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21 December 2022

Europe's uncertain energy outlook

If 2022 was a difficult year for Europe’s energy security, 2023 could prove even tougher. Ahead of next year’s winter, European natural gas buyers will have to refill storage facilities without most of the Russian gas the continent had accessed to before Gazprom shut off Nord Stream last summer. But there are several variables that will help determine exactly how hard this is. These are difficult to predict, though prolonged gas storage refilling in 2022 put Europe in a solid position, and our view tends more towards a relatively optimistic scenario, all things being equal. In the longer term, the picture is more mixed, and we do not see hurdles to diversifying sources of supply disappearing anytime soon.

One of the most important is the weather this year. A colder-than-average winter would mean relatively less demand reduction, leading to lower storage reserves heading into the summer, when these reserves will have to be refilled. The effect colder weather has on gas demand is clear from looking on Die Zeit’s online platform at residential gas demand in Germany in mild October and November, compared to what has been a relatively cold December so far.

That matters because reducing gas demand is one of the only routes out of the crisis that is in Europe’s control. According to Eurostat figures, the EU has on average reduced demand by 20.1% compared to the 2017-21 five-year average from August to November. This is much better than the EU’s 15% demand reduction target, and has contributed to European gas storage volumes remaining at a relatively healthy 85% of capacity, despite the recent cold snap. But October and November were both relatively mild months.  

Of course, gas demand reduction is also influenced by policy choices. So far, European governments have committed large amounts of spending to shield households and businesses from the worst impacts of the crisis. Governments across Europe have committed more than €700bn in spending since September 2021, and in the EU itself they’ve pledged more than €600bn. Most schemes, including Germany’s and the Netherlands, are designed to incentivise a certain amount of demand reduction. These schemes cap consumer prices only up to a certain level of consumption. But whether or not these schemes work in practice to reduce demand to EU-wide or national targets remains to be seen.

Aside from the weather, the other big uncertainty next year, which will shape Europe’s energy prospects, is what happens in China. The Chinese government’s failed zero-Covid policy has been bad for the global economy, but good for European energy consumers. This year, China is set to post its first year-on-year decline in gas demand, according to data from the country’s national energy administration.

We have seen a lot of people forecast a strong rebound in Chinese demand in 2023, but we don’t necessarily think it will work like that. Instead, we think the trajectory will involve flatlining, or even falling demand initially, amidst a chaotic reopening process with a lot of infections, hospitalisations, and deaths. We could even possibly see a partial reintroduction of zero-Covid by panicking officials.

Eventually demand should pick back up again, but how strongly it does depends on the underlying health of the Chinese economy. Here we are also more sceptical than other analysts that demand for energy will follow a similar trajectory to before. The secular trend is declining Chinese growth. This is because of demographic pressures, deglobalisation, and the risks which the economic reforms the Chinese Communist Party would have to implement to escape the so-called middle-income trap pose to its political control.

For Europe, the longer-term solution to the crisis lies in developing alternative supplies. Here, the picture is mixed. Reticence amongst European buyers to commit to very long contracts and rigid pricing models has held up signing new gas contracts. There’s only one long-term contract in place to deliver Qatari liquefied natural gas from the new export facilities they’re developing to Germany so far, and a US intermediary, Conoco, brokered it.

Nuclear power, another alternative, is benefitting from a shift in public opinion. Finland’s green party have already gone pro-nuclear, while voters for France’s EELV, the country’s main green party, support nuclear power, according to a recent Elabe poll. Poll after poll on the issue in Germany this year has found voters in support of delaying or scrapping the country’s nuclear phase-out, although it will still go ahead. Belgium’s effort to phase out its plants has met major political resistance. One emblematic moment of nuclear power’s image change last year was Greta Thunberg endorsing a delay to the German nuclear phaseout.

But building new plants has not gotten any easier, and the performance of Europe’s largest reactor fleet does not inspire confidence. Last week, EDF announced another delay to a new reactor it is building at Flamanville, in Normandy. The reactor, Flamanville-3, will not open until at least early 2024, and will cost at least €13.2bn. When announced in 2004, it was supposed to open in 2012 and cost €3bn. Finland’s new reactor, Olkiluoto-3, has suffered from more delays this year. It was originally supposed to start up in 2010, after a license application in 2000.

