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14 June 2024

Risk on

The single most toxic of cognitive fallacies that cloud our political judgement is hindsight bias. The world will judge Emmanuel Macron’s action in terms of its ultimate outcome. If he defied expectations and wins the elections he called, he will be judged to have been brilliant. If he loses, the commentators will gleefully declare that they told him so. Imagine if Rishi Sunak miraculously recovered and won the 4 July general elections. Or if Joe Biden were to defeat Donald Trump? We would be in for a feast of hindsight bias delusions. The great mass of political commentary in the media, and in the political science literature, is hindsight bias judgement of risk.

The world can learn something from financial investors who take calculated risks for a living. They do not beat themselves up afterwards, wishing they had not taken them. If a risk is worth taking, then it is worth taking irrespective of the outcome. The first rule of intelligent risk taking is that you take the hindsight bias out of the equation. The judgement of a risk should be independent of its outcome.

Sunak called early elections because he concluded that his chances of winning would not increase if he waited further. We agree with that assessment. If he had gone for November elections, he would presumably not have left the D-day celebrations early, and avoided a big embarrassment. Then again, there may have been other embarrassments that we are now spared - like yet another embrace with Giorgia Meloni at a summit. The more serious point is that if we think the judgement was correct, it will still be correct if the Tories end up in fourth place – behind the Liberal Democrats, and, who knows, maybe even behind Nigel Farage’s Reform Party, which has now overtaken the Tories in the latest YouGov poll.

Macron was in a similar position. He concluded that the outcome of the European elections killed the remainder of his political agenda. We find this is perfectly legitimate course of action. We noted the horrified reaction in the German media, who consoled themselves that it could not happen here. Well, you are stuck with Olaf Scholz. Congratulations. If we complain about gridlock in politics, and lack of reforms, we are surely not going to resolve the problem with generalised risk-aversion. History proceeds through risks that were often deemed to have been unwise at the time.

13 June 2024

Speed limit for German cars

The decline of the German car industry has already started – albeit from a very high level. The three top car makers, VW, BMW and Mercedes have seen a fall in joint first-quarter sales from 18.5m in 2019 to 15.5m this year. They never recovered from the pandemic. But the decline continues at a slow pace. During the first quarter, sales declined by 2%. Profitability was also down, but it is still high in total – the profit margins are 7.4%. Kia has the highest profits margins, at 13.1%. Despite the decline, Mercedes remains the most profitable European car maker in Europe, ahead of Stellantis. Tesla’s profit margin fell from 11.4% to 5.5%, perhaps the clearest sign yet that the global car industry is moving towards a lower-margin era.

Our base case scenario for that industry is a continuing squeeze in profit margins as Europeans are struggling with an uber-competitive China. This does not necessarily translate to sales. VW recently announced is was planning to build a €20,000 electric car to be able to compete with cheap Chinese imports. We think it is possible for them to succeed commercially with such a product. But there is a cost too. The margins on such a car would be lower than on current fuel-powered cars. The bigger impact will be on the supply industries. The trickle-down profit margins that permeated through German industry will be a thing of the past. The new cars will have fewer components, and fewer German-made components. This is the reason why the decline in cars constitutes a decline in industry and in the economy - to the extent that countries depend on it. Germany is one of those. 

12 June 2024

Wagenknecht arithmetic

Sahra Wagenknecht and her team did well in the European elections. This newly created party that straddles positions of the hard-left and the hard-right got 6.2% of the votes. She will probably do well in Eastern Germany. Unlike the AfD, the Wagenknecht party, or BSW as it is known, is a personality-driven party. The mix of policies – against weapons deliveries to Ukraine, against migration, in favour of resuming commercial relations with Russia, public subsidies for old industries – has widespread popular support. Her voters come from everywhere in the political spectrum, but then again, so do the voters from the AfD.

