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28 October 2022

Northern Ireland heads towards new elections

Northern Ireland is heading for new elections in December as the deadline to form a government passed last night. Last-minute efforts to restore the devolved government failed yesterday, since they could not elect a speaker for the Northern Irish Assembly, nor a first minister or deputy first minister. New elections are likely to be called today by the secretary of state for Northern Ireland, to be held within the next 12 weeks. The date floated by the media is 14 December, ten days before Christmas.

Since the May elections, the unionist DUP withheld its support for forming a government and installing the assembly for as long as their concerns over the Northern Ireland Protocol were not met. We have seen various dramatic shifts in UK politics under Liz Truss as foreign minister, but unilateral changes are pending as long as Westminster has not adopted Truss’s proposal which could allow UK ministers to override parts of the protocol. Negotiations with the EU continue, with a new deadline in April next year.

Politics in Northern Ireland is complicated. An executive in Northern Ireland is based on a power-sharing arrangement designed to ensure joint governance by unionists and nationalists, the two sides in the Troubles, a 30-year conflict that ended in 1998 with the Good Friday agreement. Sinn Fein won the May elections and would have claimed the first minister post under this arrangement, swapping positions with the DUP. For the DUP, the loss in power and its rejection of the Northern Ireland Protocol led them to choose a hardline stance to regain its electorate, which had been drifting towards other unionist parties. Hence their refusal to participate in the executive or to confirm the assembly, which means that the previous team continues on a caretaker role but without its full powers. The DUP kept its hard stance on the Northern Ireland Protocol despite pressures to form a government in the midst of a health and cost of living crisis. Time to find another solution ran out last night, and voters are now once again asked to go to the polls.

Where will the DUP be after the elections? Polls suggest that their hard stance could be winning back votes from other unionist parties which they lost last time. The message from the constituencies had been: stand your ground. But six weeks of campaigning could deepen the divisions between unionists and nationalists even if the non-aligned Alliance party is projected to reach third place. Sinn Fein is already campaigning on Instagram using the optics of the DUP blocking a nationalist from becoming first minister as a lightning rod, warns Belfast Live. It is not even clear that the deadlock will be resolved after the elections. If the DUP continues to refuse to participate in power-sharing, and there is no reason to believe that Rishi Sunak’s government will miraculously present a solution to them before the end of this year, another six-month deadline is looming for the next election.

27 October 2022

After Rishi is gone

Rishi Sunak has already made one egregious error, by reappointing Suella Braverman to the job of home secretary. This decision is more grave than it appears, because Braverman is subject to very serious allegations that were papered over in media coverage of the case. She was fired by Liz Truss from the same job only a week ago for what the media harmlessly described as a security breach. We have a good understanding of what happened. It is known that Braverman was using her private email account to leak highly confidential information. But this was not just any information.

Yvette Cooper, the shadow home secretary, yesterday gave one of the most robust performances we have seen from the Labour Party opposition, simply by asking a number of pertinent questions about this case. Sunak will eventually have to answer these questions. We have already reached the What-did-the-President-know-and-When-did-he-know-it phase of Sunak's premiership. The Braverman affair clouds the happy news of the first prime minister of Asian descent. Sunak's other big mistake, which will play out in full in a few weeks, is having re-appointed a chancellor who defines his role as a liquidator. 

The foreseeable failure of the Conservatives will have deep implications for Brexit. As readers know, we here at Eurointelligence did not support Brexit, though we opposed the second referendum. It was, and remains, our view that a successful Brexit would require a shift in the UK's economic model. Truss had a plan but failed to sequence it the right way. We really have no idea what Sunak's plan is.

Given the generalised lack of interest in a Brexit model, we conclude, as other have done, that Brexit is not sustainable. This does not imply that Brexit will be reversed. It is not a matter of black and white. We are looking perhaps at a bright shade of grey.

Andrew Duff has produced an ingenious strategy for Sir Keir Starmer to eat his promise not to join the EU's single market and customs union. He won't need to do this. All he needs to do is renegotiate the trade and cooperation agreement (TCA) and create a customs union with the EU. He would not join the EU's customs union. You can't join it, like you can join a club. The EU is, of course, a customs union, and it can form customs unions with third countries. It has one with Turkey. There is nothing to stop the EU and the UK from agreeing a customs union with each other as part of the TCA. Call it something else if you must.

