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8 April 2021

Geopolitics of crypto

We would like to pick up on a comment made by Peter Thiel, the hedge fund billionaire who supported Donald Trump. Thiel said during a talk at the Richard Nixon Foundation that the US administration should take bitcoin more seriously. He speculated that China might be using bitcoin as a geopolitical weapon. In the long run, bitcoin threatens fiat money in general, and the dollar as the world’s premier currency in particular.

We have been asking ourselves similar questions, though we have not yet fully thought through the geopolitics of crypto. At the moment the debate in the west - and especially in Europe - is dominated mostly by comments from central bankers and macro folk who seem to confuse what they don’t want to happen with what they don’t expect to happen.

The fact that bitcoin and other crypto currencies do not fulfil the strict definitions of money is entirely irrelevant to the potential of such currencies to disrupt the money monopoly of the state. As crypto currencies become more widespread, we would expect to see closed digital crypto economies emerging - cycles of economic activity that will not be dependent on fiat money. This is also why the viability of crypto currencies will not be dependent on their dollar market value. A crash in the bitcoin dollar price - which is entirely possible - may constitute a potential source of financial instability, but not a threat to bitcoin itself.

Thiel's focus was on China going long on bitcoin, and the associated threat to what he described as the exorbitant privilege the US derives from the dollar as the world’s largest currency.

We would add that the implication for us Europeans would be even more severe. Even after 20 years, the euro area is an incomplete project. It is likely to remain incomplete for the foreseeable future. During the sovereign debt crisis, there was a lot of talk about parallel currencies - like Italy’s minibots - but these never saw the light of day. But that does not change the fact that the euro remains vulnerable to the emergence of other forms of parallel currency. Of course, you cannot pay your taxes in bitcoin, but if bitcoin becomes the currency of choice in the digital economy, the implications for the euro and the cohesion of the EU would be potentially troublesome. That’s a world into which monetary policy cannot reach.

7 April 2021

Beware of photo-ops with Erdogan

They had to have the photo op with Recep Tayyip Erdogan, and it turned out to be bad idea, as we predicted. At a time when Erdogan is cracking down on admirals because of their public objection against the Istanbul canal, which was interpreted as an attempted coup, any show of European encouragement was completely out of place. But even without this context, the meeting will not be remembered for its content.

A video clip from the meeting went viral. It showed Charles Michel taking the seat next to Erdogan, forcing Ursula von der Leyen to sit on the sofa opposite the Turkish foreign minister. Symbols speak more than words, especially in countries like Turkey. The same is true for the official photo in which the two EU leaders smiled, while Erdogan looked like he just wanted to get it over and done with. If the EU does not know how speak in images, they are better off keeping meetings behind closed doors. 

Erdogan may not be Sergey Lavrov, but his seating arrangements were enough to display the rift between European Council and the Commission, and male dominance over a female leader. The EU's concern over Turkey's exit from the Istanbul Convention on Discrimination and Violence against Women suddenly lost its bite. 

In the press briefing afterwards, von der Leyen said human rights are non-negotiable and that Turkey should respect the recent rulings of the European Court of Human Rights (ECHR) for the release Turkish businessman Osman Kavala and Kurdish politician Selahattin Demirtain. She said the Commission will come up with a proposal for how to support Syrian refugees in Turkey in a show of good will. So goodwill first, non-negotiables after? One way to play with expectations is her announcement that it will benefit the other two major host countries, Jordan and Lebanon. Distribution of funds could thus matter. Turkey accuses the EU of only releasing €3.8bn of the €6bn promised under the Dublin pact. Brussels, for its part, accuses Turkey of refusing to take back any irregular migrants since the outbreak of the pandemic. Expect to see haggling over the price. Michel called on Turkey to make some concrete gestures towards Greece and Cyprus and remove all its troops from Libya as a prerequisite for talks on the customs union. This has been a long shot anyway, so neither side will be able to blackmail the other into concessions here. It will come down again to haggling, this time over who is to blame for what.

