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20 December 2021

Vaccine passports - French edition

How will Omicron affect the French presidential election campaign? All depends on how severe the wave and its health impact will be, and how far the government will go in its reaction. Mandatory vaccination and if so where, could these be the dividing lines amongst candidates?

Macron has decided to double down on vaccination. His prime minister, Jean Castex, told the French last Friday that it cannot be that a couple of million people who refuse to get vaccinated can put the whole country at risk. The government is now preparing a law to turn the green pass into a vaccination pass, to be presented to parliament in January. The government also discusses whether or not to extend mandatory rules on work places. At the moment mandatory vaccination only applies to the health sector. But discussions with trade unions and employers kick off this week. Trade unionists are not in favour, according to Les Echos. One of the concerns is that the moment employees were to refuse to vaccinate and thus would be suspended from work, they no longer would be covered by the work contract. Others refuse the mandatory nature on health decisions, which do not have to be disclosed to employers. Employers are reluctant too, but would comply if it means continuity for their business. Their biggest concern is who this mandatory rule is applied in practice. Mandatory vaccination is one step up on the coercion scale from the green pass. It is basically taking away the last choices people have - to vaccinate, to test or to have recovered from Covid.

Mandatory rules are opposed on the left and the far right, either in principle or in this extreme form. Christiane Taubira, who gave herself until mid January to decide whether or not to run as a candidate for the left, refused only in September to call on Guyanese to be vaccinated due to insufficient information. Another already declared candidate on the left, Jean-Luc Mélenchon, has been railing against mandatory rules since the beginning. His party just filed a proposal in parliament to end the mandatory green pass required to enter restaurants, cafés etc.

There is agitation on the right too. Marine Le Pen warns that mandatory vaccination would be a disproportionate measure and risk to kill the unvaccinated socially. Eric Zemmour talks about the hunt of the unvaccinated by the vaccinated. And where is Valérie Pécresse? For her the government has no other choice. She would never side with anti-vaxxers or encourage civil disobedience.

This new Omicron health crisis is a risk for all candidates, Emmanuel Macron and his contenders.

17 December 2021

EU 0, Putin 1

Olaf Scholz, like Angela Merkel before him, is a master of the art of saying nothing and of giving people the impression that he said something. Last night he did say something that should make us listen up. He repeated Angela Merkel’s assertion that Nord Stream 2 is a private-sector project that should not be interfered with by the state. So he keeps prevaricating, even now that Russia is making preparations for an invasion of Ukraine.

We should not be blinded by Annalena Baerbock’s expulsion of Russian diplomats, in response to a murder in Berlin, organised by the Russian state. The coalition’s priority will be to secure Germany's energy security. Yesterday, we staked out a scenario in which a Russian invasion of Ukraine could actually lead to an accelerated approval process for Nord Stream 2. And we don’t think that the Greens want to be held responsible for gas shortages during a cold winter. Right now, they can blame Angela Merkel’s inconsistent energy policies for anything that goes wrong during this winter. And Nord Stream 2 is now in the hands of the German and European regulators and courts, which is just as well.

We therefore do not see a fundamental shift in the German position. But, as became clear yesterday, Nord Stream 2 has the potential to do lasting damage to the EU. Several heads of state and government yesterday asked Scholz to drop the project. Scholz only blabbered some irrelevancies about the sanctity of borders, but did not get drawn on the issue of sanctions.

Right now, EU leaders are discussing a hypothetical: what to do in case Russia invades. If Russia does invade, the discussions would take on a different quality. We don’t see the European Council with a forceful and united response. There will be sanctions of the round-up-the-usual-suspect type.

The problems for Scholz will be the US. For him, the deal struck between Merkel and Joe Biden is perfect. Germany would procure massive investments into the Ukrainian energy network in exchange for Nord Stream 2 opening. But if Russia were to invade, that deal is off. The US would at that point pile on further pressure on Germany. If that were to happen, the balance of the argument would shift.

This is why the EU is so keen on reviving the Normandy process, if only to avoid a situation where its weakness and division would be exposed. Putin, of course, knows this too. It is not clear to us why he would want to start a serious diplomatic engagement with France and Germany at this point. What can the Europeans offer him? The Russians are saying that the Minsk agreement, part of the four-nation Normany process, did not work out for Russia. With gas shortages and rising energy prices, he has got the Europeans at the throat now. This is exactly what the Trump administration and the leaders of the Baltic republics said would happen.

We agree with the assessment of Handelsblatt that Nord Stream 2 has turned into a first-order foreign policy disaster for Germany. It is hard to see any good outcomes now.

16 December 2021

How to recall a telegram?