France’s existing reactor fleet has suffered from outages due to maintenance issues, and is still not fully back to normal. New reactors of the same type as Flamaville-3 and Olkiluoto-3 should become easier, cheaper, and less time-consuming to build as EDF learns lessons from these projects and has newfound political support in France, with its renationalisation. But building a new reactor cannot take 20-plus years if nuclear energy is to be a fuel of the future, rather than of the past.

Renewable energy has also not met targets and expectations. The rate at which renewable energy capacity in the EU is growing, as of 2021, would need to triple in order to meet the union’s 2030 target for renewables as a share of final energy consumption. But a variety of factors, from underinvestment in grids to bureaucratic hurdles, have slowed it down. That is before we get to intermittency, which will mean more investment in storage options.

The EU has tried to speed up permitting processes through new legislation, which should eventually increase the speed of its adoption. But it is potentially too little, too late. As Aurora Energy Research has recently pointed out, the designation of new so-called go-to areas for projects would only come into force in Italy, as an example, by 2025. That would be too late to meet its own offshore wind target for 2030. While the EU continues to debate whether to increase its renewable energy target to 45% of final consumption by 2030, it remains the case that you can set whatever targets you like, but it’s the implementation that matters.

21 December 2022

Iran and Turkey, troubles ahead

Moral dilemmas have always been part of foreign policy. Many of those dilemmas are about how to deal with corrupt autocrats or with warring parties, and about whether one can still do business with those regimes. Staying completely neutral is hardly ever possible. Europeans may seek more autonomy from this fragile world, but in its purest form it is nothing but an abstraction. Western companies left Russia but we could not do the same in China if they were to invade Taiwan. Also, our products are not all made at home. We still need to import some raw materials from mines, or products from factories, which practice labour conditions that may violate our human rights laws.

We may be looking towards Russia at the moment, but at our doorsteps there are two other large nations, Iran and Turkey, with which we will find ourselves entangled in contradictions.

Europeans tried to be mediators between Iran and the US in an effort to return to the nuclear deal after Donald Trump cancelled it unilaterally. For months, diplomatic efforts were reduced to whether or not Iran would accept US terms. Again and again the Europeans and the US have been sent back to the drawing board. Negotiations are now on hold as news of Iran’s human rights violations against protesters floods our screens. Iran, meanwhile, is looking towards Russia, the other most sanctioned nation in the world. They both found ways to circumvent them.

Focussing on the nuclear deal was already a misguided effort from the West when it was concluded in 2015. Why should Iran not have nuclear power for civilian purposes? Because they could use it as weapons, according to the Western concern. But the US was the only nation ever to have used the atom bomb in practice. Would Israel accept a similar inspection of its nuclear facilities? Of course not. Iran would always have a reason to justify its uranium enrichment from their perspective.

The nuclear deal also does little to bring peace to the region, where Iran is stirring up tensions through its militias in Iraq, Syria, Yemen and Lebanon. The West's idea was to do the nuclear deal first and then move on to a regional deal. But many countries in the region are left out of the current negotiations and have legitimate concerns that the US administration would walk away once it got its nuclear deal, leaving them to ensure security in the region.

Then there is Turkey, the other big player in the region. Recep Tayyip Erdogan is used to pointing out Western failings, setting Turkey apart in Nato. The war in Ukraine now gives Turkey a mission geopolitically, not only because it controls the two straits that connect the Black Sea with the Mediterranean. Turkey is the only Nato country to have objected to the Western sanctions against Russia. At the same time, Turkey has been delivering its drones to Ukraine and insisting on Ukraine’s territorial integrity. Erdogan is keeping his options open with his position towards Vladimir Putin and his Nato allies. Together with the UN, he brokered a deal on grain exports from Ukrainian ports. And is on standby to mediate between Ukraine and Russia.

As for European concerns, Turkey is the wild card when it comes to Nato accession for Sweden and Finland. Long-standing tensions with Cyprus and Greece are also likely to flare up ahead of next year’s elections. Turkey will also be key for migration policies. What will happen if Erdogan wins the elections next year? Will it amplify or deflate the tensions and his geopolitical aspirations? We have seen Erdogan’s Machiavellian streak already. How far will he go?

Turkey is likely to increase its reach in Northern Cyprus, culturally and economically, including by connecting Turkish Cypriots to the Turkish mainland's energy grid. There may not be a two-state solution, which Turkey insists on, but de facto Turkey will be more present. As for Greece, the Turkish government’s rhetorical provocations against them are increasingly aggressive. One constant demand is the demilitarisation of the Greek islands close to the Turkish shore. Recently they started threatening to land on Greek shores if they do not comply. This may be an empty threat, but a incident may become more likely, though we still would not expect a strategic invasion. This aggressive rhetoric will probably continue at least until next year’s election and the centenary celebrations of the Turkish Republic, a moment when old narratives of former glory against its old rivals are dished out like bread and circuses.

