6 October 2020
What to make of Five Star's decline
The outcome of Italy's regional elections last month was relatively unspectacular in one sense: it cemented the status-quo in Rome. However, there are a number of subtle but important shifts taking place in Italian politics right now that were underlined by those elections. Yesterday, we reported on the rise of the Fratelli d'Italia and its leader Giorgia Meloni. Another impact is a shift of power between the two coalition partners. The PD had a relatively good election. It managed to hang on to Tuscany. As a result, Nicola Zingaretti is safe as party chairman. Giuseppe Conte, prime minister, is safe too. Stefano Folli writes in La Repubblica that the PD will become less of a junior partner in the coalition. The next big shift will the dismantling of the various Salvini security decrees agreed by the original Five Star-Lega coalition.
But the really big shift that is taking place right now is the implosion of Five Star. Folli says Five Star came out of nothing a decade ago, and is now beginning to dissolve into nothing. It certainly appears that way. The regional elections brought disaster for the party except in one region in the south. But the party will not go quietly. Nor will its ideas disappear. Folli expects that a political party or faction will emerge to safeguard its achievements, like the minimum guaranteed income that would otherwise expire at some point.
Five Star is a strange political movement. It managed to gain voters from the left and the right, though more from the left. Today the party has shrunk to what we think is its core support, around 16%. Those loyal voters are mostly on the left. While this is half of what the party managed at the last general election, this number is not be scoffed at in the fragmented landscape of Italian politics.
5 October 2020
Watch out for Giorgia Meloni
Giorgia Meloni is on a roll. The leader of the Fratelli d'Italia used to be an adjunct to the Berlusconi-Salvini odd couple. But in the last couple of years, her party has become a force in Italian politics. Two October polls have the Fratelli at 16-17%, the same vote share as Five Star. Salvini's Lega is still in the lead at 24%, while Silvio Berlusconi's Forza Italia is only 6.1%. In polling terms, Forza and Fratelli have switched positions.
Meloni offers a different flavour of nationalism than Salvini, one we think is more effective. Last week, she was elected president of the European Conservatives and Reformists. The biggest constituent of that group is the Law and Justice party from Poland. This was also the group to which the UK Tories belonged. La Repubblica quoted her as saying that she was trying to find a third way between outright euroscepticism and European centrism, one of sceptical engagement. The mainstream parties in the European Parliament have drawn up what is known in Brussels jargon as a cordon sanitaire around the group nowadays called Identity and Democracy. Its biggest representatives are Salvini's Lega, Marine Le Pen's National Rally and, at some distance, Germany's AfD. Meloni's priority is to move outside the sanitary cordon and seek constructive engagement with other groups. La Repubblica dismissively called her the acceptable face of ultra-conservatism. Be that as it may, the point is that an alternative has emerged that might be more effective than the traditional far right. Meloni caters to conservatives who are dissatisfied with the centrist drift of Christian Democratic parties in Europe, but who refuse to join Salvini and Le Pen. We think there is a gap in the political landscape for political parties that cater to these audiences in several European countries. In France, the person to watch out for is Marion Maréchal, who no longer uses the family name Le Pen for exactly that reason. The AfD failed to capture that constituency as it moved too far to the right. We think the CDU/CSU will try to recapture those voters post-pandemic and post-Merkel.
In Italy, Meloni's Fratelli won the local elections in the Marche region of Italy, east of Tuscany, ending 25 years of PD rule in that region. The Fratelli now hold two neighbouring regions: Marche and Abruzzo to its south. Both are on the Adriatic coast. Her political goal is to become the leader of a Lega/Fratteli/Forza alliance. She is not there yet, but she is on her way.
2 October 2020
EU vs UK
We hope that the EU fully thought through its decision to take such a firm line on Northern Ireland during the first round of the Brexit talks. We foresee a major political conflict down the line if, or rather when, the ECJ issues a ruling against the UK at a time when the UK is no longer a member of the EU and has no representative in the court.
We are heading for this scenario after Ursula von der Leyen yesterday initiated infringement proceedings by formally giving the UK a month to explain its position. From where we are now, there is nothing much else she could have done. The UK said it would comply. Once that month passes, the European Commission will then prepare a legal case that will end up with the ECJ. Under the agreed exit terms, the UK will remain subject to ECJ rulings on treaty violations for a transitional period of four years.
The protest by UK MPs against the disputed internal markets bill had no impact on the EU because it constituted a domestic inter-institutional conflict. It was not about whether international law would be breached, but about who in the UK has the right to breach it. Insurrections from inside the mother of parliaments have developed an air of absurdity. Brussels is right to ignore this charade.