How cooperative Turkey is will become clear in the coming months, ahead of another crucial European Council in June. Don't hold your breath. Erdogan will do what he can to produce some gestures of goodwill, just in time for the summit, and otherwise continues as it pleases him. The Commission will have to square all those contradictions and work out a progressive, proportionate and reversible agenda for trade, high-level dialogue, refugees and mobility between the EU and Turkish people. Hard to keep smiling when all you have to offer are some carrots, but no real sticks. 

1 April 2021

Our scenarios for the post-Easter period

This will be our last briefing before the Easter break. We will resume on Tuesday, April 6. 

Our main story this morning is an assessment of the scenarios that lie ahead for Europe. The good news is that vaccine supply bottlenecks will ease. In the worst case, we are looking at another lost summer holiday season, and a delayed economic recovery. But the crisis, like any crisis, will eventually end. BioNTech/Pfizer are due to step up deliveries from this month onwards. BioNTech's new Marburg plant will have massive capacity to supply the whole of Europe with vaccines indefinitely.

The problems going forward lie elsewhere. The entire EU apparatus is geared to solving political problems - as opposed to actual, physical problems - the kind that do not respond to spin-doctoring. Many Europeans discuss lockdown as separate from vaccination. And they treat vaccination more as a private contract between the government and the individual, and less as a public-health issue. There were more discussions on the side-effects of the AstraZeneca vaccine, as opposed to its effects. Expect the confusion to persist for a while before the situation eases. The summer holiday season will go ahead on a smaller scale than envisaged, and the economic recovery will be postponed. The economic costs of the crisis mismanagement will dwarf the positive impact of the recovery by a very large factor.

Pandemic mismanagement has taken attention away from the other policy failures - notably the failure to generate a fiscal response large enough to close the output gap. There is no way the EU would ever use a fiscal accelerator with the same aggression as the US would. But most of our fiscal measures were loan guarantees that were not taken up. The recovery fund is large only if you are willing to be fooled by large headline numbers. We see the economic effect as 0.3% of GDP for a period of five or six years - which is macro-economically in the category of statistical noise. The main economic effect would be in the long run through reforms that boost productivity growth. We expect this effect to be present, but small.  

It is, of course, possible that the German constitutional court ends the charade. As we argued yesterday, the legal case of the plaintiff, under German law, is relatively strong. The composition of the court has not shifted to such an extent as to produce a majority willing to break with the principles established in previous rulings. So there is a risk that Germany cannot participate in the fund. An injunction against the own-resources legislation would constitute a political shock no doubt, but its main effect would to puncture the feel-good story about the recovery fund as the start of a fiscal union.

For that, the conference on the future of Europe is the more important development because this is where the foundations for a future fiscal union could be laid. It requires treaty change, and in the case of Germany also constitutional change. The EU will not be able to create a fiscal union based on Art. 122 TFEU, an emergency clause. If the German court allows the ratification, the recovery fund will go ahead. But we are certain that the court will prevent the German government from repeating this exercise in the future. If the courts stop ratification, the EU will have to find another way to circumvent existing law. 

Some of the events are inter-dependent. The more chaotic the summer, the worse it is for the economy, and the better it is for the Greens. We have a separate story on Green foreign policy below. On economic policy, they are the only party in Germany with an explicit agenda to change the German constitutional debt brake and the European fiscal rules. The two are logically linked, as the purpose of the debt brake was to provide legal instruments to implement the spirit of the original stability pact. It said that countries with debt levels of more than 60% of GDP were supposed to run a small surplus over the economic cycle, but hardly anybody took this seriously. The one prediction we are happy to make is that the EU will not change the fiscal rules without Germany changing its constitutional debt brake. 

A Green-led government will not achieve that on its own because constitutional change would require a two-thirds majority. If the CDU/CSU were to end up in opposition, that would probably be a worst-case scenario because they will never accept a relaxation of the debt brake when a government of the left is in power. The best-case scenario for debt-brake reform would be for a CDU-led government, with the Greens occupying the finance ministry. If such a coalition were to accept constitutional reforms, a majority is foreseeable since SPD and the Left Party would support it too.

