12 May 2023
Ince, the last minute joker
A dramatic turn in the election campaign in Turkey happened yesterday as the third candidate, Muharrem Ince, withdrew from the race just three days before the presidential and legislative elections. The media reading is that his withdrawal will benefit Kemal Kilicdaroglu, the opposition candidate. But the circumstances of Ince’s withdrawal, after a smear campaign against him with fake videos and images that were promoted by opposition politicians, may sit uneasily with Ince supporters. Who is to blame? Doubts may point in both directions.
The polls still have Kilicdaroglu leading slightly over Recep Tayyip Erdogan, but they also show that Kilicdaroglu cannot get above the 50% threshold that would decide the elections already on Sunday. Could Ince’s supporters tip the balance and decide the race this weekend? Politico’s poll of the polls suggest that even if only half of Ince’s supporters were to vote Kilicdaroglu, he could indeed win the first round.
But campaigning is a dynamic game and Turkish polls are notorious for getting it wrong. They famously did in 2018. Erdogan has never lost an election so far. He also doubled down on giveaways yesterday, promising to double the salary of civil servants after announcing a 45% pay rise for public service employees earlier. Even if neither of the two were to clear the 50% threshold, a second round will be held a couple of weeks later. This would give Erdogan more time to show his campaigning skills and for disinformation campaigns to continue upsetting the race. Don't count him out yet.
11 May 2023
If Robert Fico were to return to power in Slovakia in the upcoming elections, Europe would be in trouble. A populist, who was ousted out of power in 2018 after a journalist who investigated government corruption was murdered, would bring back a pro-Russian government with a nationalist agenda. Suddenly, Viktor Orbán would no longer be alone in his opposition to supporting Ukraine.
Slovakia, Hungary and Bulgaria stand out as three countries where people still have empathies for Russia despite having endured Russian aggression themselves in the past. Hungary is the only Nato and EU country to flatly deny any arms deliveries to Ukraine; Bulgaria’s government delivered ammunition but secretly, without telling the public about it. Slovakia’s government delivered arms and even fighter jets, but sided with Hungary on oil sanctions. Its more centrist prime minister, Eduard Heger, lost a confidence vote last December and resigned this week from his caretaker role. A new technical government will get the country to elections due in September, which Fico stands to win according to the polls.
We agree with Sylvie Kaufmann in Le Monde that the war in Ukraine completely reshuffled the cards in post-communist Europe. It broke the Polish-Hungarian tandem, which presented a common front on law and order since 2015 but is now deeply divided over the Russian invasion. It destroyed the Visegrad, where Poland, Hungary, Slovakia and Czech Republic coordinated their positions since the 1990s. More destructive even are the secondary effects of the war, such as energy inflation and the question of arms deliveries. Those weakened the moderates in power in those countries. In Bulgaria, prime minister Kiril Petkov was ousted last year. It's now Slovakia's turn.
With Fico and Orban in power, there would be a much bigger populist force to reckon with inside the EU. A polarisation between pro and anti-Russian sentiments will create new dividing lines and make the accession of Ukraine more perilous. Even if Russia were to lose the war militarily in Ukraine, it may succeed in splitting the EU.
10 May 2023
What's crony capitalism in German?
German industry transitioned straight from arrogance about their innate superiority to panic about the impending collapse of the economy due to higher energy prices. This is why the German government is contemplating an electricity price discount for German industry. The argument in favour is that industry does not return once it leaves, and that the purpose of the subsidy is to bridge that time gap between the cheap Russian gas of the past and the cheap renewable energy in the future. There are several flaws with that argument, too. Will energy really be all that much cheaper? Is it legal, under the German constitution, to give one sector of the economy a competitive advantage over the others? Is it legal under EU state aid law? Will other EU countries support this if this involves the EU?
For us, the most important argument is that it is economically plainly wrong. Germany is suffering skill shortages in many sectors. We hear reports of restaurants that were not be able to reopen after the pandemic because they could simply find no staff. When we are subsidising industry, we are typing up labour in unprofitable sectors, while distorting the national labour market.
Germans tend to equate industry and economy to an absurd degree. We recall Olaf Scholz dissing a group of German economists last year after they published a forecast according to which a Russian gas embargo would not be as catastrophic as many feared. The economists turned out to be right. Scholz, like all German chancellors before him, was listening to his friends in industry. German industry accounts for 20% of GDP, almost double that of other advanced countries, like France or the US. Industry matters, for sure, but so much to the 80% of the rest of the economy.