This is step one. A customs union does not imply freedom of movement: the big political issue during the Brexit referendum. Here is where Braverman comes in. The home secretary is the most ardent opponent of relaxing immigration. Her security breach related to a cabinet discussion on this very issue. Truss has to be commended for trying to overrule her. But Truss is gone, Braverman is back, and the immigration regime will be tightened to the great detriment of business.

If, or rather when, Sir Keir becomes prime minister, he will inherit a country with acute labour shortages in many service sectors, including hotels, restaurants and baggage handling. In a situation like this, the EU's free movement of labour turns from a threat to a promise. A well managed version of free movement - not the one of 18 years ago, but one that is restricted to those who seek work in areas that suffer from labour shortages would be by far the best way out of Sir Keir's dilemma. At no time will he need to join the single market or the customs union, but simply agree to a bespoke TCA with equivalent provisions.

What we don't see is that Sir Keir would himself come up with a post-Brexit economic model himself. You can't blame a Remainer for not having a Brexit strategy. What happened is that the complacent Tories have failed to deliver what they got elected for: to get Brexit done. If they can't, nobody will. 

26 October 2022

How to live with China?

Today the German cabinet is due to vote on the Cosco purchase of a stake in the Hamburg port. Bild made a last-minute appeal to the government to stop this, but reported that the Green and FDP ministers all folded, except for Annalena Baerbock, the foreign minister. Unless there is some political movement overnight, this is now a done deal. Olaf Scholz has learned nothing from the Nord Stream 2 disaster, but in the country there is now some fledgling recognition of the national security implications of trade.

US policy towards China is also mistaken in our view. It is based on the futile attempt to stop China from getting access to the latest generation of semiconductors, and catching up with US defence technologies. It is naive to think that we can keep any technology private for any length of time, and secure our leading position through export restrictions. The Chinese will find a way. They always have.

Yesterday, we noted a comment by John Kerry, President Joe Biden's climate envoy. Kerry noted that China constitutes 30% of all greenhouse gas emissions. There can be no effective global climate change agenda without the active co-operation of China, he said. Kerry is calling on both the US and China to start a dialogue. Obviously, this is not going to happen for as long as the US imposes sanctions on China.

The problem with western foreign policy is that it is overloaded with conflicting objectives: supporting Ukraine, climate change, human rights, and technological Mercantilism. On China, neither Germany, nor the US have it right. The EU is probably better placed to agree a more nuanced stance, a policy more assertive than Germany's but more constructive than that of the Biden administration's, if only because the EU does not itself have a need to protect technological leadership that it does not possess.

Kerry made an astute reference to the rather naive US idea of keeping the climate change agenda in a separate bubble from geopolitical concerns, as he put it. This is not working. What happened is that China and the US have essentially broken off any meaningful dialogue on climate change. US policy towards China will fail. The German policy has failed a long time ago, but they still keep doubling down. Something new is needed.

25 October 2022

By appointment

An overriding pan-European theme we have been witnessing here at Eurointelligence over the years is uncritical support for technocratic governance. Whenever a professor took over the Italian government, he (always a man) could always rely on uncritical support from the Italian media, the EU, European think-tanks and academics. The most striking feature of the technocratic fan club is disdain for elections and referendums. 

The UK resisted this trend, but has now joined it. Rishi Sunak, who will become prime minister today, is of the same category as Mario Monti and Mario Draghi, except that he is an MP. As prime minister he was not elected in a general election, and not even elected by his own party, or the parliament. It is interesting to see how the UK media are finally relieved to see a return to rule-by-experts. They regard the disenfranchisement of Conservative voters through an electoral stitch-up a price worth paying, since they would have invariably voted for the wrong candidate. The Conservative parliamentary party managed to avoid a members' vote by setting an artificially high first-round voting threshold. But it means, politically, that Sunak is prime minister by appointment. Just like a technocratic leader or a central banker.

We think the call for an election is justified, but we are under no illusions that it will happen. Technocrats always hang on to the last minute. When the Draghi administration was appointed, we argued at the time that it should be self-limited to one year. But it continued until the moment it fell apart. It was a political disaster for every party that supported it: the Partito Democratico in particular, as well as Silvio Berluconi's Forza Italia and Matteo Salvini's Lega. Five Star did better but only because they pulled the plug on what was ultimately an unpopular government, which is not to be confused with the relatively high popularity of Draghi himself. The problem with Italian politics until recently has been that no matter what you voted for, you end up with the same technocratic policies. It will be interesting to see whether Giorgia Meloni will ultimately escape the technocratic trap.