On balance, good outcomes are possible. Bud so are poor outcomes. A debate on fiscal tightening could start once the immediate pandemic is over. We would expect the ECB's governing council at least to discuss exit strategies for asset purchases. We are marginally more optimistic about the rise of green investment in the next period ahead. The crisis has also - finally - persuaded some governments that they need to prioritise digitalisation. As the emergence of BioNTech has shown, there are pockets of technical excellence on the continent. But the entrepreneurial dynamics remain weak. And at least there is also a discussion about the defence of European interests, but still a lot of confusion about what these interests are.

We used to say that crises were good for the EU - and that may still be so in the very long run. But we have not seen it yet.

1 April 2021

Greens vs China

With Germany’s pandemic mismanagement now threatening the summer holidays, as well as the grand coalition’s re-election prospects, a Greens-led government is becoming a possibility. This could have profound implications for German and EU foreign policy, including German- and EU-China relations.

We noted a recent piece in Internationale Politik Quarterly examining how Germany’s approach to China would change under a government led by the Greens. Noah Barkin writes that the Greens have been the sole party in Germany to consistently take a stand against Germany’s business-first approach to China. Party support for human rights in China dates back to the 1980s – Greens founding member Petra Kelly was a strong supporter of Tibet – and the Greens fought Gerhard Schroeder’s efforts to lift an arms embargo to China in the early 2000s.

The Greens were also the first party in the Bundestag to release a strategy paper on China in 2012, in which they criticised the German government for prioritising German interests over European interests. The party has maintained this tougher stance in recent years: it was the first to challenge the German government’s position that it had no legal basis to exclude Huawei from 5G network development in 2018, and perhaps more significantly, it was the only party in Germany to oppose Angela Merkel’s rush to sign an in-principle deal, the EU-China comprehensive agreement on investment (CAI), in December.

According to Barkin, many Greens members argue that Germany must be prepared to make economic sacrifices in support of a stronger and more cohesive European strategy for China. This news will undoubtedly be welcomed by the Biden administration and China hawks in the US, who are keeping a watchful eye on Germany in the lead-up to the September elections. 

Maintaining a strong stance on China presents many challenges, however, particularly since there are some in the party itself who have adopted a more pragmatic approach. Keen to avoid being caught in the crossfire of a new Cold War, Greens members such as Jürgen Trittin have been quick to temper criticism of China with criticism of the US. American officials’ aggressive lobbying to exclude Huawei from European networks is viewed with scepticism by figures like Trittin, while other Greens members have supported the idea of adopting a softer position on China in order to foster better cooperation on climate change.

If the Greens return to power, they will need to make difficult decisions on Huawei, the CAI, and whether to boycott the 2022 Beijing Olympics. Pressure from German companies with significant interests in China will intensify, and a Green-Black coalition with the CDU/CSU would only amplify pro-business voices.

But difficult choices extend far beyond China, and the Greens will likely also be struggling to implement key components of its domestic and European platforms, including a reform of Germany’s constitutional debt brake, increased European integration, and a total exit from fossil fuels. It is easy to imagine concerns over China’s human rights record falling by the wayside in the face of these pressing priorities.

We would argue that unless the Greens become the largest party in government, they are unlikely to have much of an impact on China policies because the chancellery holds the real diplomatic and foreign policymaking powers in Germany, whereas the foreign ministry remains limited to providing consular services and assistance at German embassies. A victory by the Greens is by no means certain, and the CDU/CSU could always rebound in the polls, particularly if it improves its dismal vaccine roll-out.

We would also argue that the economic sacrifices required might be too hard of a sell in post-pandemic Germany. Germany was far better-prepared than many European countries to face the economic shocks brought on by the pandemic, but it was in sore need of billions of investment in digitisation and green infrastructure even before the pandemic hit. Cutting ties with one of the world’s most valuable consumer markets – and a major source of high-tech investment – could cost more than German voters are ultimately willing to pay. Merkel’s departure leaves more space for the Greens to manoeuvre, but tensions between China and Europe are ramping up against the backdrop of a looming economic crisis. The walls are closing in.