While the percentage of voters for AfD has been fluctuating wildly, the support for the sum total of AfD and BSW is totally stable. In these elections they came to 22.1%. Before the arrival of the Wagenknecht party, the AfD polled at around 20%, peaking at 23% at one point. What the two parties have in common, apart from similar positions on important issues, is that they are both outside the political firewall, Germany's domestic cordon sanitaire. Yesterday the CDU added the BSW to the list of parties with which it will not form a coalition. This was prompted by the BSW Bundestag MPs joining the AfD in boycotting Volodymyr Zelensky’s speech in the Bundestag. The party said Zelensky is risking the security of Europe through his refusal to negotiate with Russia. Ukraine has become another dividing line in German politics. With the AfD and BSW outside the firewall, that leaves approximately one quarter of the political spectrum in opposition. Some bewildered commentators have asked how this will play out in eastern Germany. A CDU/FDP/Wagenknecht coalition may be the only viable option to crowd out the AfD. What might happen now is an AfD/Wagenknecht tie-up.

What this means is that the German political spectrum is splitting into two broad groups, a centrist establishment, and an anti-centrist fringe. As we saw in Italy, and may soon be seeing in France, oppositions eventually win elections.

11 June 2024

Stopping the far-right in Finland

Finland was another exception to the far-right gains elsewhere. Instead of gaining votes, the Finns party, Finland’s resident far-right outfit, fell back substantially. It went from 13.8% of the vote in 2019 to around 7.6% now. The big winners of the night were instead the Left Alliance. Normally a perennial junior partner to centre-left governments, the party gained 10.4pp in vote share to come second overall.

What’s going on here? Turnout is much lower in European than domestic elections in Finland. But that doesn’t really explain the story. At 42.4% this year, turnout was actually slightly higher than in 2019. Voters either ditched the Finns for other options, or the Left Alliance was able to activate new voters whilst those who opted for the Finns in 2019 stayed at home. Something was happening in 2024 that wasn’t the case in 2019.

We think there are a couple of explanations, which have some lessons for those who want to beat the far-right elsewhere. One is that bringing the far-right into government can expose them, and lead to scrutiny that they would not otherwise be subject to. The Finns have been in the current right-wing coalition government since last year.

Riika Purra, the Finns’ party leader, is now finance minister. She is therefore directly accountable for the austerity programme that Finland’s government has overseen since coming into power. Back in April, the government announced that it would press forward with a new €3bn tightening package. That follows another €6bn in spending cuts and tax rises last year. Purra may be finding out the hard way that a lot of the Finns’ voters may care more about their livelihoods than immigration.

The other part of the equation is bringing good leadership yourself, and finding a salient theme to campaign on. Li Andersson, who heads up the Left Alliance, has been an asset for her party. A former minister, her own policy preferences have included support for Finland’s Nato entry, and tough attacks on the aforementioned austerity policies. Andersson also ran for Finnish president. Although she did not do nearly as well in the first round of that contest, winning less than 5% of the vote, it may have raised her profile.

10 June 2024

A hard path for Europe's liberals

One of the clear losers from the European elections is the liberal Renew group. The most recent Europe Elects projections show the group dropping by 17 seats in the next parliament. The liberals will still be the third largest group in the European Parliament. But the ECR came ahead of the group in popular vote. Macron’s Renaissance party, the largest single entity in Renew, losing badly was a double-blow.

Now, however, the question will shift to what to do next. The campaign was pretty bad-tempered within Renew itself. This was mostly because of disagreements over how to deal with the far-right. The EPP, S&D, and Renew, the three core centrist groups, will still have an EP majority between them. That might delay the far-right issue for the group.

But it will come up again eventually. If Macron’s gambit in France is to draw the far-right into a co-habitation agreement, that may further complicate things. Valerie Hayer, Macron’s lead candidate, instigated an attempt to chuck the Dutch liberal-conservative VVD out of the group over its cooperation with Geert Wilders. Her own party may find itself in a similar position with Marine Le Pen and Jordan Bardella.

