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22 September 2020

Towards a second lockdown

We hope that it won't happen, or at least that Sweden will be joined by a few others in resisting the gut reflex of western political systems to lock down the economy in order to defeat a virus. The UK has imposed restrictions on public gatherings and the opening hours of pubs and restaurants. We are sure that more restrictions will follow. The Times reports that Boris Johnson was about to order the complete closure of pubs, but was persuaded to hold off by Rishi Sunak, the Chancellor.

Infection rates are rising throughout Europe. We expect Germany once again to be among the countries most effective in their crisis response, with a focus for now on walk-in test centres for high-risk groups and special protection for care homes. The Italian response is also similar to Germany's, with the addition of compulsory mask-wearing in public. The Dutch response is more similar to the UK's: restrictions on bars.

We expect the situation to ease the moment a vaccine is ready for mass introduction, which is likely to happen at some point in 2021. The winter tourism season is definitely cancelled. We expect the summer tourism season in 2021 to resume partially, but at a subdued volume. Even if restrictions were lifted in the summer, we do not think that tourism revenues in Europe will reach 2019 levels for many years, if only because travel has become more bothersome. Tourism and hospitality have joined the media and cars as declining industries.

The economic effects come mainly in the form of cross-sectoral shifts, which would be massively accelerated in the event of a second lockdown. Economic history teaches us that disruption is often good for economic development in the long run. But there are notable exceptions. It took the German economy 100 years to recover from the 30-year war in the 17th century. Beware of lazy historical analogies. What is unique about the lockdown is its massive interplay with two trends that have been happening in parallel: a technological shift from analogue to digital, and a political pushback against globalisation and multilateralism.

21 September 2020

Forget soft power

At their last meeting, EU foreign ministers discussed a paper that was uncharacteristically honest in its appraisal of the current situation: a shift in the global environment towards hostility to the European way of life. We have a copy of this paper, which touches on some of the things we have been discussing here at Eurointelligence.

The first big hurdle is to confront the culture of denial about the world as it is today, and Europe's role in it. The paper identifies five hostile trends, with some overlaps: 

  • multi-polarity without multilateralism: confrontation prevails over regulation;
  • return of competition between states;
  • return of empires: lack of respect for the sovereignty of people as opposed to the sovereignty of states;
  • weaponisation of interdependence: trade wars, secondary sanctions; 
  • reconfiguration of global supply chains as strategic policy instruments. 

The overriding theme is the breakdown of liberal multilateralism. We are not surprised that this is happening. Our multilateral institutions are ineffective and elitist. We have made the observation before that the dumbest thing a politician can do these days is to go to Davos or some other global junket. If you want to revive multilateralism, you must to involve your electorate in much deeper ways, and put an end to the elitist nonsense.

But herein lies the dilemma. European electorates are becoming more assertive, but they do not favour hard-power solutions. In Germany, for example, no coalition could currently win an election by supporting Nato's 2% defence-spending target.

Our suggestion is to focus on high-tech capacities in a more general sense, and develop them for dual civilian and military use. The latter is particularly critical as a new arms race is developing in this area. 

The UK has been the European country most advanced in signal intelligence. For this reason alone, Brexit will constitute a net loss to European security. This is one of the reasons we have been so critical of the EU's hardline position in bilateral negotiations, and its excessive focus on 20th-century manufactured goods rather than 21st century technologies. If the EU wants to think more strategically about Europe's role in the world, a useful first step would be to stop thinking of the UK as an adversary.

18 September 2020

EU hydrogen targets are a bunch of hot air

The European Union has officially bumped up its 2030 emissions target from a 40% reduction relative to 1990 levels, to a 55% reduction. The European Commission is banking on hydrogen to meet this goal. Green hydrogen, or hydrogen produced using renewable-powered electrolysis, could be a game changer for Europe’s energy sector. But the Commission’s hydrogen production targets are extremely ambitious given the current state of the industry.

Climate change and the European green deal were near the top of Ursula von der Leyen’s priority list during her state of the EU address this week. She confirmed that 30% of the Commission's €750bn recovery fund borrowing will be raised via green bonds, and that the fund will prioritise hydrogen projects. The goal is to develop hydrogen valleys, or large localised clusters of hydrogen production, to modernise industry and to power vehicles and rural areas.