1 April 2021

Legal challenges of Covid measures

First time around last year, no one was prepared for this pandemic. After China, European countries imposed strict lockdown measures nearly overnight and a stunned population had to adapt their lives to this new reality. People re-emerged in the summer and everyone thought this is it. But no. A second lockdown followed in November/December and now a third lockdown. Once the initial surprise was over, lockdown measures were contested by the health sector and the people as either not enough or too harsh. They were also contested legally in the courts. Can a restriction of citizens' freedom be justified by measures that may or may not work to protect public health? A functioning health sector and fundamental civil rights are playing against each other in this pandemic, and national courts may define a balance between the two. For this Easter briefing picked up three different stories of legal challenges coming from EU member states.

In Belgium the court of first instance dismissed Covid-19 measures as illegal with respect to citizens' rights. Their main argument relies on the fact that these measures are not a response to one-off emergencies, but a crisis that has lasted for more than a year. The pandemic law must therefore have a more solid legal basis, so the court says. The mechanism the Belgian government got approved in a first reading in parliament is based on a royal decree declaring an epidemic emergency. Parliament confirms this emergency and entrusts the executive with the task of taking measures for a period of three months. Regular reporting to parliament is planned. The text lists a series of measures that can be taken and which have been used for a year: restriction of movement, closures of establishments, curfews, etc. 

The Irish attorney general is concerned about the plan to extend mandatory hotel quarantines to 43 additional countries, including the US, France and Germany, according to the Irish Times. His reservations relate in large part to Ireland’s obligations under EU law to ensure the free movement of people, and also to the state’s powers to detain people. At the moment Ireland is the only EU country controlling the inward flow from other EU countries with mandatory hotel stays. Austria is already on the list that requires arriving passengers from other EU countries to quarantine in hotels for 12 days. The latest plans are to extend this list to include 17 other European countries. There is also a legal and political challenge over what to do with the Isle of Man, which is part of the Common Travel Area covering Ireland and the UK.

Finland has its own version of constitutional challenge. The Constitutional Law Committee that has to approve the government's latest partial lockdown ruled the proposal unconstitutional. According to the committee, restrictions on movement must be targeted precisely at the presumed sources of infection, i.e. private events and parties, moving around in groups and shopping, writes YLE. The committee pointed out that the prohibitions in the government's bill are subject to interpretation. Therefore, in practice, it would be impossible to predict what is forbidden or permissible. What is targeted here is the legal ambiguity of the lockdown measures, not the measures themselves. The more concrete the better. This requires the government to define exactly what they mean when they recommend celebrating Easter only with close ones, and what unnecessary travel is. As with all boundaries thus defined, this may end up dividing in those inside and those outside the legal parameters.

1 April 2021

Vaccinate to exit lockdown

Vaccination and lockdown go hand in hand. The more people are vaccinated, the easier it is to exit lockdown. What seems straightforward on paper is not in real life. In many member states, vaccination and lockdown are still discussed as two separate issues. 

Emmanuel Macron made exactly this link last night. Amid an alarming surge in infections and hospitalisations, Macron announced the extension of the lockdown light in 19 regions to the whole of France for four weeks, with schools closed for three, and put vaccination in front as the new yardstick. The logic is that everything opens once enough people are vaccinated as from mid-May. Using vaccines is to make the new constraints palatable and to stand up against the peoples' desire for freedom. Only in January, Macron decided against confinement for exactly this reason. Now vaccines are the new harbinger of hope and the message is: hold tight in April and you will be free in May. 

Macron's new bet, though, relies on the assumption that nothing goes wrong anymore with the vaccines, no order debacle or suspension of a vaccine. The logistics of the vaccination strategy have to deliver. And what exactly the formula will be to exit lockdown, we do not know yet. France is eager to catch up with the UK on vaccines, but how it moves from 11% to more than 50% vaccinated in just one month is still a mystery. Will it heal the rift with an overburdened health sector? Health professionals blame the executive for acting too late and warn that if it continues, they will have to choose who is to get treatment and who not. The symbolic threshold of 5000 beds in intensive care units has been passed this week. Last night Macron asked hospitals to increase numbers of beds in the intensive care units from 7000 to 10,000. In other words: do your job and I do mine. 