More fundamentally, however, there will have to be some soul-searching about the future of European liberalism. Macron’s famous slogan, ni gauche ni droit, is a kind of embodiment of the idea. But it is extremely difficult in practice to straddle both at the same time. You inevitably end up getting pulled in one direction or the other, based on who’s stronger, and political contingencies. This happened to Macron, and to the VVD. It led to the extinction of Ciudadanos, Spain’s own once-powerful liberal insurgents.

The result can be a disunited front that struggles to formulate a core message for its voters. Different liberal parties also instinctively lean in different directions. Liberal conservatives like the VVD face the temptation of just becoming a straightforwardly conservative party. Social liberals like D66, another Dutch liberal party, have to decide how close to the social democrats they want to get.

Part of this reckoning should be where to stand on European integration. Renew includes some of the most enthusiastic proponents of further integration. It also includes parties who either explicitly don’t want it to go much further than now, or say one thing in principle and do another in practice.

7 June 2024


When the numbers come in on Sunday night, our advice would be to take a deep breath, and forget anything that measures the result relative to what was expected. We get a whiff of that with yesterday's publication of the Dutch exit polls. The Dutch Labour Party came first. But Geert Wilders appeared to have raised the number of his MEPs from one to seven.

There will be a similar story in Germany on Sunday. The AfD once polled 23%, and is now at 15%. It has a rival in Sarah Wagenknecht's new party. And it had a terrible election campaign during which the party managed to get itself excluded from the Identity and Democracy group in the European Parliament. The political adviser of the lead candidate has been arrested on charges of espionage for China. Another MEP has received money from Vladimir Putin. And yet at 15%, the AfD would still be stronger than last time. Marine Le Pen and Giorgia Meloni will be much stronger. Robert Fico and Viktor Orbán will still be strong, and so will assorted nationalists in the Nordic countries. The far-right, even after a merger between the two rival groups, will not have a majority. The smartest thing for them would be to become the main opposition group against a centre locked into an uneasy coalition. 

That would be the happiest outcome for everybody. But it's not clear that we will get it. The centre-right and the centre-left used to be the parties of government and opposition, switching positions from time to time. Now they are always the government together, and the far-right is in opposition. We will see on Sunday whether that is still a stable equilibrium.

The more fractured the parliament, the more difficult it will become to govern. Last time, the centre did hold. Ursula von der Leyen secured a majority for herself and her agenda. The Green deal has been a massive block of legislation. Under her leadership, trade policy became more geopolitical. The EU has introduced important new regulations on digital content, AI and crypto-currencies. Agree with them or not - we mostly don't - this has been a very busy Commission.

So far, the big question is whether the next Commission will also have an agenda backed by a political majority, whether the EU will resort to an Italian-style technical administration with a minimal agenda, or whether the EU will descend into legislative gridlock. The polls would suggest that we are at the knife-edge between those various scenarios. What to look out for on Sunday night is not whether the right gains more votes, but whether there will be a majority at all.

6 June 2024

No solution without two states

This is Israel’s fifth conflict in Gaza, and it won’t be the last if Israeli and Palestinians do not find a way to reimagine a new way forward despite their difficult history. The land was not without a people when the people without a land arrived. And there will be no security for Israel without granting Palestinians their rights on this land.

A majority of Palestinians are for a two-state solution that guarantees Israel’s right to exist. Israel focuses on Hamas, a minority, and uses this as a reason not to engage in negotiations for a two-state solution. Attending only to the extremists won’t strengthen the healthy part of the Palestinian society. On the contrary, the killing and destruction in Gaza drives the next generation towards extremism. This policy won't guarantee Israel’s security. Repeating the same thing again and again, expecting a different outcome, is madness as Einstein attested. And the next cycle of violence could be worse than Oct 7.