It all sounds very good, but Europe has a long way to go. The EU's hydrogen strategy, laid out in July, calls for 40 gigawatts of green hydrogen electrolyser capacity by 2030, and an additional 40GW of capacity from countries in the southern or eastern neighbourhood, possibly Ukraine or Morocco, which would export to the EU. The interim 2024 target is set at 6GW. Green hydrogen is preferable from an emissions perspective because it uses renewable energy to generate the electricity needed for hydrogen production. Blue hydrogen uses fossil fuels in the production process, and so relies on carbon capture and storage to reduce its greenhouse gas emissions.

Europe is certainly making inroads in hydrogen. The Netherlands, Portugal, Germany, and France have all published hydrogen strategies over the past year. Global investment in electrolysers planned to be operational by 2030 more than doubled in the six months to March 2020, and more than half of this will be built in Europe.

But even this is not enough to meet the EU's mid-term target. Europe’s current electrolyser production capacity is well below 1GW per year, and the largest electrolyser currently under construction has a capacity of 10 megawatts. The Oxford Institute for Energy Studies reports that, for electrolysers, the typical success rate for large infrastructure projects to progress from feasibility to a positive investment decision is between 20% and 30%. Achieving the 2024 target would require between 20GW and 30GW of projects to be in the pipeline now, or by early 2021 at the latest. As of July 2020, Europe had 4.5GW of projects expected to come online by 2030, not even by 2024.

That's not the only challenge. The EU hydrogen strategy prioritises green hydrogen development. But it also accepts that, in the short and medium term, other forms of low-carbon hydrogen will be needed. However, it calls for just €3bn-€18bn of blue hydrogen investment, compared to €180-€479bn for renewable hydrogen. The green hydrogen figure does not include investment required to bring additional renewable power production capacity online, which adds between €220bn and €340bn to the bill. The recovery fund alone is not going to cover this, and Europe's hydrogen leaders can't meet the shortfall on their own. France, for example, plans to invest €7.2bn in hydrogen by 2030. It's not enough. 

At the end of the day, even if the Commission reaches its 40GW target by 2030, this would meet just 3-3.75% of Europe’s total projected energy demand. Hydrogen still holds potential to transform Europe's energy landscape in the long term. But right now, the hydrogen hype should be taken with a grain of salt. 

17 September 2020

Johnson's conservative friends are pushing him towards no-deal

The UK's internal market bill turned out to be a storm in a teacup. The storm subsided yesterday when Boris Johnson cut a deal with Tory rebels that will give the UK parliament the last word on any future breaches of the withdrawal agreement. For the EU and the EU/UK trade deal, this whole episode is completely irrelevant. 

There is one political development, however, that could increase the probability of serious challenges. Conservative commentators, friends of Boris, are rounding on him. This morning we see the extraordinary spectacle of both the Spectator and the Daily Telegraph running stories about Johnson's failing premiership. Allister Heath writes in the Daily Telegraph that Johnson needs to do two things: fix the broken system of Covid-19 testing; and leave the transition period properly, by which we presume he means no deal. We certainly agree with Heath on the former issue. But we are not sure that the UK, or even Telegraph readers, are quite ready to draw the right conclusion from the testing debacle: an open acknowledgement that the UK's revered National Health Service is no longer fit for purpose. 

Fraser Nelson's cover story in the Spectator this morning lists a large number of policy failures and U-turns, including the latest twists and turns on the internal market bill. The criticism is devastating, but the message is conditionally optimistic. Even now, Johnson is ahead in the polls. There is no alternative leader in his own party. But he needs to start to govern.

The reason we give these comments so much prominence is the implicit message they contain for the future relationship with the EU. They are both saying that Johnson cannot afford a deal with the EU that would be interpreted as a climb-down. If that happened, the sense of indecision might become irreversible. These are spine-stiffening rally calls by Johnson's most loyal supporters. We think he will heed what are still, in tone, friendly warnings.