France and Germany both restricted AstraZeneca, with many appointments for this vaccine cancelled. They are now in talks with Russia over the Sputnik V vaccine. The official line from Berlin is that all vaccines are welcome as long as they are approved by the European medicines agency, EMA. But will it be improved in time for Macron's bet for mid-May? News reports suggest that EMA could approve Sputnik V within the next two months. Not fast enough for Macron, but good enough for member states including Austria to begin negotiating with the Russians.

1 April 2021

When the third wave hits Germany

In Germany, the headline infection rate number has stalled at just above 130, but it is too early to predict a trend. Hospital admissions are rising - and the daily data are often subject to subsequent corrections. Looking at all numbers, we see a rising trend, but not an exponentially rising trend. This is relatively good news. We are not in the worst case scenario. 

That said, the Robert-Koch Institut, Germany's centre for disease control, published the following alarming projection for admissions to intensive care units. The grey line represents a reduction in total contacts of 50%, the blue line of 20%, each for a period of four weeks. The four charts represent the starting date of the lockdown. The dashed red line is the limit of intensive care beds, and then bold red line is the line of all emergency beds taken together. These data are telling us the following:

  • The top of the spike is around June/July - at the beginning of the summer holiday season. It is only towards the end of the season that the numbers would fall to within the current capacity limits. 
  • The impact of lockdown is relative strong. The timing also has an impact, but is far less important than the intensity of the lockdown. We presume that this prognosis is based on the assumption that the lockdown constitutes a circuit breaker.
  • None of the scenarios suggests that an emergency situation can be avoided. 
  • The vaccination campaign will not affect these numbers.


source: Robert-Koch Institut

31 March 2021

Campaign against AZ finally succeeded

It is interesting that in the German decision to ban the AstraZeneca vaccine for under 60-year olds there was almost no discussion of the counter-factual risk. Clinical evidence suggests that among the 2.7m people who received an AZ vaccine in Germany, 31 suffered a cerebral thrombosis. Of those, 9 people died. All but two of the 31 cases involved women. The women were between 20 and 63 years old. The two men were 36 and 57 years old.

The counter-factual risk for people in these age groups of dying of Covid-19 is significantly higher. A group of German doctors calculated for the same population on the basis of current infection rates, and found that 10 women in the age group of 20-29 are statistically likely to die of Covid-19. But since AstraZeneca is banned for anyone under the age of 60, that is obviously not a fair comparison.

What is happening here is that one set of statistics is factually established, while the other set is not. This is legal thinking. Germany is still treating vaccination as a contract between the state and the individual.

Angela Merkel and Jens Spahn admitted last night that the decision constitutes a setback for the vaccination programme. Germany had an allocation of 56.3m AZ doses, compared to 64.1m doses for the BioNTech/Pfizer vaccine. The decision also affects secondary vaccinations, as a result of which the 2.7m who received a first doses of AstraZeneca will have to rejoin the queue because they won't get a second AstraZeneca vaccine unless they are over 60. As the vaccine was banned for the over 65-years old at the beginning, it was used mostly for younger people. 

We are hearing from a German medical practice that they have been allocated only 18 vaccines during the first week after Easter. We reported last week that the health ministry had already stopped both AstraZeneca and Moderna from delivering to doctors' surgeries. In the UK, the relatively easy cooling and handling requirements for AstraZeneca were a factor in the fast rollout through pharmacies and local health centres. 

One of the questions we have about the decision is, why has there been no increase in cases of thrombosis in the UK? Is this manufacturing-related? Does the UK not report all the cases? We find the discrepancy striking, since in the UK, the AZ vaccine has been given to 15m people. Or will the problem only occur later since the UK, unlike Germany, has not yet vaccinated anyone under the age of 50, except in a few cases where it was medically indicated.

One of the many consequences of yesterday's decision is that it will creative excess demand for the BioNTech/Pfizer vaccine, and that it may affect the EU's willingness to honour export contracts to the UK. The UK needs BioNTech/Pfizer for second doses mainly, but could face a shortages in the case of a ban. 