The EU remains divided over Israel’s war, but not about the two state solution as an ultimate goal. Many of those disagreements are about the immediate steps to take and how a two-state solution is to come about. Wait-and-see until Israel and Palestine sort this out has proven to be ineffective strategy already under the Oslo accords. It is no option today either. How to support turning a two-state solution a more concrete option for the future?

The EU sent a letter yesterday to invite Israel’s foreign minister to an ad-hoc association council to talk about Israel’s compliance with human rights obligations under the EU-Israel trade deal. The EU is on the road towards sanctions. The invitation is unlikely to picked up any time soon. What will the EU do if no one in Israel is interested in coming? Forget about it and move on?

It could also lend its support to the Arab states, whose work will be essential for any deal with Israel. They presented their peace plan last week to EU foreign ministers, and linked the normalisation with Israel to the two-state solution.

Some EU member states chose to act instead of waiting. Spain, Ireland and Norway went ahead and recognised Palestine as an independent and sovereign state last week. Slovenia did so this Tuesday. Malta may be next. Cyprus and Sweden recognised Palestine in 2014. The total number of EU states is 10. Altogether, 140 UN states that have recognise Palestine statehood. 

With this move, Spain is emerging as the coordinating leader within the EU on the recognition of Palestine. Another large member state, France, is working alongside the US to prevent another major Israeli offensive in Lebanon against Hezbollah.

A two-state solution will be a win-win for both sides, respecting the Palestinians' right to their own land and Israel’s need for security. It will reduce the threat from Hamas and Hezbollah. It will take the fire out of the conflict.

5 June 2024

How China circumvents US tariffs

China’s pivotal role in global trade is undeniable. Whether the US slaps tariffs on Chinese imports or not, China will find other markets or ways to circumvent restrictions. Its strategy in the Middle East and Africa makes China an indispensable partner for many infrastructure projects in those parts of the world. And as the de facto leader of the Brics+, the trade association starts to attract countries not only from the Middle East but also Turkey, a Nato country with a customs union with the EU. Hakan Fidan, Turkey’s foreign minister, told the press on his visit to China yesterday that he will attend the Brics+ meeting in Russia next week as Turkey explores new cooperation opportunities. Brics+, once a loose term to describe China, Russia, Brazil, India and South Africa, made more concerted efforts in recent years to organise and encourage trade across the bloc and to become less dependent on the US. It also admitted Egypt, United Arab Emirates, Ethiopia, and Iran as new members.

The US used to be China’s biggest trading partner. This is no more. The US import share from China fell from 21% to 14% over the past six years. Average customs duties jumped from 3% in 2018 to 20% in 2023, and are likely to rise further with the latest round of customs duties, such as the 100% tariff on electric cars, 25% on lithium, and 50% on solar panels and semiconductors.

The fall in trade with the US has not harmed China’s exports, however. On the contrary, China more than doubled its exports in dollar terms over the 2018-2023 period. Of the $200bn lost in exports to the US, $154bn have been added to exports into the EU over this period, which in itself represents a 36% increase compared to 2018. The French research institute Rexecode also finds that China is using third countries such as Mexico and Vietnam for trading with the US. What has been lost in direct China-US trade, is now mirrored by triangular trade flows between China’s exports to Mexico and Vietnam and US imports from those two countries. Access to the US market has thus been preserved by using those transit routes. Chinese price competitiveness and the depreciation of the yuan against the dollar also means that the effects of tariffs have been more or less off-set. Circumventing tariffs by adding transit destinations is not without costs. It increases risks to the value chains, and leads to higher prices.

In this fragmented world, the US can no longer coerce its trading partners with tariffs as it used to. We have seen a similar pattern with sanctions on Russia. In a globalised, fragmented world, there is always a way around for resourceful countries.

