has a decision to make about how she wants to play it politically. A tempting move might be to slam the judges, and even the CJEU. This would be straight out of the Conservatives’ playbook.

But there is a risk of this backfiring for two reasons. Firstly, Meloni has made building good working relations at the EU level a priority for her government. Calling for changes to EU law might be a workable strategy. Going on the offensive against EU institutions will be more difficult.

Secondly, and relatedly, she has political allies who are all too happy to go off-message on the EU. Matteo Salvini certainly has no problems trying to outflank Meloni from her right on European politics. One lesson from the British experience is that this can easily derail you. Rishi Sunak’s repeated insistence on the Rwanda scheme gave cover to voices in his party who wanted to leave the European Convention on Human Rights altogether. This proved to be a futile and distracting debate when, frankly, the Tories had bigger fish to fry.

The ruling may also give the EU itself pause for thought on its own migration plans. Meloni’s Albania scheme has served as something of a template for how policy at the EU level might end up in the future. If it’s not workable there, trying to pursue it elsewhere would be a fools’ errand.

Cognitive human biases make us fit events into our schemes of thinking. After the US elections we kept hearing much talk about fake news. The only way for someone like Trump to win an election is for his voters to be misinformed. It is a soothing thought. It helps you bypass hard questions about our policies. If only we had a better candidate, all would be well. 

Hillary Clinton made the revealing admission that unmoderated social media had deprived the Democrats the control over information. This is indeed what happened. Unlike Senator Clinton, we think that the moment to moderate the content of social media platforms has passed. 

The traditional media, or legacy media as is the parlance in the online world, tend to support the centre-left. Social media often veer towards the right. Social media are winning this battle, just as digital technology won out against the analogue world. We often criticise the German adherence to analogue business models. The same applies to media as well.

The Democrats and European centrists still dominate the legacy media, but the legacy media itself has lost control of the information flows. We recall predicting as early as 2008 that the traditional media would lose their dual oligopolies over advertising and readers. Some of the traditional US and UK newspapers have found viable business models. But none are in control any more. We have been observing this trend to varying degrees in European countries, too. Bild still exercises an enormous influence on popular opinion - but only within the part of the political spectrum that ranges from the SPD on the left and the CDU/CSU on the right. Beyond those confines, the social media rule. The AfD and the entire Wagenknecht phenomenon would not have been possible otherwise.

The legacy media are the Norma Desmond of the media world - delusional about their own influence. It is possible nowadays to be perfectly well informed about current affairs without reading any newspapers or news magazines and without watching any TV, if you try hard enough. That was not possible 20 years ago.

The social media contain fake news, but so do traditional media, especially during wars and pandemics. Modern methods of data visualisation have introduced new ways of lying with statistics.

One of the first things you learn in journalism schools is that your terrorist is someone else’s freedom fighter. Perspective distortion applies to other categories too. Your facts are someone else’s fake news. When people complain about fake news, what they are really complaining about is that they are no longer in charge of information flow. In that respect, Senator Clinton is right. The Democrats have lost control. The party will be back in power one day. But the days when they control - or think they control - information flows are over.

Europe’s far-right populists have generally been able to find their footing and become a persistent part of the continent’s political ecosystem. But it has been much tougher for the populists of other political persuasions that emerged in the aftermath of the 2008 global financial crisis. These are struggles over what direction their parties should take.

The fight within Five Star is one that has been going on for several years now, between Beppe Grillo, one of the party’s founders, and Giuseppe Conte, its current leader. Grillo and the late Gianroberto Casaleggio, the party’s other founder, envisaged it as a totally new way of doing politics, beyond left and right. The movement – not a party, a movement – would work through direct democracy, and take a syncretic approach to ideology.

What happened next to Five Star demonstrated two things about contemporary politics in Europe. One is that there is a large segment of mostly non-ideological voters who are jaded with contemporary politics and want something different, but un-dogmatically left or right. Another is that in practice, it is really hard to govern effectively like this.

Five Star eventually became a victim of its own success. It became popular enough to end up governing cities, regions, and eventually the country. But a lack of a coherent framework and political experience led to the party losing popularity as quickly as it gained it.

Then, in comes Giuseppe Conte. He initially entered the picture as a non-partisan prime minister that Five Star and Lega installed in 2018. After stepping down from the premiership in favour of Mario Draghi in 2021, he ran for Five Star’s leadership, and won. His big gambit was to turn Five Star into a more conventional left-wing party. Conte’s problem is that this hasn’t really worked either. Five Star has still lost more support. Politico’s poll of polls now puts it at 11%, and it has suffered some very bad regional election results recently.

But Conte’s prescription is seemingly to double down. Niccolo Carretelli, writing for La Stampa, reports that at the party’s next constituent assembly, the idea is to strip Grillo of virtually all his remaining power. Conte and his supporters also want to get rid of one of Five Star’s totems: a rule that limits its elected officials to only serving two terms. The party may even change its name, from Five Star to something else.

The outcome of this fight is important for Italy’s political future because of how its electoral system works. Both of Italy’s houses of parliament are elected via a combination of proportional representation and first-past-the-post. In practice, it rewards ideologically like-minded parties that can form coalitions and punishes those who cannot. In 2022, a more united right was able to do well at the expense of a divided centre left. If Five Star divides further, this could be another wrench in the concept of a so-called broad front between all opposition parties.

In as much as Donald Trump is perceived as a threat in Europe, he is seen as a chance in the Middle East. As a friend of Israel and a friend of the Arab world, he is uniquely positioned to mediate a peace deal for the region. Trump owes his landslide victory to the many Jewish Americans and Arab Americans who voted for him. They have hope in him that he could bring an end to these wars at last.