Another consequences is a serious delay in the German vaccination programme. Appointments for an AstraZeneca vaccination will be cancelled. As there is no capacity, people will have to wait. The infection rates are high - but have stabilised at just over 130. This morning, the Robert-Koch Institute reports a small fall in infection rates - but this may be due to data reporting. We are not in the worst-case scenario of the institute's previous predictions. But cases are likely to go up before they go down.

The big political question is whether the vaccination programme will have advanced to such a degree by the summer that people can go on holiday. In Germany, the summer school holiday seasons starts in mid-June in some states. The most optimistic scenario is now for a late summer holiday season, but this would be a problem for many young families - especially in Northern Germany where school holidays start early.

30 March 2021

UK strives for vaccine self-sufficiency

Ursula von der Leyen's loose talk about vaccine export bans belongs to the category of things that have an enormous long-term cost and fail to achieve anything in the short-term. One of the costs became apparent yesterday when the UK took steps to decouple from the EU in its future vaccine supply chain.

While EU member states are still struggling to get the required amount of doses for the first round of vaccinations, the UK is already planning ahead for the second round - and making sure that the entire production process takes place within the country.

The UK government had previously secured a deal with Novovax, a Maryland-based producer, to manufacture 60m doses of the vaccine in the UK. What happened yesterday is a separate agreement with GlaxoSmithKline, the UK pharmaceutical company, for a fill-and-finish deal as it is called - bottling and packaging. That was originally supposed to take place in Germany. As Boris Johnson said yesterday, the strategy is to build long-term vaccination manufacturing self-sufficiency.

Like the other vaccines, Novovax also requires two doses, to be administered in a space of three weeks. The agreed 60m would cover around half the UK population. The vaccine itself will be manufactured in the north-east of England by Fujifilm. GlaxoSmithKline will do the bottling and packaging. Production will start in May and reach full capacity in September.

The UK has also secured follow-on deals with Johnson & Johnson, and of course AstraZeneca. After the first round of vaccinations is completed this summer, the first step will be booster shots for the old and the most vulnerable before the next stage of the vaccinations are rolled out.

Despite Johnson's promises to offer vaccine sharing, we see no evidence of that actually happening. Politically, vaccination is the first big ex-post Brexit justification. We expect the Johnson administration to make similar moves in other areas where the EU is notably slower, for example in high-tech investments that are inconsistent with the EU's over-reaching data protection legislation. This is why the economic effects of an event like Brexit are likely to be very different from those static economic predictions - that take no account of innovation.

29 March 2021

Glowing green

Another controversy in upcoming green investment taxonomy, after the European Commission’s scientific arm, the Joint Research Centre, came out in favour of giving nuclear energy a green label.

The JRC wrote that it did not find any science-based evidence that nuclear energy does more harm to human health or to the environment than other electricity production technologies. It also found that storing nuclear waste in deep geological formations would be appropriate and safe, citing France and Finland as evidence.

France, Hungary and five other member states have spearheaded the effort to include nuclear power in the European green deal’s taxonomy, which would potentially give nuclear power investments the sustainable label required to access subsidies for green investment. Member states such as Austria have joined environmental groups in opposing the move, arguing that hazardous waste and high construction costs should exclude nuclear power from the green deal.  

This is not the first debate over what should qualify as green spending. As we reported earlier this month, European Parliament has been at odds with member states over whether natural gas should be included in green taxonomy, potentially by being classified as transitional in recognition of the role it could play replacing coal as countries move towards renewable electricity production. The most recent green finance guidelines, released in 2019, were widely criticised for excluding natural gas. An updated Commission proposal expected in the coming weeks is already at risk of being vetoed for going too far in the opposite direction.

And as we have been arguing for many months, the Commission’s approach to green investment classification currently uses the Rio markers to round a project’s green content up, putting the entire effort at risk of greenwashing should this criteria be maintained. It is becoming increasingly apparent that the European green deal is more of an rebranding exercise than a serious policy shift. 

The JRC’s report will be studied by two expert committees for three months before the Commission takes a decision.