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22 April 2021

Karlsruhe vs Berlin

The German parliament yesterday approved emergency legislation to enforce lockdown in regional districts and municipalities where the infection rates exceeds 100 per 100,000 population. School closures will be mandatory from an infection rate of 165, which is close to the current national average rate. Other measures include a mandatory curfew from 10pm to 5am, except for solitary walks, which are allowed between 10pm and midnight. Between midnight and 5am only ghosts are allowed to roam the streets.

The ruling could come into force as early as Saturday. The opponents don't have the votes to stop it, but they still have Karlsruhe. An SPD MP has prepared a constitutional complaint, to be lodged with the constitutional court on Friday. The legal argument is that the lockdown violates the proportionality principle of German constitutional law. A lawyer for the plaintiff cites the following concrete example: since most infections occur in closed rooms, it would constitute a disproportionate response to reject outdoor activities and to stop restaurants and bars from serving food and drink outside.

This is the kind of case that is hardest to predict because it depends on the individual judges' definition of what constitutes a proportional response to a threat. Since the goal of the lockdown is to save lives, we think that a proportionality case would have to pass a very high hurdle to succeed. We are not sure it does. 

21 April 2021

On the persistence of euroscepticism

Pity the pollsters who hate the result of their poll, and then try to put a spin on it. Germany’s venerable Allensbach institute took real efforts this morning to underline that its latest poll on EU attitudes confirmed Germany’s support for European integration. Except that when you look at the numbers you would not necessarily put it quite the same way.

For starters, Germans have lost confidence in the European Commission. Only 21% of Germans say that they have a either a lot or some degree of confidence in the Commission, down from 30% in 2019. This is in contrast to 50% who would say the same about the German government.

8% say that Germany has benefited from the EU’s vaccine purchases, while 46% said no. But what is really striking is creeping euroscepticism. 39% wants repatriation of competences from the EU to member states. Only 12% want more competences for the EU. 63% think the EU is excessively bureaucratic, and 58% believe that Germany has to pay for over-indebted eurozone countries. Allensbach points out that most of the indicators are unchanged from the last few years. But it is interesting that support for the EU has not recovered after the eurozone crisis as one would have expected. We see a hysteresis effect. Support goes down with each crisis, and gets stuck at that level.

We believe the AfD Dexit campaign is more dangerous than it appears. The AfD’s internal division might overshadow everything. But the party has the potential to attract protest votes from disgruntled CDU voters, especially in the east. And it is the only party willing to fish in the pool of anti-EU sentiment. The Allensbach numbers don’t suggest that Germans are in their majority in favour of leaving the EU. But they do tell us that euroscepticism is large and persistent.

We keep reminding ourselves that this is how Brexit started.

20 April 2021

Football without the players

Since the day we started Eurointelligence almost 15 years ago, we never reported on football because we know absolutely nothing about it. That has not changed. Today, we would like to offer a single tangential observation about the super-league that is not related specifically to the sport: about uncompetitive elite structures. A football league without relegation is very similar to the Ivy league club of universities in the US, whose elite status is based on a club membership. Oxford and Cambridge operate an even narrower cartel in the UK.

The western capitalist system is at its best when it innovates, and at its worst when it protects interests. Trade unions used to be the most protectionist institution of the post-war economy. The world has since moved from protecting industrial workers to protecting elites. This protection occurs not by force, but hidden barriers: invitation-only events like Davos, elite universities that require elite schools to prepare for, and elite employers who recruit only from elite universities. British trade unionists used to talk about a closed shop. We think of the modern-day equivalent as a closed network. If one of the nodes goes, the network no longer works.

Football without the fans and the players is like a CDU chancellor without the CDU, or an elite university without the students - very much like what we saw during the lockdown. In the UK, elite schools still offer a good education, but they no longer secure entry into an elite university. Elite employees like City of London financial institutions or media companies no longer earn the monopoly profits that allowed them to restrict their recruitment to a few universities. The network is breaking.

The super-league is the counter-trend. It is a reminder that the path towards meritocracy is not a straight line. But don't underestimate the push-back.

19 April 2021

Do they really care about Navalny?

It is interesting that the US is now threatening more sanctions in case Alexei Navalny were to die in prison. We are not holding our breath since the last sanctions were mostly symbolic.

The Germans, too, follow the plight of Navalny with interest. But there is no discussion about sanctions. And certainly no discussion that would link the Nord Stream 2 pipeline to Navalny’s health. We only hope that the Russian opposition leader did not think that Angela Merkel would put pressure on Vladimir Putin when he made the fateful decision to return to Russia. Merkel may have given Navalny her emotional support when she visited him at a Berlin hospital. But German politics has been and remains on the side of Putin. The Nord Stream 2 project is a monument to the Russo-German relationship, which is probably the most important strategic partnership in Europe right now. 