The UK-Japan trade agreement tells us what a compromise can look like. We disagree with the interpretation of this deal in the FT, which argues that the UK had undermined its own negotiating position with the EU by agreeing to a state aid regime in its recently concluded deal with Japan. As the FT writes, the two governments agreed to prohibit indefinite government debt guarantees for struggling companies, or open-ended bailouts without restructuring plans. We cannot think of an existing or potential future state aid case in the UK that would fall under this category. We believe that the UK can happily live with this type of arrangement in a trade deal with the EU. We think the problem here is more likely to be the EU. Recall the proximity argument. The EU seeks harder guarantees from the UK than it did from Japan, on the grounds that the UK is geographically closer.

This is where the rallying calls of Johnson's supporters become relevant. Nobody would regard it as a defeat if Johnson were to agree to the standard terms on state aid in international trade agreements. The same goes for other level-playing-field issues, such as environmental and labour standards. But we think this is the marker of a broader line between perceived success and failure. A deal will happen if the EU agrees to treat the UK as a normal trading partner. But such a consensus has yet to emerge in Brussels. It won't happen until October. If it doesn't emerge, or only insufficiently, our expectation is that Johnson will walk. 

16 September 2020

Unclear whether Turkey and Greece will start talks soon

The path to dialogue between Greece and Turkey remains unclear, even if both countries declare they are ready for dialogue. It will be crucial for diplomatic efforts to produce tangible results in the next eight days, ahead of the European Council on September 24/25.

The Oruc Reis, Turkey's exploration ship, has returned to port. But Ankara continues to send conflicting messages. The Turkish government issued a naval directive for real-fire naval exercises on September 17, near the Turkish coast opposite the Greek islands of Rhodes and Kastellorizo. Turkey also extended a hydrocarbon exploration expedition off the shores of Cyprus. In terms of rhetoric, Recep Tayyip Erdogan has kept quiet but his spokesman and foreign minister both insist that Turkey will protect its rights and interest in battle and at the negotiating table. Ankara clearly wants to keep up the pressure.

The Greek government is asking for tangible signs that Turkey seeks de-escalation ahead of the EU summit, while the Turkish government has signalled that more Green conditions will prompt their own counter-conditions. In the coming days, diplomatic efforts will be all about where to draw the bottom line for starting talks.

There is some last-minute diplomatic effort from Brussels to pull off a multilateral conference with Greece and Turkey before next week's summit. One of Athens' preconditions is that Cyprus also participates, which Ankara strongly opposes. Whether this conference will actually happen will emerge in the coming days. Other diplomatic initiatives include talks between Athens and Berlin, an appeal by Mike Pompeo to demilitarise the conflict, and a visit to Greeve by the Egyptian foreign minister. 

16 September 2020

Macron's transformation to bottom-up candidate

Emmanuel Macron is turning his green credentials upside down, starting with his swipe at opponents of 5G. The French Greens requested a moratorium on 5G and Macron went against them yesterday, comparing them to the Amish people who advocate a return to the oil lamp. Ecologists, as the greens are called in France, are also against the Tour de France. Macron made sure to attends one stage of what he called a major event in French sporting and cultural heritage. And then there is the ban on neonicotinoid pesticides used in agriculture, which is about to be lifted. There go three years of building up his green credentials.

Why? Macron is about to reinvent himself for the 2022 elections. In 2017 he was an elite candidate who promised the people he could destroy the political system without destroying the country. For 2022 he wants to become a bottom-up candidate, writes Cécile Cornudet. This is what his choice of Jean Castex as prime minister is all about: changing the tone and talking like people on the streets, though not the ones in Paris. There will be green policies still, but less systemic and more in sync with the people. They are to follow common sense, without giving up the French art of living well. These are little phrases, but they are signalling a fundamental shift in Macron's positioning for 2022.

For Macron, the next candidate from the left will come with a green agenda. By pointing out that this agenda is not in sync with the French way of life, Macron presents himself as the compromise candidate in times when economic recovery is a priority. The polls suggest that he is not giving up much political capital, as his green agenda, allocated €30bn in the stimulus package, fails to convince. But whether Macron's U-turn will help or harm him as a presidential candidate is yet to be seen. After all, the French are divided over environmental questions, and Macron's makeover could accelerate this polarisation. 