The only upside is that none of this really matters for the trade agreement currently being negotiated. That is stuck for different reasons. There was no breakthrough in the latest round of talks. Both sides continue to offer fake compromises. The UK was willing to offer a three-year phase-out period for unlimited access to its territorial waters. This has been flatly rejected by France. There is also no material progress on the level playing field, which is the bigger issue in our view. Fishing communities matter to Boris Johnson, but not nearly as much as the freedom to use industrial policy to cement political support in his newly-won constituencies. The same goes for Emmanuel Macron.
If a breakthrough occurs, it will not be at the level of Michel Barnier/David Frost, but at the level of the European Council and Johnson. The outcome is impossible to predict because it depends on both sides climbing down from long-held positions. We keep saying a deal is always more likely than a no deal within EU discussions, but that is not necessarily true in this scenario.
The European Council will deal with Brexit at its meeting in two weeks. Both sides rightly concluded that there is no point in an early political process. If there is a breakthrough, this is when it will either happen or start to happen. The EU set a nominal deadline of end-October, to give enough time for ratification and implementation. This is a soft deadline. We believe that much of the work can be done in parallel. Once there is a political breakthrough on the critical issues, the two sides will enter a period of intense negotiations where they don't talk to the press.
The withdrawal agreement will, of course, remain in place even if there is no deal on the future relationship. And, even if there is a deal, the legal proceedings initiated yesterday will continue. If the ECJ rules against the UK, which we think it will, it will do so at a time when Johnson will still be in office and preparing for the next elections. Prepare for a massive deterioration in the bilateral relationship. If a deal on quotas and tariffs is reached, this dispute might not matter all that much.
1 October 2020
As rule of law controversy explodes, EPP delays Fidesz decision
Rule of law disputes could derail the European Council’s special summit today. The war of words between Hungary and the EU has dominated headlines. Yet almost no attention has been paid to a recent move by Orbán’s EU-level political family, the European People’s Party, to delay a decision on whether to eject Fidesz from its ranks.
The EU’s first-ever rule-of-law report covering all 27 member states was released yesterday. The chapter on Hungary rehashed what we already know: there are serious concerns about judicial independence, anti-corruption mechanisms have been eroded, the media is not independent or effective, and the legislative process lacks transparency.
Amid the noise in the lead-up to this publication, the EPP quietly held a political assembly via videoconference on Monday. Members had been expected to decide whether to exclude Fidesz from their ranks, as the party has been suspended since March 2019. But the decision was delayed, purportedly because the confidentiality of a videoconference vote could not be guaranteed.
After claiming that the pandemic was not being used as an excuse, EPP leader Donald Tusk gave a frank assessment of the problem. Tusk said divisions about the future of Fidesz run deep. According to him, there are some in the party who are okay with what Fidesz is doing. Many more are critical of Orbàn’s political philosophy, but do not want to exclude Fidesz for tactical reasons. These are dictated by the internal dynamics in their countries, and also of fears of an EPP split in European Parliament.
A barnstorming article published in Politico revealed last week that the EPP has been the lynchpin of Fidesz’s success for 20 years. As the largest party in the EU, Angela Merkel’s Christian Democratic Union is also a member, the EPP did not want to lose an energetic organiser that currently holds 13 seats.
Former EPP leader Joseph Daul was especially supportive, and the European party helped Orbán fine-tune what has been described as a Frankenstein approach to its first big fight with the EU over controversial media laws. Hungary published lengthy rebuttals to international criticism which included examples of similar practices in other EU countries to demonstrate that its actions were not unique.
This strategy is being deployed again now. On Monday, Hungary and Poland announced plans to establish a joint institute to assess the rule of law across EU member states. Hungarian foreign minister Peter Szijjártó told media the two will not be taken for fools over allegations of rule-of-law violations.
The EPP wants to remain the largest political party in the EU so it can continue to hold EP committee chairmanships and top posts at the European Commission. But the party is losing its grip. In the 2019 EP elections, the EPP lost 34 seats and now holds 187. The EP’s largest far-right parties, Identity and Democracy and the European Conservatives and Reformists, won a combined 138. In 2014, the balance between the EPP and the far right was 221 to 113. Losing Fidesz to ID or ECR now would bring the balance to 174-151.
The split Tusk mentioned is already happening, and so the EPP continues its losing strategy and attempts to delay the inevitable. Whatever happens at today’s summit, rule-of-law issues are unlikely to be resolved by the EPP alone. But Hungary’s recession was the third-worst in the EU in Q2 2020, with GDP growth contracting by 14.5%. It needs EU money. The EPP already showed Orbán how to get his way. It may now want to help the EU call his bluff.
30 September 2020
How recovery funds interact with Italian politics
Plans on how to spend recovery fund money in Italy are taking shape. La Repubblica tells us about a potential fight ahead between the governing coalition partners. The Italian treasury wants to get started with grants-based projects in 2021 and 2022, and increase the share of loan-financed projects towards the end of the three-year period. Five Star has different ideas. The senior coalition partner thinks of the restructuring fund's loan component as an alternative to an ESM loan.