Then there is the migration pact. We wrote in 2015 that Europe sold its soul when it concluded a deal with Ankara to keep migrants from heading towards Europe. Erdogan has already proven in the past that they can instrumentalise migrants by sending them towards EU borders. The anti-immigration mood in several EU countries will give him some leverage to play around with the EU and divide them over their migration policies.

Europe has been focusing on Ukraine and Russia, but the two other trouble makers in the neighbourhood could cause much more havoc in the wider region. A strategic rethink is essential for Europe.

21 December 2022

Central banks will succeed, at a cost

Just as the retired generals misjudged the Ukraine war, the teenage scribblers misjudged the central banks.

Our central expectation for 2023 is that scribblers will double down as headline inflation rates are falling. And that central banks will stay their course, and be proven right. 

But what will happen is that the policy consensus within central banks, and within the ECB in particular, will come under pressure. Raising the deposit rate from less than zero to 2% was a no-brainer when inflation overshoots your target to the extent it did. Most central bankers would also agree that policy needs to become at least mildly restrictive. But reasonable people can, and will, disagree on what that means. It is clearly a number larger than two. But is it 3%, or 4%, or even higher?

We think the best course of action for central banks would be to frame their internal reference point from headline to core inflation. The experience in the US, and more recently in the euro area as well, has been that core inflation is a good leading indicator of headline inflation: not the other way around, as European central bankers use to think. The core rate, too, may have volatile components. There are several metrics, with different technical characteristics. But between each other, they fluctuate in relatively tight margins - currently in the range of 4-5%. That, to us, sounds like a reasonable underlying measure of current inflationary trends. We expect core inflation to fall as the economy slows down, but not to reach 2%. Core inflation metrics are relatively sticky. Central bankers will have to decide whether they want to pay the price, in terms of lower output and higher unemployment, of getting the core rate all the way down to 2%. We think the ECB will stick to the target, rather then shift the goalposts after failing to score. But we would not expect everyone to agree. Debate will ensue.

We think what keeps aggregate demand and inflationary pressures moderately high is not wages but fiscal policy. The central bank-funded fiscal support during the lockdown is probably the deep underlying reason for the surge in global inflation rates. Many of these fiscal policies have after-effects. You don't need a wage-price spiral for inflation to persist. There are other ways in which an economy can generate excess demand.

Our outlook beyond 2023 is ultimately optimistic. Central banks will get on top of this for as long as they don't drop the ball. We are more optimistic on this point than we were a year ago, especially in the euro area. Inflationary pressure are starting to fall. Fiscal policy is start to adjust, albeit too slowly. The biggest risks stem from continued shocks, like the surge in Covid cases in China, or a long war in Ukraine. It is the age of disruption. And an age of diminished expectations.

20 December 2022

Granddad's army

The problem with German defence spending is not the distance it is away from 2% of GDP. Germany's defence spending is at 1.7% this year. According to a study by IW, the economic institute in Cologne, it will miss the target each year until 2026. Bad though as it seems, the quality of what it is being spent on is the bigger problem. Christine Lambrecht, the defence minister, yesterday suspended the purchases of Pumas, the mainstay German infantry fighting vehicle, because they are simply not working. In order to meet Nato commitments, German soldiers will have to fall back onto their Marder IFVs, based on technology from the early 1970s.

The Puma is a rare example of German engineering at its very worst: over-engineered and unreliable. FAZ reports that a recent exercise with Puma turned into a total disaster, as not a single one of the 18 worked. There were problems with electrical components. In one case, a cable caught fire. Pumas are produced by a consortium of Rheinmetal and Krauss-Maffei, and have had a long history of problems. The Bundeswehr has around 350 of them. One of the reasons why Olaf Scholz was so hesitant to supply Marder tanks to Ukraine, was the knowledge that the Bundeswehr may have to fall back on them to meet their commitments to Nato. The Pumas were supposed to be deployed for Nato's fast reaction force, but this is now not going to happen. We previously reported on similar problems in other areas of defence purchases, including Eurofighters that were mostly inoperable due to poor servicing. The sorry tale of German defence procurement is an example of what happens when you impose across-the-board spending cuts on areas that are heavily reliant on investment and maintenance. The big failure of Ursula von der Leyen as defence minister was that she did not stand up to Angela Merkel and her cabinet on defence spending cuts, and then cut corners in her departmental spending to preserve appearances, with consequences that are only becoming apparent many years later. 