The UK has not advanced nearly as much in that direction. There was a choice between Brexit and Remain. The political classes are still reeling from the 2016 defeat. The electorate had another stark choice in 2019, superficially between two very different leaders, but deep down between Brexit and Brexit reversal. Foisting an unelected technocratic leader on to such a system constitutes an interesting political science experiment, best watched from some safe distance.

So what can possibly go wrong? For starters, Sunak cannot disassociate himself from the consequence of his policies as chancellor. What he will do now is impose austerity, a policy for which there is also no political mandate. The closest Italian parallel is the Monti rule in Italy from 2011 until 2013. Applauded by the media, Monti was a star in Davos. Everybody wanted to rub shoulders with him. He even founded his own party. Everybody liked him, except the electorate. This is how technocrats always end. Not with a bang like Boris, but with a whimper. They just fade away. 

24 October 2022

Two incidents, common culprit?

Infrastructure is not only important to transport goods, but also for data. We somehow take them for granted, but should not. The Shetland islands and Southern France had to find this out the hard way last week. Two damaged subsea cables leading to the Shetlands shut down internet and telephone services on the island. Three fibre optic sea cables in southern France were cut in a major incident last Wednesday leading to a slowdown in internet services for Europe, Asia and the US, according to NatCost Security. Alternative systems had been put into place rather quickly, but the subsea cables still need fixing.

The big looming question that agitated the press and social media last week is this: can this be a coincidence, or is it sabotage? BT, who are responsible for the Shetland cables, has said that those two incidents were caused by fishing boats. Maybe. The one in France has yet to be explained.

These incidents damaged communication cables under the sea. They follow shortly after Northern Germany experienced a breakdown in its train traffic due to the shutdown in two crucial signal nods. And after Nordstream 1 had been irreversibly damaged by an undersea explosion pipeline explosion. Co-incidence or deliberate attack? A new form of eco-terrorism or Russian intervention?

From the joint occurrence of these events, it is easy to construct a story of a deliberate attack by the Russian state or non-state actors on European infrastructure, and link this to the war in Ukraine. Whether or not the real culprit will ever be found, those incidents will strike fear in European operators. After gas, what target is next for the Russians? How resilient are our networks? Are the perpetrators only testing us in preparation for a much bigger attack? 

21 October 2022

End of a beautiful friendship

Europe is losing precious time trying to find highly technical and highly political solutions for an EU response to the energy crisis. There are too many subjects EU countries disagree on, notes Dominique Seux, be it on defence, on how to respond to the energy crisis, on capping gas prices or decoupling those from electricity. And the new German government changes tone and pace of what European integration is about.

Olaf Scholz and his three-party coalition government is loud and clear on all those subjects, but it no longer seems to know where it stands. China is courted for economic ties that could result in new dependencies, while at the same time it wants to rid itself from dependency on Russia for gas, and refuses a European price cap that he fears would lead to shortages over the winter.

Emmanuel Macron may reassure the press that the relationship is not broken, it never is, but a shift is happening in the centre of gravity that will change the nature of this relationship.

During the traditional meetings in Évian, some thirty CEOs of French and German companies received Olaf Scholz and Emmanuel Macron 24 hours apart. They noted that the German chancellor did not refer to the Franco-German relationship. Instead they heard Scholz saying that he is the first chancellor of the first European power to be so central to Europe, which includes Ukraine. This is geographically correct but to deduct that this is also so politically is quite a jump. Is there a risk of a political delusion similar to Liz Truss? Is this the era of political experiments for radical change that create chaos without solving any of the underlying problems?

We see a more assertive German government is creating facts without much consultation. The latest example, as we have written in our separate story, is Scholz’s deal with China’s Cosco to take over parts of Hamburg’s container ship port. Germany also pre-emptively defined parameters on European defence by buying Israel’s Arrow 3 air-defence system that it will share with the Baltic states, the Netherlands, the Czech Republic, Slovakia and the Nordic countries. France and Poland are not part of this. Then there is the €200bn energy package that may have been coordinated amongst coalition partners, but not with other EU countries.