Even though the two are very different, there is an indirect link. Both, for example, would be available to fund health infrastructure. Recovery fund money is targeted more at green projects and digital infrastructure. The conditionality of an ESM loan is weaker, as it is aimed broadly at pandemic-related investments. But the ESM has become so toxic in Italian debates that several political parties - Five Star, Lega, Fratelli - nowadays define themselves in terms of their opposition to the EU-led institutional response to economic instability.
Another interesting snippet of information in the La Repubblica article is that the Italian government is looking at legislation to fast-track recovery-fund spending. The model employed is the reconstruction of the more than 1km-long Morandi motorway bridge in Genoa, which collapsed in 2018. The bridge was rebuilt in less than two years, and re-opened in August this year. The reconstruction constituted an exemplary and exceptional achievement, by bypassing the usual bureaucratic obstacles. If Italy approaches recovery fund investments with the same mindset and organisational focus, the recovery fund may produce much hoped-for returns.
In contrast to Germany and France, the Italian government intends to follow the EU's investment guidelines, with green projects accounting for 37% of spending, and digitalisation accounting for 20%. As ever, be careful with such numbers. We reported before that the European Commission employs absurd methods to round up the green content in an investment project. As a rule of thumb, we recommend that readers divide those percentages - or indeed any headline number - by half to arrive at a more realistic figure.
29 September 2020
EU/UK talks still in limbo
Most people are clearly on one side or the other in everything that relates to Brexit. We have tried to be neutral with our assessment that both sides started out with unreasonable demands, which they will need to drop if a deal is to be done. The deadline stated by the EU is end-October. If there is no deal by then, both sides will start serious no-deal preparations. But, even in that case, we would expect a final diplomatic effort.
Tony Connelly offers a useful analysis in the sense that it debunks the idea spun by Downing Street that a deal is now imminent. That is not the view in Brussels. Brussels wants the UK to compromise on fish and the level playing field. We think the UK will, and should, compromise. But we also think that the EU will need to compromise too, and forgo its desire to micromanage a third country's competition policies. We also urge our readers not to believe the line that Boris Johnson desperately needs a deal, now that a first opinion poll has shown Labour ahead of the Conservatives. He still has four years to go. A deal perceived in the UK as a foul compromise could constitute a higher cost to him than the short-term economic disruption of no-deal Brexit.
We think that an agreement on the level playing field is possible, but it requires crafty compromise and some trust. We are not there yet.
28 September 2020
Possible Finnish referendum over the recovery fund
The youth wing of the Finns' Party organised a successful petition for a referendum on the EU recovery fund. In just five days the group obtained enough signatures for the petition to move ahead. Since 2012, any citizens’ initiative that collects at least 50,000 certified signatures from Finnish citizens must be considered by the legislature, writes YLE. The petition argues that, while a recovery fund is justified in times of economic collapse, the reach of the recovery fund agreed by the European Council is broader and goes much further than is warranted by the crisis.
How many will join until the petition closes in March 2021 will depend on public opinion about how the money is spent. Media reports about EU governments wanting to use the money for pork-barrel spending will provide more ammunition for this type of argument.
Finland is responsible for €13bn in loan guarantees and grants out of the €750bn plan from the European Commission. Parliaments in EU member countries will have to approve these spending commitments. The Finns' party, the second largest in this Finnish legislature, has already signalled that it will try to block approval of the plan.
25 September 2020
Regional revolt against new lockdown measures
EU countries countered the first wave of Covid-19 with a general lockdown for everyone. Now that a second wave is coming, lockdown measures are confined to local communities or areas. This means that now, even in the national context, measures will hit some but not others. Sensible decision-making and good communication will be key to keep everyone engaged in this process. Some will disobey, others will insist on strict observance. New fault lines will emerge in the public discourse about what is reasonable and what not. Are governments prepared for this?
The metropolitan region between Aix-en Provence and Marseille is an example of what can possibly go wrong. The French health minister called the local executives just an hour before announcing maximum alert for the metropolitan region. The order implies closing down schools, shops, pubs and restaurants. It has significant economic and social consequences. Local executives revolted. They challenged the central government over lack of coordination, and used different indicators to suggest that the region is improving rather than deteriorating. The mayor of Aix-en-Provence even insulted the health minister. He told him to shut up and stop ruining the local economy, saying there are only 5 people in reanimation and 10 hospitalised in the city.
Citizens now face the dilemma of deciding for themselves what responsible behaviour is. Should they obey the central government's order and close down pubs and restaurants, or disobey for the sake of their local community? The mayor's no to the order from Paris and social media communication could well foster disobedience. The region may be unusual, as they have a history of disagreement with the government since the lockdown kicked in in March. But it also shows that more needs to be done to ensure that the regional alert system is more than just a farce.