19 December 2022

Should the EU rely on Qatar for energy?

Taking a moral stance on business transactions is easier said than done. EU countries may have found ways to replace Russian gas ending the tit-for-tat diplomatic game of sanctions. But new energy contracts present their own difficulties, as the case of Qatar reveals.

Just when more EU countries look towards Qatar for increased liquefied natural gas supplies, Belgian prosecutors unveiled a cash-for-influence scandal in the European Parliament. The investigations are still ongoing with its crackdown on third party lobbyists and MEPs, four of them, including an EP vice president, have been charged for corruption. How far and deep this will go we do not know yet. But it is already having a diplomatic impact. The Parliament suspended Qatar’s access to its institutions, while EU member states are being questioned about their energy contracts. The government in Qatar said it has been singled out before the investigations have concluded, and warned that this could have a negative impact on gas supplies.

LNG gas imports from Qatar to the EU are still low, and only accounted for 5% of the union's intake this year. But it is set to grow significantly via the North Field expansion, two projects in Qatar's massive gas field to increase production capacity, due to finish in 2026 and 2027.

Most EU countries deal with Qatar on the spot market. But Germany is the only country so far where energy companies have concluded long-term deals with Qatar, in the form of a 15-year long contract with state owned Qatar Energy, guaranteeing 2m metric tons of LNG annually as from 2026. Up until now, the main reason for the comparative lack of interest from EU energy buyers in signing deals with Qatar has been because of the restrictive contractual terms the Qataris want buyers to stick to. Even the German deal was brokered by Conoco, a US intermediary.

But the influence-buying scandal adds a whole other set of complications. When Robert Habeck was asked after the EU energy ministers' meeting whether it was right to buy gas from Qatar if Qatar buys MEPs, he said one should not mix up the two things. The Germans used to say the same about Vladimir Putin's breaches of international law and Nord Stream 2. The dilemma won't go away. Pressure on the German coalition government will increase.

Qatar has already had one diplomatic showdown with Germany in recent months, according to Euractiv. Doha summoned the German ambassador after the interior minister cast doubt on whether Qatar should host the World Cup because of its treatment of foreign workers.

Germany is not the only country with deep ties to Qatar. France’s TotalEnergies and Italy’s Eni hold stakes in the development of one of the LNG capacity projects. Watch this space.

16 December 2022

France winning - another 1998 momentum?

We remember when France won the World Cup for the first time in 1998, turning around the country's morale. The newfound optimism fuelled the economy, and multiculturalism was all of a sudden a winning strategy rather than a burden to get rid of. This year France is back in the finals. Will this kick off another 1998 moment? Eric Le Boucher in Les Echos is confident that it could well have even more lasting effects than in 1998.

Back then Jean-Marie Le Pen dismissed the team of French players with African origins and found himself at odds with the rest of the country. His daughter was wise not to repeat the same error, and won’t talk about the footballers in dismissive terms. But the far-right’s main tenet remains immigration. The narrative that immigration is bad for France has no grip in a country where every corner is cheering Kylian Mbappé, France's star player and a second-generation Frenchman, and his team. And the great replacement theory propagated by Eric Zemmour all of a sudden loses its sting.

Under Le Pen the father, anti-immigrant sentiment used to be fed by narratives of immigrants taking jobs away from the French. Today, Zemmour and Le Pen the daughter defend the idea of French civilisation against immigration. But it is this immigration that helped the French team get into the finals. In a country where unemployment is low and certain sectors are lacking work, the economic fears won’t fly either. Whether the French team wins or comes second, like they did in 2006, it could take the butter from the bread of the various far-right factions, just when they were gaining momentum on the ground.

The far-left also has its issues with the football tournament. This is a tournament that defies all social classes and is a testimony of the success of globalisation, not its defeat. Nothing is perfect and Fifa has its problems and inequalities, but the Qatar scandal about working conditions and corruption could turn out to be an opportunity for the organisation to reform to become an example of healthy globalisation.

For France itself, two images emerge: The one is France as a nation winning in the world cup, the country's most popular sport. The other is France where people are miserable, complain and go on strike. This is a well-known negative discourse, which French have repeated to themselves over the past years. Now, all of the sudden, football adds headlines with its positive message. A counter-momentum in narratives.