Yesterday, the three economists in question noted that the German economy withstood the withdrawal of Russian gas much better than predicted. They also claim, rightly, that the economy would have been fine even if Germany had imposed a total gas embargo at the beginning of the war. That would have had a massive impact on the Russian economy. It was the trickle-down nature that allowed Russia to re-organise supply chains via third countries.
So would the same logic not apply to higher energy prices too? There are reasons why German companies are losing competitiveness which are not related to energy. The much bigger factor is technology. As industrial competitiveness falls, we should expect Germany to become increasingly protectionist. What they are protecting are dying industries, and they do so at the expense of next-generation industries, those that have no lobbies. The denial of Schumpeterian creative destruction is a recipe for long-term decline.
If they really want to help business, which we think they should, they should cut corporate taxes instead, along red tape like data regulation protection laws. What they are doing instead is revert to crony capitalism.
9 May 2023
Greens, stuck in the mud
The German Greens are in several big crises right now, all directly related to Robert Habeck. First came the legislation to force homeowners to upgrade their oil and gas heating system from January onwards. From next year onwards, it will no longer be legal to instal new gas and oil heaters. And from 2030, all existing ones will have to be replaced by heat pumps. As the sale of Viessmann has demonstrated, this is not a business in which German companies can compete. The legislation, a centre-piece in the government energy transition, effectively amounts to a tax on home owners, something people did not have on the radar screen before.
The story that energises the world of political journalists is a graft scandal in Habeck’s economics ministry. His state secretary, Patrick Graichen, has been part of a committee that awarded a lucrative job to Graichen’s best man at his wedding. There were other reports of conflicts of interests. Graichen is the brain behind Habeck’s energy policies. A member of the Green party, he has been an influential figure in Green politics for many years. What we have learnt from this scandal is that the Greens are not so different from other parties once they climb the greasy pole of power.
And finally, the decision to close down the three remaining nuclear power stations has also not met with much enthusiasm amongst the population, especially now that people are starting to become aware of the costs. See also our discussion about the industrial energy price in a separate story. The latest polls are also registering a persistent decline in support. The Greens peaked at 22% last August, and are now down to 14% in the latest Insa poll. The decline of the FDP, meanwhile, seems to have bottomed out.
5 May 2023
Some thoughts about Huawei
Italian, German and Belgian police scored a huge success two days ago in their fight against the ’Ndrangheta, the Calabrian mafia organisation, which operates like a European corporation. We are not interested in police stories, but a snippet peaked our interest that has some relevance to a debate much more central to our reservation. It is about data security.
The German police said they had trouble locating the most senior members of the crime ring in the past because they could not locate them. The ’Ndrangheta used to be old-school. They did not use mobile phones, and preferred to drive hundreds of kilometres in their cars to meet up. The German end of the raid succeeded this time because police were able to locate the mobile phone of one of the main suspects. The interesting question for us is how did they do this?
When intelligence agencies, the German one included, warn about Huawei as a provider of 5G technology, they are claiming that Huawei would send the data to China. Huawei has retorted that it is technically feasible to stop this, and has offered to co-operate. Our, albeit limited understanding of this matter, is that Huawei is technically right. If we were really serious about adding a security lawyer, we would be able to do this. The question is: do we want to? We are wondering whether the stated reasons by the US and European security agencies are genuine. Do we really fear that the Chinese government can listen in on the ’Ndrangheta, or do we fear we won’t be able to do this ourselves anymore? We recall that the US managed to eavesdrop on Angela Merkel, who has been one of the big supporters of Huawei’s 5G engagement in Germany. We would assume that her perspective on data security threat is a different one from that of the official narratives.
The Iraq weapons-of-mass-destruction fiasco should be a warning that we should demand incontrovertible proof from security agencies, and not base our political decisions on blind trust. If Huawei poses a security threat, we feel that it is a claim that needs to be subjected to the same standard.
4 May 2023
Diesel scandal keeps on fuming
The main reason the German car industry is in this deep mess is because they bet on the wrong technology.
The second, and related, mistake they made is running a criminal conspiracy to prolong the lifeline of their outdated technology. This story is back in the news again. Audi was at the centre of the software cheating device scandal. German police have now cut a tell-all deal with Rupert Stadler, Audi's former chief executive, whereby he would plead guilty implicate others, in return for a suspended prison sentence.