15 September 2020

Towards an EU-run refugee camp

The German government will decide this week how many refugees it will accept, out of the 12,000 left homeless by a fire in the Moria camp on Lesbos. Bild Zeitung also reported that Merkel, Kyriakos Mitsotakis and Ursula von der Leyen are working on a proposal to rebuild the camp and have the European Union operate it. This would be a first.

Reports already confirmed that 10 EU countries agreed to take the 400 unaccompanied minors from the camp. This seems tiny compared to the thousands who lost their homes and belongings in the fire. The inhumane living conditions in Moria camp had been known for years, yet it took a disaster to prompt action. For politicians the decision is a double-edged sword. Even if it is morally right to take in the migrants, it should not set a precedent for similar fires to be caused elsewhere. 

Bild writes Merkel is leaning towards taking in children with families, possibly thousands of migrants, while insisting that this is a one-off gesture. This line is disputed, however. Horst Seehofer, the interior minister from the CSU, has been reluctant to take in more than 100-150 unaccompanied minors. He keeps insisting that doing more requires an EU effort first. There are also critical voices within the CDU like Jens Spahn, health minister, or Michael Kretschmer, president of Saxony. They do not want to see a repeat of 2015, when Germany was first to welcome migrants arriving at the Greek shores while other EU countries dragged their feet.  

An EU-run refugee camp would be a first step for Germany towards ending the hypocrisy that arriving migrants are a problem only for Greece, and not for the whole European Union. How to go on from there will likely entail a battle among the member states. Austria's prime minister already decided not to take any of the migrants this time, even if that puts him at odds with his Green coalition partner. At the moment, just 10 out of 27 member states are ready to step in and help. There is still a long way to go to get a common EU migration policy up and running.

14 September 2020

There is no silver bullet for the second wave

Bloomberg reports that some European countries hit hardest by the Covid-19 pandemic are also those where uptake of government contact-tracing apps is lowest. But trust between governments and citizens may play a more decisive role in the success of a pandemic response.

France and Italy recorded the lowest known adoption levels of Covid-19 apps as of 8 September. In France, where daily cases recently surpassed 10,000 for the first time, just 3.7% of the population had downloaded the StopCovid app. In Italy, where millions of children are set to return to school today, only 8.9% of the population has downloaded the Immuni app. The highest adoption level for any European country surveyed was Finland, at 32.7%.

Source: Bloomberg/national health authorities

Annelies Blom, a researcher at the University of Mannheim in Germany, told Bloomberg the problem is that people don’t trust either the apps themselves or the governments operating them. Norway and Iceland pulled their Covid-19 apps entirely for that reason.

Questions still remain over whether apps have the capacity to reduce the pandemic's impact. In Finland, daily infections have dropped significantly from their April peak. In Germany, where just 21.4% of the population has downloaded the government tracing app, infections have risen nearly eight-fold from their June lows. Harvard professor Miguel Hernán tweeted that low levels of contact tracing are one reason why Madrid’s infection rates surged over the summer while New York’s did not.

A surge in new cases cannot be attributed entirely to low app adoption. But, as we see with the example of Sweden, mandatory masks and lockdowns may not play a decisive role either.

Swedish authorities adopted a controversial pandemic response strategy early on. Authorities kept shops, schools, and restaurants open and no national lockdown was imposed. They asked only that people wash their hands frequently and follow social distancing rules. Face masks were never mandatory, nor even recommended. The government has not launched a track-and-trace app.

This strategy yielded mixed results. The country’s infection rate was the highest in Europe in mid-June, and it has recorded more deaths than Norway, Denmark and Finland combined, mainly in care homes. Now, however, Sweden is back in the headlines for its record low numbers of infections and deaths.

As we recently warned, using infection rate comparisons to make real-time policy decisions is a risky endeavour. It is impossible to say whether Sweden’s pandemic response has been a success because the pandemic is ongoing. But we’ve also argued that a lockdown is an extreme policy measure, the consequences of which will not be known for some time.