How far will this momentum go? Will it only clip the wings of the far-right? Will it affect the protest momentum in France just when trade unions and gilets jaunes were getting ready for a winter of discontent? It's possible. The effects on the economy, however, may be short-lived, like they were in 1998. In 2023, energy prices are to rise and supply chain problems won’t just disappear, thus the crisis mode will continue to affect households.

But the negative spell is broken and with it the discourse of protection could change. That alone could help to open up minds to new endeavours. The government could even dare to extend its reform agenda beyond pension reform. So France may surprise us by being better than expected in 2023, just as it turned the economy around in 1998. Thanks to Mbappé and his team.

15 December 2022

Why economic sanctions are failing

The Ukraine war has surprised us in two ways. We overestimated Russia’s military capability. But we also overestimated the impact of western sanctions.

On the latter we took note of the joint leaders' statement from EU-Asean summit:

“Most members strongly condemned the war in Ukraine and stressed it is causing immense human suffering and exacerbating existing fragilities in the global economy… There were other views and different assessments of the situation and sanctions.”

Indeed, there were other views. Even China, which is not a member of Asean, may not be sitting on the fence any longer, as the Wall Street Journal reported. It says that President Xi Jinping has instructed his government to forge closer economic ties with Russia,

“building on a trade relationship that has strengthened this year and become a lifeline to Moscow in the face of Western pressure.”

The policy includes imports of Russian oil, gas and agricultural products, and energy partnerships in the Arctic, and Chinese investment in Russian infrastructure, including railways and ports. The two countries are also transacting in their own currencies, rather than through euros and dollars, to help protect themselves against sanctions.

What this is telling us is that the western strategy of forcing Russia to its knees economically is not going to work, in contrast to predictions of a 30% fall in GDP. What this is also telling is that economic sanctions, as a tool of foreign policy, are becoming blunted.

What is less clear is how the combination of our two misjudgements are going to pan out. One scenario is that Ukraine manages to free the occupied territories, but that Russia will continue to be in a position to pound Ukraine in a guerrilla war that might last for years. There are many other scenarios. The point of sanctions was to ensure a robust response to exhaust the enemy. Vladimir Putin will not achieve his war aims. But Russia’s regime is also not on the brink of economic collapse either. This sounds to us like a balance of continuing terror.

14 December 2022

An (uncharacteristically) cheerful message

Gloom comes from the things we deem as unsustainable, or the stuff we ignore at our peril. Hope often comes out of the blue. We are not rose-tinted-glasses types, but we have to acknowledge that the breakthrough in nuclear fusion is a very big deal. If we ever get on top of climate change, it will not be due to CO2 targets, COP conferences, or Extinction Rebellion. It will be due to technologies that have yet to be invented.

The most promising of them all is nuclear fusion. Yesterday the Lawrence Livermore National Laboratory in California reported the biggest breakthrough in nuclear fusion research yet. They managed to get more energy out than the laser they used to kick-start the reaction put in. This tells us that the science is working. The rest is engineering. The path ahead is still long. But there is a path.

It is unsurprising that the most optimistic news of our times is not from politics or economics, but science. The western world is scraping the barrel with policies designed to improve the lives of people. In most western countries, politics is reduced to an exercise of redistribution of income. The biggest social changes we have experienced in the last century are from scientific and technical innovation. The biggest was, arguably, that of the transistor in 1947, followed by the integrated circuit in 1960.

Nuclear fusion is possibly of even a bigger scale. It constitutes a cheap supply of unlimited energy. Its development would constitute the single biggest step forward in our efforts to reduce greenhouse gas emission. There is no space for the likes of Vladimir Putin in a world powered by nuclear fusion. It may take a long time until this technology is ready for deployment, but the scientific breakthrough will have many immediate effects.

We think of it in terms of one important function of finance: to intermediate between the future and the present. The realistic prospect of nuclear fusion will focus our currently confused approach to climate change on the stuff that is needed, like scientific research and development. It will give rise to new areas of research in neighbouring disciplines. For example, this technology requires a lot precision engineering, the part where Europe may come in. And it is telling us that it is perfectly fine to use technologies that offer temporary solutions, like nuclear power. We need to get through the transition period. But we don’t need to solve the problem with existing, inferior technologies.