We are not interested in the criminal justice aspects, but in the politics of this. When the scandal broke in 2015, VW's then chief executive claimed that it was only a small group of bad people who are to blame, not the company. We know now that the small-group claim is a lie. German car companies have a history of running illegal cartels, to reduce competition and to drive down costs. Many people who are socialised into this culture would not think twice about the legal ramifications of a software cheating device. This is an industry that had Gerhard Schröder and Angela Merkel in their pocket. The chief executives would walk in and out of the chancellery, and dictate the German government's position on regulation in the EU Council. The scandal only came out because the industry's political influence did not reach as far as the US, where testers discovered the devices.
FAZ writes the deal struck with Stadler is as dirty as the fumes of a VW diesel engine, not something you would have read in German newspapers until very recently. Expect more former prominent car bosses to be dragged in front of the courts. This story will run and run, while the rest of the world innovates. It is the Industry 4.0 story of our time.
3 May 2023
Hostile takeover - Russian edition
It’s a tit-for-tat game between the West and Russia over assets: as the EU threatened to confiscate Russian assets to pay for Ukraine’s reconstruction, Russia moves ahead to take over western companies that are still in Russia. Last week, the Kremlin made the first move on two energy companies, the Finnish Fortum and its German branch Uniper. The management was forced out and replaced with a Russian puppet last Wednesday. So far, Vladimir Putin’s decree does not concern the property, just the management of the company. So the assets are officially still in the hands of the owner, only that they no longer can decide anything. The management takeover is temporarily, they say, and in retaliation for unfriendly moves from Europe. This power battle with retaliation as the motive could continue for a while.
We do not have the numbers for Western assets that are still in Russia, but we know that the obstacles for those companies to operate or the price to leave Russia have increased. Any departure has to be authorised by a special committee, with a loss on the book value for between 20-50% of the assets. Also they will now have to pay a leaving tax. More sanctions or expropriations from the West is likely to be met with more expropriations from the Kremlin.
There is clear potential here to escalate. Over the past year, the West froze €300bn from the Russian central bank, €22bn from oligarchs as well as targeted actions. The EU set up a commission in January to examine how those assets could be confiscated in a legal way. To confiscate Russian assets from the central bank and private owners is legally difficult and morally questionable. The EU would use the necessity to reconstruct Ukraine to trespass its own principles of what ownership means. We impose conditionality on who can keep their assets and who not. Those conditions are politically motivated. A confiscation would weaken our own set of legal principles, setting us up for double standards in the future. This is a road we better not choose.
Resisting political pressures, as justified and strong as they may be, will be key, as the separation between politics and economics or politics and finance is waning. Geopolitics starts to impose itself over economic and financial decisions with goals that are very different from economic and financial ones.
2 May 2023
Sleepwalking into technical oblivion
Current policy debates are rightly focused on the consequences of global bifurcation. But perhaps an even bigger danger for the EU is its failure to keep with the US and China on high tech. This is an area that is not on the radar screens of policy makers and the media. We noted a commentary in Germany outlining a scare scenario in which Germany would lose its leadership in the global car industry. The journalist concluded that this is possible but not likely. For us, this is the baseline scenario.
And so it seems for Federico Fubini, who has taken a deep-dive into the market for electric batteries in Corriere della Sera. Fubini notes that the European trade surplus in cars derives exclusively from the shrinking segment of fuel-driven cars. They are hopeless in the fast growing electric car business. The Chinese sold almost nothing to Europeans until recently, but they have become competitive in e-cars now (despite the protectionist EU car tariff). Fubini notes that the EU runs a trade deficit in this sector. Of the ten largest manufacturers of electric batteries, which is one of the core value-added components of electric cars, six are Chinese, three are South Korean, and one is Japanese. They are also the big global investors. The EU country they prefer for their investments is Viktor Orbán’s Hungary.
The decline of the European car industry is a cautionary tale. It’s not just e-cars, but a whole array of 21st century technologies. Europe has no representative in the world’s top ten digital companies any longer. SAP now ranks number 11, and there is not much after that. Artificial intelligence is largely a duopoly between the US and China. The only European country with a foot in this sector is Brexit-Britain. The UK government has identified AI as the best bet for regulatory divergence from an EU that is hampered by data-protection laws with a one-sided focus on consumers.