The Swedish government’s strategy relies on mutual trust between authorities and citizens to ensure softer voluntary protocols will be followed for longer. The World Health Organization recently praised this strategy, because it allows citizens to go on living their lives and reduces economic harm. With countries including the UK and France now contemplating a new wave of lockdowns and restrictions, governments might do well to consider the Swedish case. 

11 September 2020

Russia's extremely hostile threat to Germany

German diplomacy used to be boring, a slumber interrupted only briefly during the years of unification. Germany has since become a reluctant, hamstrung and inconsistent diplomatic actor, ultimately constrained by a general unwillingness to use force under almost any conceivable circumstances.

Yesterday saw an extraordinary statement by the Russian foreign minister, which could easily be interpreted as a military threat. The Russians told the German ambassador in Moscow that they consider Germany's refusal to hand over the test results of Alexei Navalny a hostile provocation against Russia. This will have a negative impact on the Russian-German relationship, and could have grave geopolitical consequences. This is clearly all about Nordstream 2. Russia is using maximum force to safeguard the project. We think this strategy will succeed.

Germany is also not expected to get any relief from the US elections. Defence News reported that German defence officials have warned their government not to expect any change in US policy towards Europe if Joe Biden were to win the presidency. We agree with that assessment. There is no consensus in Germany for an increase in military spending, and we see no change on the political horizon. While we expect the outwards appearance of transatlantic relations to improve under Biden, we don't think the US will constructively re-engage with Europe.

In other words, Germany and the EU are on their own in managing relations with Russia. We note that this realisation is slowly setting in, but also that they are not prepared for it.

9 September 2020

Breaching the law, but only a little

We might have been a tad too dismissive yesterday about legislation that caused much uproar in the relationship between the EU and the UK. Depending on some details of this legislation and on how the EU reacts, it could well unleash a sequence of events with a negative dynamic. 

Our twitter feed exploded yesterday after the UK's Northern Ireland Secretary admitted that the no-deal legislation constituted a breach of international law, in a very specific and limited way, as the minister put it. The anticipated breach of law relates to Northern Ireland: Under the withdrawal agreement, the region would continue to have custom-free links to the Republic, while new customs borders would have to be erected along the Irish Sea. The legislation seeks to nullify this arrangement in the event of no deal. Readers may recall this was the single biggest controversy in the withdrawal agreement negotiations.

Depending on how the legislation is drafted, that is, whether the breach of law is real or potential, it could make it impossible for the EU to continue negotiations. This is indeed a risk we do not believe the UK government has considered in careful detail. Politically, the UK is now using Northern Ireland as a bargaining chip in the talks. The political purpose of this no-deal legislation is to gain the upper hand in negotiations by signalling to the EU that the UK is really serious about no deal, and that this could endanger the peace in Ireland. 

As we noted there has been virtually no serious debate on the continent about the wider impact of a no-deal Brexit, on European companies, EU residents in the UK, security, foreign policy or Ireland. The European Council can only deal with one crisis at the time. Within member states the debate has not happened because the probability of no deal was widely underestimated. 

It is worth reflecting on how we got to this point. The moment the EU tried to make a power grab for UK state-aid policy, the negotiation turned into an ugly battle of egos. We heard a lot of tough-luck arguments. The EU is the bigger of the two sides, and can impose its will, for example by anchoring the level-playing-field to its own conditions. This was a short-sighted argument. As we learned ourselves, there are no obstacles in UK domestic law to stop the government legislating breaches of international law. The International Court of Justice in the Hague may well end up ruling against the UK. But, first, this won’t happen before the end of the year. And, second, the ICJ has no enforcement powers. If you start playing the relationship talks in the spirit of a geopolitical power game, don’t be surprised when the other side plays in the same spirit.

While perceptions of a no-deal outcome have clearly shifted, we don't think that the reality has. The outcome is still wide open. We don't like to give percentages chances because they are usually numerical extensions of gut feelings. What determines whether there will be a deal or not is the readiness of the EU to accept a compromise on state aid. If it does, then there will be a deal. If not, there won't.