We see Russia’s influence in Germany in other areas too. This weekend we heard about the rise of vaccine-tourism. For €1999, a tour operator organises two separate flights to Moscow for two vaccination appointments, plus another €300 for the vaccine itself. This is interesting not only because Sputnik V has not even been approved in the EU, but also because it is a vaccine of the same type as the much-maligned AstraZeneca. 

16 April 2021

Coinbase IPO marks crypto inflection point

Cryptocurrency made major inroads into mainstream financial markets this week after Coinbase, the largest cryptocurrency exchange in the US, launched an extremely successful IPO. Share prices closed at nearly $330, 31% higher than Nasdaq’s reference price for the company. This means the company is valued at $86bn, making it more valuable than GM, FedEx and Twitter.

The Coinbase IPO could mark an inflection point for cryptocurrencies, with AP reporting that a growing number of companies including PayPal, Visa and Tesla are now accepting Bitcoin, the dominant cryptocurrency, for payment. Mainstream acceptance is clearly growing. Larry Fink, CEO of Blackrock, said yesterday that Bitcoin may become a great asset class, and the world’s first inverse Bitcoin exchange traded fund also launched yesterday on the Toronto Stock Exchange, allowing investors to short Bitcoin futures for the first time.

The idea is clearly catching on in North America, though we would argue that Europe, more specifically the ECB, has become a world leader in dismissing it. In the US, one study found that 11% of the population owned Bitcoin in 2019, against just 5% of Europeans in 2018. Isabel Schnabel, an ECB board member, wrote last week that Bitcoin is a speculative asset that does not fulfil the basic properties of money. Christine Lagarde has made similar statements. That's technically true when you use the definition of money as used by economists. Yet it misses the point, and underestimates the nature of the challenge of crypto-currencies for central banks.

We would argue that Bitcoin can’t be dismissed so easily. They exist because at least some people distrust the state and central banks. Bitcoin prices have been skyrocketing this year because people believe it has value. In that sense, crypto-currencies share some characteristics of fiat money. Money is a promise. That promise may be irrational. But only a fool would dismiss it.

15 April 2021

The kids aren't allright

With a third wave rising and a delayed recovery looking increasingly certain, a looming economic crisis is casting a pall over young people’s prospects in Europe.

We noted a report in Rue89 Strasbourg this week, which found that more than 5000 students from the University of Strasbourg were still searching for internships as of February. Internships are often a graduation requirement in French higher education, but the Covid-19 pandemic is scuttling the hopes of thousands of students for the second year in a row. Last year, an Opinion Way survey found that more than half of French students reported significant difficulties finding an internship, a number that rose to 80% for low-income students.

Perhaps more worryingly, 22% of students were unable to validate their school year because they could not find an internship. Those that did secure an internship have often found the experience disappointing, as work from home requirements have seen most internships carried out over Zoom, offering fewer networking opportunities and reducing the chances of full-time employment afterwards.

The problem extends beyond universities, with Le Figaro reporting that the crisis has slowed Emmanuel Macron’s campaign commitment to train 1m low- and unskilled job seekers, and 1m young people seeking to enter the labour market, under a five-year skills investment plan that runs until 2023.

While the Ministry of Labour reports that 1m job seekers have completed a training programme under the plan since 2018, admissions fell from 485,000 in 2019 to 390,000 in 2020 because of the pandemic. Those who do participate are still struggling: the government recently increased remuneration for vocational trainees for the first time since 1988, but it remains pitifully low, at between €200 and €685 per month.

Furthermore, the employment rate for people who have completed training programmes fell from 57.6% before the crisis, to 50.8% now, despite the government having invested more than €7bn in the plan to date. French officials have said it will take between a few months and a few years to boost this number.

The problem is not limited to France, with the European Commission reporting that youth unemployment in the EU stood at 17.2% in February 2021, nearly 10pp higher than the EU unemployment rate. A total of 3m young people were unemployed as of February, up 230,000 yoy.

As we wrote earlier this week, a Covid-19 baby bust will accelerate a decline in birth rates that is already placing a disproportionate burden on a shrinking younger generation, which faces ever-higher taxes to pay for pensions and healthcare. Given the trends in training and employment, we would further argue that many young people may not even face a tax burden, since their full-term employment prospects are so dismal. But if young people can’t find work, and therefore do not pay taxes or social security charges, who will support the older generation? One thing is certain, it will not be the young who can pay for the recovery from this crisis.

14 April 2021

Greenwashed out

More controversy about the EU’s planned green taxonomy, after a group advising the union on new rules for green investment published an open letter calling on the European Commission not to weaken them.  