The war in Ukraine and the new tripartite arrangement in Germany shifted the gravitational field of Franco-German centred Europe. It has been coming for some time, culturally symbolised when they moved Germany’s capital from Bonn to Berlin. In Bonn they still hailed the closeness to France and committed to Rheinish capitalism, a cuddly and social version of Anglo-Saxon capitalism. In Berlin, the climate is rougher and it is about defending their own interests. On top of that comes the claim for leadership in Europe. A Germany that is driven by fear of supply shortages is clearly not in a healthy position to lead. And here we are with Germany flexing its muscles, France with a government weakened in parliament and Italy, which is about to turn to the far-right. What could possibly go wrong?

20 October 2022

Franco-German big freeze

The biggest political development in continental Europe right now is the freeze in the relationship between France and Germany. We have always wondered about France’s seemingly endless tolerance of German unilateralism, during the euro crisis for example. Angela Merkel kept the relationship intact through deft diplomacy. But diplomacy is not a strength of Olaf Scholz. He falls into the large category of Germans who think they are European, but who don’t like to spend too much time with Europeans, let alone coordinate policy with them. He coordinates within the coalition, and presents the German position to others.

Alarm bells should be ringing at the news that the France and Germany have cancelled the scheduled bilateral cabinet meeting, which was set to take place in Fontainebleau next Wednesday. The reason is that Emmanuel Macron is livid about Scholz's European air defence system. Scholz proposed it at his Prague speech. At the recent Nato ministerial meeting, 14 countries signed a letter of intent to procure a joint system from Israel, the Arrow 3, that is capable of straddling borders. France and Poland are not part of it. Macron sees this as a rebuff of European strategic autonomy, an idea he personally championed, and into which he managed to co-opt Angela Merkel.

France has a long list of issues with Germany right now. The German coalition did not coordinate with France, or any other EU country, on its decision to cap gas and electricity prices. We too argue that the lack of coordination, and the lack of flexibility afterwards, constitute a huge problem for the EU going forward.

The joint cabinet meetings between the countries are enshrined in Art. 23 in the Aachen treaty, where the two sides agreed to meet in full cabinet form once a year. The last meeting took place in May 2021 in the form of a video conference. Macron understands that the current economic crisis has the potential to destabilise the German economic model and that Germany needs to take action. But he is irritated at the generalised lack of coordination.

Sylvie Kaufman writes in Le Monde that the Franco-German engine, which has driven European integration, has given up. We think the following nails it. From the French newspaper L’Opinion:

“Germany is afraid because in six months it has lost its bearings. Its model was based on a triptych: cheap energy, thanks to Russian gas, a defence guaranteed by the United States and broad access to the Chinese market. Germany has entered a phase of reinvention that is pushing it to refocus and turn inward.”

19 October 2022

A bleak midwinter

We are no experts in warfare, but we do know that modern wars are rarely determined on the frontline battlefield. Ukrainian troops are still making progress in recapturing occupied territories, but the speed of advance is slowing. They are approaching areas where Russian troops are more solidly entrenched. We keep on hearing estimates from well placed sources that the Russian army is facing imminent defeat - within weeks - that they are running out of missiles, and that the stock of foreign reserves will only last for one more year. What these pieces of information have in common is that they confirm what we want to happen. What never ceases to amaze us is that even battle-hardened generals are prone to these cognitive biases. In war, and in life, events intrude all the time.

Since the beginning of the war, a lot of expert predictions have not come to pass. Russia did not occupy Ukraine within days. What about those forecasts that Russian GDP will collapse by 30%? It’s more like 3%. Or the expert view that Russia is running out of missiles and drones? This does not seem to be right either. Iran and North Korea are supplying missiles and drones, which are used with great effect in strikes against Ukrainian power stations and waterworks. Almost a third of the energy supply has apparently been destroyed in a week. The Russians are now once again blocking wheat shipments to the rest of the world. If you now consider the outlook for the European economy, which faces the mightiest fiscal/monetary squeeze in modern history plus an energy crisis, we are hesitant to declare game, set, match for Ukraine and its allies yet. Nor can we see a Russian victory, or even a situation in which Putin succeeds in cutting off Ukraine from the Black Sea.