Europe was the world champion of the previous generation of technology. The great inventions of mechanical, electrical and chemical engineering are still the backbone of the European economy. These sectors will keep on generating employment, but what is now changing is that the big profit margins have moved elsewhere. It does not matter a great deal where the electric batteries are produced, but who owns them. The European car industry is dying, while the EU keeps on congratulating itself on the successes of its science and research programme, Horizon Europe. Denial is the most protracted of the phases in the stages of mourning. When we get out of this, we will have left it late.
28 April 2023
AfD snakepit politics
We normally spare you the local politics of the large European cities, but yesterday's story about Berlin's mayoral elections has a wider significance. The AfD, Germany's far right party, claims to have been pivotal in yesterday election by MPs of Kai Wegner as the governing mayor of Berlin. The claim is plausible, but neither provable, nor falsifiable, because the newly elected MPs in the Berlin state parliament take a secret vote. The newly agreed grand coalition between CDU and SPD together has 86 MPs between them, a comfortable majority above the threshold of 78 MPs. In the first round of voting, Wegner got only 71 votes. So there must been 15 coalition MPs who did not support him. In the second, he got 77, still one short. In the third round he got 86. Afterwards, the AfD issued a press release claiming that some of its own MPs supported him.
In German politics, it is an absolutely taboo to allow yourself to be voted into office with the help of the AfD. The claim alone is damaging. The AfD pulled a similar stunt in a previous east German state election, where it managed to get a vane FDP man elected to the job of prime minister. He came under so much pressure afterwards that he was forced to resign 24 hours later. That was a traumatic event in German state politics. It is at least possible that the same happened yesterday again.
Berlin was previously governed by a coalition of the SPD, the Greens and the Left Party. In this year's state parliamentary elections, the CDU got the largest number of seats. The SPD could have chosen to continue the old coalition, which, too, would have had a comfortable majority. Instead, it chose to become the junior partner of the CDU. The SPD had suffered big losses and felt that it no longer had no mandate to lead a government.
The decision to form a grand coalition proved controversial within both parties. It is normal that MPs express disagreement with a candidate in a first round of elections. But this only explains what happened in the first vote. Normally, the No-voting MPs would have rallied behind the candidate in the second round, but that didn't happen to a sufficient degree. This is what gives the AfD's a touch of legitimacy. They can now claim to have ended the political chaos created by the centrist parties, a favourite claim of the far-right throughout the ages.
The wider political significance is that the AfD remains a significant force in German politics, partly due to its ability to create utter parliamentary havoc. It manages to create narratives the centrist parties have been struggling to discredit, in this case due to their own internal divisions. It would have been smarter for the party leadership of the CDU and the SPD to have concluded that this coalition has no stable majority. But they pushed on, as they always do, without being aware that the AfD had laid a trap for them. This is snakepit local politics, an art at which the AfD excels.
27 April 2023
A decisive moment
The war in Ukraine will shortly enter its decisive moment as Ukraine is about to start its long-awaited spring offensive. We make no judgements about whether it is likely to succeed or fail. We are also sceptical about any of the assessments we have been given, including a negative one from the leaked US intelligence papers. It could mean one of three things: it could be genuine; it could be a plea for more weapons deliveries; or the very opposite: an attempt to put pressure on the US administration to end its support. The problem is that military assessments are often intermingled with agendas.
What we do know is that success or failure of this offensive will be critical for continued western support. We expect that support to be maintained if this offensive opens a plausible pathway to Ukraine's ability to reoccupy most of the occupied lands. If not, we would be in a messier diplomatic scenario, one that would also open up divisions between western countries, and in which China could play a more important role.
The public in the US and Germany still supports military and financial aid to Ukraine, but support has been weakening over the last year. History tells us that public support for proxy wars often starts strongly, but can fade quickly. We ourselves have expressed doubt that support would hold through the 2024 US presidential elections. We doubt very much that Biden will sacrifice his presidency over this issue. We also do not believe Germany would step up its efforts if the US retreats. The ability to hide behind the US is the sine-qua-non of Olaf Scholz's dithering position on Ukraine. We see Emmanuel Macron's position as being similar to that of Scholz.
We are looking at a timeline of about one year. The military events this spring will be critical.