The Commission has been working to update its green finance taxonomy because the most recent set of guidelines, published in 2019, were deemed too strict by some member states and industry lobbyists. One of the most contentious issues was that the 2019 guidelines excluded natural gas from a list of transition fuels, but debates are also raging over whether bioenergy, forestry and nuclear power should receive a green label.

An upcoming revised proposal is under fire from the advisory group because it is too weak. It deviates from environmentally sound parameters within the taxonomy by stretching the framework beyond scientific rigour, introducing substantive risks to its intended purpose and to the credibility of the project overall. In layman’s terms, projects that are not green will still be labelled green, which defeats the purpose of the entire endeavour.

Nine members of the 57-strong group have threatened to quit over the latest proposal because it would allow companies that are not currently considered green to claim investments, such as highly efficient steel production, and classify them as taxonomy-aligned. According to the group, the taxonomy defines what is green, but it does not specify that everything else is bad for the environment.

This means that the proposal will maintain a longstanding practise of mislabelling green investments. Under a previous set of guidelines, a system called the Rio markers was used to round up the green content of investments and projects. A project with even a tiny amount of green content would qualify as 40% green, and anything with more than 40% green content was rounded up to 100% green. Controversy over the latest proposal shows lobbyists have made their voices heard - will anyone listen to the scientists? 

The deadline for the latest proposal is 21 April.

13 April 2021

AfD supports Dexit

There is a lot of stuff going on in Germany right now, which would normally make big stories on their own. One of them is the decision by the AfD to support Dexit. There are no prizes for guessing what that word means. The party was born with an agenda to exit from the euro. Now it now wants to get out of the EU.

This decision was the result of a party revolt. Its co-leader, Jörg Meuthen, who is also an MEP, sought a more ambiguous formulation. But the party radicals managed to get the full-Monty Dexit into the official election programme. The party also, unsurprisingly, reiterated its anti-immigration stance, as well as its principled opposition to lockdown. Unsurprising too. But Dexit is interesting for a number of reasons.

Germany is not, of course, about to elect a party that favours Dexit. Nor will the AfD participate in a government. But we believe that the number of Germans who want the country to leave the EU is larger than the AfD’s existing support base. It makes strategic sense to us for a party of the right to support Dexit if no one else does.

Also, look at the dynamics of German politics right now. CDU/CSU are hopelessly divided. The liberal FDP will benefit from this, but the FDP does not reach into the right of the political spectrum. Immigration is less of an issue in 2021 compared to 2017. The lockdown will have ended by election day. And in any case, the FDP also takes a principled anti-lockdown position. But Dexit will still be a good theme in September. It unites all of their existing voters and activists. And it reaches beyond.

The AfD has come through a bad patch. They have recovered a little. The party is now polling at 11-12%, close to their 2017 result. If they managed to capture an additional two or three percentage points, that could have a strong influence on the coalition arithmetic. All other parties have declared that they will under no circumstances enter into a coalition with the AfD. This means, the larger the AfD becomes, the bigger the arithmetic hurdle for the next coalition. Two or three percentage points are therefore a big deal.

We noted a couple of complacent German political journalists concluding that Dexit was a losing proposition. We had a deja-vu experience. This is how Brexit started. The Remain-supporters were complacent, and when they realised they had a fight, they stuck to their old arguments about the benefits of the single market. It is not clear at all that German EU-supporters would know any better how to campaign in favour of EU membership if it ever came to that.

Also consider the parallels with the UK. There has been a lot anti-European rhetoric in the German European discourse over the last few years. The ECB is still unpopular. And the Germans blame the EU for their vaccine order disaster, not their own incompetent government. Support for the EU has fallen - not to the extent that there is a majority for leaving it. But there are enough Dexit supporters to sustain a single political party. One of the lessons of Brexit is not to underestimate the political consequences of an anti-European discourse.

12 April 2021

Bailing out the belt and road initiative

The inevitable fall-out of ill-conceived projects launched under China’s belt and road initiative is being felt in Europe. That hasn’t stopped countries from moving forward with white elephants that are at serious risk of becoming debt traps – and a major headache for the EU.

Euractiv reported late last month that Montenegro is calling for the EU’s help to repay a loan to China’s Exim Bank for the first section of a highway linking the port of Bar in the Adriatic Sea to Belgrade in Serbia.

The €1.3bn project was financed in large part by China, and if Montenegro defaults, the terms of its contract for the loans give China the right to access Montenegrin land as collateral. Montenegro’s borrowing from China pushed the country’s debt-to-GDP ratio from 63% in 2012 to nearly 80% in 2019, and as it turns out, warnings that this highway was a bad idea went unheeded. Dritan Abazovic, Montenegro’s deputy prime minister, has said that the country is now dependent on Beijing, and without a kilometre of highway, as the deadline for completion of works has already been breached several times. Milojko Spajic, the country’s finance minister, has since gone to the media to make the case for an EU bail-out, arguing that it would be a small but easy win for the union.