4 June 2024

The young and the right

Young people are more drawn to novelty and risk. Studies suggest that this is why they are attracted to new far-right parties, be it the Portuguese Chega or Spanish Vox. We will see next weekend how far this attraction can go. Green parties seem to be the novelty of the past. Anti-immigrant and anti-establishment parties are the new outlet for a youth that seems hungry for change. This is not a phenomenon only reserved for those with a grudge or low-income background. A social media post showing young people partying on the posh German island of Sylt chanting anti-immigrant songs suggests that what used to be behind closed doors of some obscure fraternities is no longer ashamed of coming out into the open.

There is a gender divide though in voting behaviour according to Politico, which looked at young peoples’ voting intention for the upcoming European elections in Germany, France, Belgium, Portugal and Finland. With the exception of France, women are more likely to vote for the Greens or the left while young men are clearly favouring far-right parties.

This gender gap may reflect the social tone of the agenda and the leading figures of those far-right parties. Marine Le Pen and Giorgia Meloni are role models for women to engage with far-right parties. Their agendas also include a social and cultural component young women can identify with. For young men, party leaders such as Jordan Bardella for Rassemblement National in France, Tom Van Grieken for Vlaams Belang in Belgium or macho types such as André Ventura for Chega seem appealing. The gender difference is the strongest in Belgium, while the number of undecideds is the highest in Germany.

Traditional parties have a hard time appealing to first-time voters. Will those 18-24 year-olds who turn away from classic parties come back once they settle down in their lives? Nothing is more uncertain. These emerging parties could become the new normal, while traditional parties have a hard time reinventing themselves in this fast changing environment where a presence on Tiktok is more influential than any press conference.

3 June 2024

Opec's labyrinth

Sometimes it’s not about the figures, but what lies behind them. The most notable thing about Opec+’s latest meeting in Riyadh was not that the cartel kept its output cuts in place. It was the slightly chaotic way the meeting came about, as well as the increasingly Byzantine structure of the output quotas that determine how much oil its members can produce. For the meeting itself, first the idea was to hold it via video-link rather than in person, in the cartel’s headquarters in Vienna. But then the plan quickly changed when Saudi Arabia invited other oil ministers to its capital.

This last-minute shift is less surprising when you consider how complex Opec+’s arrangements have become. The total production cuts compared to baseline quotas that the cartel has dialled up amount to a bit under 6m barrels per day.

But they come in a three-layer cake. First you have cuts that the entire group has agreed to, across the board. That is worth about 2m barrels per day. Then there is one nine-member set of voluntary cuts, which account for another 1.66m. after that, there is another eight-member set, worth another 2.2m. On top of this, you also have some so-called compensation cuts, recompense for not meeting previously agreed-on production drops.

If all of this sounds a bit confusing, you are not the only one. Javier Blas has recently pointed out that this maze of different cuts, with variable end-dates pencilled in, is confusing even to the more seasoned observer. He offers one possible explanation: that the complex structure helps conceal that countries are not actually meeting their cut commitments. Iraq, Russia, and Kazakhstan all seem to be pumping more oil than they said they were.

The backdrop to this is a series of competing pressures that the world’s big oil producers are facing. Russia relies on oil revenue to help pay for its war in Ukraine. Iraq is in a tight spot budget-wise. But on the other hand, Saudi Arabia, the biggest producer in the group, needs higher long-term oil prices to make the sums add up for its own expensive economic diversification plan.

What you have added to all of this is a not-great demand outlook compared to the start of the year due to persistently higher inflation, and therefore interest rates. Plus longer-term trends, like the rise of non-Opec producers in the US and elsewhere in the Americas, as well as vehicle electrification. All of these put pressure on the cartel to somehow defend higher oil prices while also producing enough to keep revenues healthy.

It also provides a glimpse into what a more multipolar world looks like in practice. Opec is its own little rules-based order, where countries rely on a set of agreements to pursue their common interests. Thanks to external pressure, plus those interests beginning to diverge, the agreements are getting more esoteric and difficult to maintain. This is perhaps a lesson for the rest of us, even if we aren’t petrostates.