Trump could well become the peacemaker in the Middle East if that is what he choses to pursue in his second term. His transactional style in foreign policy is well understood throughout the region. With his frank talk he ruffled feathers but also defended many of their leaders against contempt in the western world during his first term.   

His personality makes sure that everyone understands who is the boss and that there are concrete results at the end. The many trips of Anthony Blinken without achieving anything tangible there would be unthinkable under Trump. After all, it is US security and military equipment that Israel and Arab states want. If the US is to invest into this region, there has to be a return for the US in it too, and a peace deal could just be that price to pay. Trump will not accept being dragged down by the minutiae of war diplomacy, as happened to Joe Biden’s administration.

Trump already said that he wants the wars to be over by the time he takes office in January. It gives Israel some time to wrap up its military operations in Lebanon and Gaza on its own accord. This is a friendly warning.

Trump comes to the scene with ample credibility. Israel never had a more supportive US president during his 2017-2021 presidency. Back then he recognised Jerusalem as Israel’s capital by moving the US embassy from Tel Aviv and recognised Israeli sovereignty over the Golan Heights. He withdrew from the Iran nuclear deal and brokered the normalisation between Israel and four Arab States without the necessity of recognising a Palestinian statehood.

At the same time, Trump enjoyed doing business with the Gulf States and Saudi Arabia, despite international human rights concerns. These countries had something to offer Trump, and they wanted to buy military equipment from the US. They all had an interest in curbing Iran’s influence in the region and were to gain from normalisation with Israel. Trump has supporters amongst autocratic leaders in the region, amongst them Egypt’s president Abdel Fattah Al-Sisi.

Trump comes back to the White House with personal credibility too, now that he has not only a Jewish but also a Lebanese son-in-law with an influential family behind him. During his election campaign he met with leaders from Jewish but also from Muslim communities without ever being called anti-semitic. He is his own man who forges deals that others find impossible.

What will his role in the Middle East be? In his first term, Trump cemented Israel’s rights and backed its interests in the region. Could his second term now be about recalibrating this by recognising Palestinian rights as part of a peace deal? The chances for a peace deal were never better. The senior leadership of Hamas and Hezbollah is gone, and Iran is weakened. All Arab States are supporting a peace deal or at least are not against it. This consensus line up never happened before. Recognising Palestinian sovereign rights is their condition for normalisation. It is now Israel’s turn to decide what price they are willing to pay for peace. Trump could be the deal maker in this historic moment.

On the day Donald Trump was elected, the German coalition collapsed, a decision that condemns the country to a political vacuum that could last for 8 or 9 months. If you want to know how Europe reacts to Trump, this is your answer: no statesmanship, no coordination, and pettiness. Annalena Baerbock, the German foreign minister, put it in a nutshell when she said that this was a bad day for Europe. She was not referring to Donald Trump, but to the small-mindedness of a German political system interested only in itself.

Olaf Scholz yesterday fired Christian Lindner as finance minister. The decision marks the formal end of the three-party coalition. Lindner was fired after refusing to accept Scholz’s order to declare a state of fiscal emergency that would allow the government to bypass the rules of the debt brake. Scholz went on national TV to declare he wants to set aside money to support Ukraine, and for an increase in defence spending that has now become necessary after the victory of Donald Trump. He also said he would not accept a trade-off with social policies. This will be the theme of the election campaign - and the new dividing line in German politics.

The decision means that Germany will not have a 2025 budget unless Friedrich Merz, the opposition leader, changes his mind. The FDP insisted that the increase in defence spending should be funded from the social budget. That was a red line for the SPD and the Greens. This is also the dividing line in Germany, the line around which the next election will be fought. How do we fund the increase in defence spending? German opinion polls – more on this below – do not reflect this like development. The only two ways to fund higher defence spending is either inside the budget or outside. The SPD will not accept a redirection of social money to defence. Germany is a high-tax country. There is not much scope for tax increases either. The social budget is the ultimate red line around Scholz’ support for Ukraine and for his commitments inside Nato. The CDU and the FDP continue to place their red lines around the debt brake itself. Since neither SPD/Greens nor CDU/CSU/FDP are large enough to form a government amongst each other, they would have to form a coalition. A grand coalition between CDU/CSU and SPD would face the same unsolved dilemmas as the current one.

Scholz is a most absent communicator, but last night he gave a feisty speech, a taster of what this election campaign will be like. This election will flush out policy positions that are not openly discussed. German politics is caught in a trilemma of social spending, defence spending, and the fiscal rules. The political fight will be about what to sacrifice. This could be one of those campaigns like 2002, 2005 and 2021, with the potential to upend all early forecasts because big political themes intrude.

Scholz has one procedural trump card up his sleeve. He can determine the timing for the next election. He is pushing it back. He said the priority now is to pass the budget. He is daring the CDU to veto a rise in defence spending, and a rise in financial support for Ukraine. He will then call for a confidence vote on 15 January to pave the way for elections mid-to-late March. This would be six months before the envisaged date. He would stay in power after the elections until a new government is formed, which could take months, depending on the result. The shortest time frame would be June or July for a new government to be in place, but this process might drag all the way into the autumn.

The bottom line is that even when faced with a US president who has promised to reduce his commitment to Nato and to impose a 20% tariff on European manufactured goods, European politics remains stuck in petty discourse. The euro crisis disproved the theory that if only the threat is sufficient large, Europe will unite. We have not seen anything since to suggest otherwise.

We would like to end with a small announcement. It is a coincidence of timing that the coalition would formally end on the publication day of a book, written by one of us on the decline on the German economy. It is entitled Kaput, published today by Swift Press in the UK. The book is about the decline of the German economic model and the deep reasons why German politics finds itself at its current impasse.