13 December 2022

Russian gas is still a risk

It’s been a difficult week so far in some parts of Europe, but generally speaking the continent’s prospects for making it through the energy crisis this year look good. We managed to refill gas storage volumes to record levels, and so far, demand reduction looks robust. But the real test will be winter 2023.

This is something which the International Energy Agency’s latest report warns us about. One risk they highlight is a familiar one: that China’s gas demand could rebound next year, meaning that global liquefied natural gas markets will be tighter. It is, of course, always good to be prudent, though we think the possible impact of the Chinese government’s latest move to loosen its strict Covid policies will not be straightforward.

The second is a bit more surprising. The IEA points out that although Russia is exporting much less pipeline gas to Europe, it still is sending some gas on to the continent. Supplies are still flowing via Ukraine’s transit network, despite a scare last month after a dispute over gas supplies intended for Moldova. Gas is also going to Europe via Turk Stream. Supplies from Russia in week 48 of this year were about 24% of what they were in 2021, according to Entsog data compiled by Bruegel.

This does not include LNG that also comes from Russia, which is measured separately. That came to 16.5bn cubic metres in the first nine months of the year, according to data from the European Commission. Russia is not the EU’s largest supplier of LNG, but it is a non-negligible one.

Altogether, the IEA estimates that if Russia were to cut its remaining pipeline imports to Europe, and if China’s demand was to return to 2021 levels, there’d be a 27bn cubic metre demand shortfall next year. This is even with the energy-saving going on now being carried over into next year, and it would require us saving at least as much gas on top of what we’re doing now.

We can, of course, debate how realistic those assumptions are. China’s exit from the zero-Covid regime is probably not going to be some linear process, but instead a bumpy road with peaks and troughs. National and local-level authorities will figure out what works and what doesn’t partly through trial and error, and if the lack of coordination so far is much to go by this could be pretty messy. In any case, Chinese demand could still trend lower than in 2021 simply because their importers don’t want a bidding war, especially when those who are able to can re-sell contracted gas to Europe.

What happens with Russia is also up in the air. One factor to watch is the longer-term impact of the natural gas supply stoppages on the Russian state budget. Total oil and gas revenue was still in good shape for October, but this was largely due to a non-off windfall tax on Gazprom. According to the Russian finance ministry’s own statistics, the budget is now sinking, if we take that effect out of it. Higher gas prices have meant that its share of export revenue recently increased relative to oil, though the latter remains a larger source of revenue.

9 December 2022

A bad day for Europe

For EU citizens, amongst everything EU membership entails the introduction of the euro and the Schengen passport-free travel zone have made the biggest perceptible difference to their lives. Croatia will become a member of both in 2023. Gone will be the kuna and the long jams on the Croatian-Slovenian border. 

But Romania and Bulgaria will stay outside the perimeter fence. The EU home affairs council rejected the Czech EU presidency's plan to expand the Schengen zone to the southeast European countries, in a mammoth session. Ylva Johansson, the home affairs Commissioner, stated bluntly

"This is a day of disappointment. Right now we are not united, and this makes us weak."

We admire the honesty and the precision of the statement. The veto against the Schengen membership of Romania and Bulgaria came from the Netherlands and Austria. Karl Nehammer and Mark Rutte both said during this week's European Council that they opposed the accession, and the interior ministers stuck to the line. The argument is that both countries have not implemented sufficiently robust systems to register refugees on their borders with non-EU countries. Romania has external EU borders with Ukraine, Moldova and Serbia, Bulgaria with Turkey and Northern Macedonia. The Austrians say that of the 100,000 migrants that came to Austria, three quarters were not registered in the countries where they first arrived. Around 50% of the refugees came through Turkey and Bulgaria.

Refugee policy is where Europe is at its most vulnerable and divisive. The 2015 crisis fractured European solidarity, and so will this one. Virtually all the important decisions the EU has to take these days, in foreign and security policy and internal security, have to be taken by unanimity. Hungary is vetoing foreign policy decisions like the EU aid package to Ukraine, and possibly sanctions against Russia. To get around this week's Ukraine aid veto, the other EU members are hoping to find a bilateral workaround, but the whole idea of a common EU foreign policy is to avoid having to go outside the institutional mechanism on an ad-hoc basis.

Annalena Baerbock, the German foreign minister, responded to yesterday's mess in the Council by saying that this was a bad day for Europe. In other words, we have a real crisis: I veto what you want, you veto what I want. This is also the reason why we have been sceptical of rule-of-law procedures. They are political fair-weather constructions being deployed during a storm. The more you antagonise, they less you get done.