Our main scenario remains of a protracted war of attrition - in Ukraine, but also indirectly in Europe as well. We have witnessed a strange accumulation of infrastructure attacks in various places in Europe in recent weeks. Europe is full of Russian operatives, friendly terror networks. Some are more professional than others. If the Russians are good at one thing, it is warfare in winter, and the exploitation of complacent dependencies. Gas is not the only one. We continue to see a non-trivial probability of a nuclear detonation - not by a tactical missile but an explosion in one of Ukraine’s four nuclear plants. Putin's decision to wage war on energy supplies does not make a nuclear attack less likely, as some commentators claim. On the contrary. 

We should prepare for a tough winter ahead.

18 October 2022

A Scottish money

The chaos in the UK government is the backdrop against which Nicola Sturgeon has renewed her call for Scottish independence. This time, plans include an independent central bank and a new currency that would be carefully phased in, as she puts it. Back in 2014, when Scotland held and lost its referendum on independence, there was still an open question as to whether or not Scotland should keep the pound or introduce a new currency after becoming independent. This question seems to be settled now.

After years of consultations, including with Brussels, she laid out her plans on how an independent Scotland would function in three papers. The third paper outlines plans for monetary and fiscal independence, including how Scotland would introduce its own currency, central bank and debt agency. Scotland would also have to negotiate with the UK government over how to divide assets and liabilities.

Sturgeon has been on a long-haul mission to get Scotland out of the UK, and ready to join the EU. Her plans did not convince in 2014 where 55% of the Scots voted to stay part of the UK. Would the numbers be different today? The proposal is much more serious this time. Opponents still argue that there is not yet a clear understanding of the economic costs of such a transition. There is still some work to be done, but we think this is a more substantial proposal than the last one. Then there is the question about timing.

Brexit clearly has been an accelerator for the drive towards independence with its prospect for Scotland to rejoin the EU after independence has been gained.

The current chaos in the UK government and its inability to turn Brexit into a growth strategy could help Sturgeon mobilise. But there is a counter-pull too. Brexit could eventually be reversed under a new Labour government. Brexit and Scottish independence are highly interactive. Would the Scots still vote for independence if Brexit were about to be reversed, even if only partially? Would Labour persist with its promise not to reopen Brexit if the polls suggest a majority for Scottish independence otherwise? Sturgeon argued that the UK is no longer offering economic strength, stability, or financial security. Would Scotland be in the position to build up a credible alternative? Plans are one thing, implementation quite another. The credibility is built on both: good planning and good implementation. This is especially true in times like these, where people experience how unpredictability impacts life.

Sturgeon wants a new referendum to be held in October 2023, but the UK government said that not enough time has passed. Sturgeon turned to the UK supreme court to establish whether the administration in Edinburgh has the legal authority to hold a referendum without the consent of Westminster. If the court rules against her, she vowed to use the 2024 UK elections as a plebiscite.

17 October 2022

Is Turkey bypassing EU sanctions?

Turkey is coming under increasing pressure from the EU over concerns that its companies are bypassing EU sanctions against Russia. Turkey refused to participate in the western sanctions on the grounds that it prefers mediation, while assuring the EU that it would not allow its companies to bypass or breach the union's own sanctions regime.

But last week, the EU's worries over sanctions compliance reached a new level. They are now seeking more concrete assurances that Turkey, which is in the customs union, does not procure EU products for Russia or resell products from Russia to the EU while concealing their origin. Ankara rejected those suspicions, saying that they are not evidence-based. But data suggest that its exports to Russia have more than doubled in a year, according to the latest EU report on Turkey. Brussels is also watching Recep Tayyip Erdogan’s efforts to increase economic ties with Vladimir Putin. All these indicators raised suspicions that Turkey has been acting as a conduit for sanctions-busting.

To address those issues, the European Commission and the Turkish government are to set up a working group, writes Deutsche Welle. Mairead McGuinness, the commissioner for financial stability and capital markets, visited Turkey last week and talked extensively about EU sanctions.

The same week, the EU approved its eighth sanctions package, including those real and legal persons, such as companies or organisations, that violate the EU sanctions regime. This could imply restrictions on Turkish companies if they are found to circumvent sanctions. For the EU a particular concern is over so-called dual use products that can be used for military as well as civilian purposes. The 2022 report warns that non-implementation of the EU's sanctions against Russia could cause problems in the customs union. If the two parties cannot find a way to resolve these tensions, the EU may impose restrictions on certain goods in its trade with Turkey.