We wonder how many small wins the EU will be facing in the coming years as the true cost of BRI projects becomes apparent. In Greece, for example, reports of growing disputes over the Piraeus port, which is now majority-owned by China Ocean Shipping Company, are becoming a media mainstay. Legal disputes over a Chinese-backed, €1.7bn coal-fired power plant planned for construction in Bosnia are ongoing.

More worrying in our view is Chinese-backed projects for which the business case is far more questionable, such as Fudan University’s planned new campus in Budapest. As investigative outlet Direkt36 reported last week, the €1.5bn project would be the largest investment in Hungarian higher education to date, but it will be built using Chinese materials, labour and loans, with the contract stating that construction must be carried out as a Chinese only project. Since the project is being developed under a Sino-Hungarian international agreement, EU rules about fair competition and procurement practises have been deemed not relevant.

The new campus will cost more than the state spent on Hungary’s entire higher education system in 2019, and it will be constructed on space that had been earmarked for the Budapest City Development project, which would have provided modern dormitory and community spaces for Hungarian students. Fudan University in Shanghai is considered a top higher education institution, offering world-class international relations studies. But in 2019, its charter’s chapters on freedom of thought and academic freedom were replaced by a declaration of allegiance to the Chinese communist party.

After Viktor Orbán expelled the Central European University, stakeholders warned that the country is suppressing liberal academia, with the Fudan campus demonstrating that Hungarian education is being reorganised under another state. A 2018 survey also found that 40% of Hungarians aged 18 to 24 said they or their family planned emigrate to seek better opportunities abroad. Like Montenegro’s highway, the business case for the new campus is weak. We wonder whether an EU bail-out for this project will also be branded as a small and easy win.

9 April 2021

Bold tax ideas and poor prospects

The IMF looked in its fiscal monitor at how Covid-19 affected inequality based on first evidence from last year. It is the rise in inequality through the pandemic, and the potential for social unrest, that prompted the IMF's call for a temporary levy on the privileged. While the rise in inequality is undeniable, the levy is harder to implement, even if there is a broad political will behind this initiative.

The evidence is still sketchy, but empirical studies confirm that the virus was more virulent in poorer communities, especially in urban areas, and that lockdowns affected mostly low-income service workers and those without digital skills. School closures threw back all children in their educational attainment, and this fallout was even more pronounced for children from poor families in developed countries or for developing countries. This educational gap will have to be addressed moving forward.

Coming out of this pandemic we will find a world where inequality has increased between countries and communities. Governments will face some difficult choices when it comes to financing education, health care, infrastructure, or social safety nets. Expect more diversity across countries in their policy choices.  How governments respond will define the future growth potential. Digital infrastructure, health care and education are important building blocks for a society to thrive. After this lockdown experience there is a chance to reform the school curriculum to reflect a new reality and new digital teaching tools. Universities already work on digital master programmes. Secondary and primary schools will need to teach new skills, and for this teachers will need to be equipped. 

We agree that this is an opportunity for governments to implement some bold reforms in the education sector, and a chance to rethink public health, digitalisation and industrial policies. We are more sceptical about how to finance it. The IMF's proposal to tax those who benefited from the crisis sounds all fair and good, but the past has shown that taxing the rich never really took off the ground. The Tobin tax on financial transactions, for example, has been debated since the 1970s, yet despite the financial crisis in 2008 and the general outrage over taxpayer bailouts for badly managed financial institutions, only 10 countries ended up levying a 0.1% financial transaction tax.

Janet Yellen called the IMF and World Bank meeting the Bretton Woods moment for the global economy. But the 21% global minimum tax rate as proposed by Yellen seems high. The OCED had proposed a 12.5% in earlier talks. How likely is it this tax will be applied? Look at where we are in the EU. The Irish won't give up their low corporate tax scheme or risk losing their business model. This will be no different on the global scale. 

The call from the IMF to temporarily tax businesses and wealthy individuals who benefited from the pandemic are bold, but face challenges once it comes to implementation. Imagine the US administration raised a tax on its tech companies. Do they expect Facebook or Twitter to just pay the bill? Or will companies fight back, either with an avalanche of law suits or by withdrawing services, as Facebook did in Australia? Even if companies accept the tax, they likely find a way to balanced it out, either by passing costs on to the customers or by cutting some other tax corners. There are legal challenges too. The German solidarity levy was successful precisely because it was clearly targeted and not limited to wealthy taxpayers. Everybody had to contribute according to their ability to pay. If you were to tax the wealthy only, you would tax income twice. Expect the debate to continue but solutions to remain vague. What is clear though, is that inequalities are starker today than they were before Covid-19 hit.