24 September 2020
If Trump refuses to go, spare a thought for us Europeans
We treat the US elections as outside our reservation. But the outcome, of course, has potentially important consequences for the rest of the world, and for Europe in particular. We admit this is a narrow perspective. Much bigger issues are at stake. But while our perspective is narrow, we think it is nevertheless useful because it allows us to focus on foreseeable policy issues.
The scenario we would like to discuss today is an inconclusive outcome.
Barton Gellman offers a truly scary scenario in the Atlantic: Donald Trump loses against Joe Biden, but then employs constitutional tricks to stop Biden from becoming president. It is a gripping read. In this briefing, we do not have the space to discuss the various legal mechanisms in the necessary detail. But the bottom line was well summarised by the constitutional law scholar Lawrence Douglas:
"Our Constitution does not secure the peaceful transition of power, but rather presupposes it."
The consequences of such a scenario for American democracy would be hard to imagine. But they would also affect the rest of the world, including Europe. We have already witnessed the euro's exchange rate rise this year. A scenario in which Trump refuses to leave after an election defeat would almost surely trigger broad-based asset shifts out of the US and into the next-best safe haven. No prizes for guessing who that might be.
Currency appreciation constitutes an additional source of instability for Europe right now. Without the monetary union, Italy and Spain would have devalued their currencies during the eurozone crisis, and again during the pandemic. The only compensation they stand to receive are transfers through the recovery and resilience facility. But those are really quite small compared to the effect of a devaluation. Another increase in the euro's external exchange rate would constitute an additional, uncompensated economic shock for these countries. Just when you thought it could not get much worse...
Even with the reforms of the last few years, the eurozone remains a fair-weather construction that lacks the tools to manage asymmetric shocks. We never thought that we would consider a US election as a potential cause of an asymmetric shock in the eurozone. But if Gellman is right with his scenario, it would be.
23 September 2020
SPD has not benefitted from Scholz' candidacy
The best polls are not those that accidentally happen to predict the correct result, but those that give us a deeper understanding of underlying trends. We never cared much for the political polling record of the old-established Allensbach institute, which regularly publishes its results in FAZ. The institute is often slow to pick up shifts in real time because it places a greater weight than others on past results.
But this polling institute excels at providing deep analysis of underlying trends. This morning, it gave a comprehensive explanation of a superficially puzzling trend in German politics: Olaf Scholz is one of the most popular politicians in Germany, along with Angela Merkel and Markus Söder. And yet, the SPD is not benefiting from his nomination as chancellor candidate. The three latest polls have the SPD at between 14-16%, once again overtaken by the Greens who are polling in the range of 17.5-22%.
So, why is the SPD not benefiting from a Scholz effect? The short answer is that the candidate is not nearly as important as people think, a fact that seems to contradict the underlying assumption of virtually all political journalism.
Allensbach has found that the political priorities of Germans do not square with the SPD's perceived strengths. The Germans are not currently prioritising classic SPD themes like social welfare, income redistribution, and refugee integration. The citizens' priorities are: the fight against the pandemic, strengthening the health care sector, a smooth operation of schools and childcare facilities, economic stimulus, concerns about unemployment and corporate insolvencies, terrorism, education, and climate change. The timing is all wrong for the SPD.
The analysis comes with an important health warning: the priorities might change again before the next elections. We assume that, by September 2021, a Covid-19 vaccine will be available and the pandemic will have peaked. The economic consequences, however, will persist. Corporate insolvencies will jump once support programmes end. While the situation will undoubtedly be different in 12 months' time, economic uncertainty will persist. This is a climate in which the electorate has greater trust in the CDU.
That analysis tells us more than the numerous polling snapshots. What is particularly striking about the Allensbach survey is the disillusion of SPD voters. While the SPD's support is still in the mid-teens, only 9% of Germans have confidence in the party's ability to lead the country through the current crisis. An overwhelming majority of citizens oppose all the theoretical coalition options under which Olaf Scholz could become chancellor: with the Greens and the Left Party, or with the Greens and the FDP. These scenarios assume furthermore that the SPD would be larger than the Greens, whereas all of the current polls have the Greens ahead of the SPD.
The big conclusion from this analysis is that parties succeed if the issues they stand for and in which they are perceived as competent match the priorities of the electorate. It's not a dog fight between candidates. Election campaigns can still twist results. We recall that Gerhard Schröder twice managed to recover by almost 10% during a campaign. But he did so because he succeeded in aligning party and country. It was not only a question of his charisma. Germans are concluding that this is not the time for a coalition of the left, or indeed any coalition led by the SPD. With last year's leadership election, the party moved to the left. We think this is still a strategically intelligent direction because one of the likely consequences of the pandemic will be a rise in inequality and a return to SPD themes. But it might take a few election cycles, and a candidate who embodies the political shift, for that to happen.