This is a hilarious story, though with a serious background, about what you are up against if you want to bring Germany into the digital era.

The state premier of Saxony has received a credible death threat, organised by members of a Telegram chat group. The social media network is also extensively used to organise demonstrations against Covid measures. Germany’s new interior minister, Nancy Faeser, had the seemingly brilliant idea of restricting Telegram. Unfortunately for her, this is not so easily achieved since Telegram does not have a German office.

Telegram was founded by Pavel Durov, a liberatarian Russian, who found a market niche by offering a non-censored social media platform, though Telegram, too, claims to remove posts that openly incite violence. But this rule is barely enforced. Spiegel sent a reporter to Telegram’s Dubai head office, but nobody opened the door when they rang the bell. The German justice department also sent letters to Telegram’s HQ, threatening to impose a fine, and also received no response. The Germans are shocked, genuinely shocked, that there is something out there they cannot regulate. We are wondering what will happen once they encounter the world of crypto finance.

Hilariously, the government is now considering asking Apple and Google to remove the Telegram apps from their devices. For starters, even in the unlikely event that Apple and Google collude with Germany in an argument about censorship, a ban from app stores would not would delete existing apps. Nor would it affect Telegram on PCs and Macs. And considering that Telegram users are likely to be at the sophisticated end of mobile phone users, they probably know how to jailbreak a phone. We doubt that people who plan violent protests and or even assassinations are swayed by the loss of their smartphone’s warranty.

The popularity of services like Telegram is due to the fact that they don’t censor, unlike Twitter. We warned against the decision by Twitter to ban Donald Trump as probably the single most counter-productive decision ever taken by a social media company. Freedom from censorship, and from protectionist regulatory control in the financial sector, has since become a viable business model, as German justice officials are just finding out.

15 December 2021

Who are the Fratelli?

We would like to share some observations by Daniele Albertazzi, professor of politics at the University of Surrey and one of the great experts on European populism, about the Fratelli d'Italia. The right-wing populists are scoring some 18-20% in opinion polls, along with the Lega. Giorgia Meloni, the party's leader, is seen as a potential future prime minister.

Albertazzi focuses on the ideological disputes inside the Italian Social Movement, the former fascist party, one of the precursors of the modern Fratelli. The MSI was split between conservatives - pro-Americans, in favour of low taxes - and radicals - anti-American, and willing to make common cause with communists.

Meloni has positioned herself clearly as a conservative. This is what makes her position so potent right now. As a conservative, she is an ally to both the Lega, whose main support is from the small business community in the north of Italy, and Forza Italia.

Albertazzi notes that the conservative position of Meloni was at odds with many in her own party who see themselves as the losers of globalisation. But he notes Meloni's clear position as a right-wing conservative gives the centre-right alliance a coherence which the centre-left never had. This, in our view, is the critical point of his analysis. The right-wing alliance has deep roots. It is not a fleeting affair.

We would like to make one further point, an issue that is often misunderstood in the UK. Neither Fratelli, nor Lega, are fundamentally anti-European. Gianfranco Fini, whose National Alliance also arose from the Italian Social Movement, was an ardent pro-European. Melloni herself has changed her position on Europe towards a position to fight the EU from within. Matteo Salvini has become ambivalent on some of his erstwhile anti-European positions, especially on the idea of a parallel currency. Many of the Lega's supporters in the Northern Italian small business community are very pro-European. Italy's populists parties do not define themselves in terms of euroscepticism. They are outside the European mainstream in the certain policy areas, notably immigration, but they are not plotting to leave the EU.

Outside of Italy, the perception now appears to be that Mario Draghi is firmly in charge of politics there. It is possible that the current rainbow coalition lasts until the end of the parliamentary term in the spring of 2023, but we struggle to see the continuation of a centrist alliance beyond the date. The centre-right parties have had a solid lead in the polls for a few years now. This may yet shift. But as year one of Draghi ends, this shift has yet to happen.

14 December 2021

Germany vetos arms sales to Ukraine

Germany's relationship with Russia is a potential fault line in the new coalition. The SPD is Germany's most pro-Russian party, with deep links to Vladimir Putin not just through Gerhard Schröder. Angela Merkel, too, has played a role, as Bild reveals in an extraordinary report. The former German chancellor blocked proposed Nato arms sales to Ukraine.

According to Bild, Germany has been using a Nato mechanism to block arms sales to Ukraine since May 2021, relating to semi-automatic, anti-materiel precision rifles, and to anti-drone rifles. Ukraine had already paid for these systems in early 2021 through the Nato support and procurement agency. The decision was blocked by Germany and the Netherlands in the agency's governance body. Volodymyr Zelensky, the Ukrainian president, begged Merkel to change her position, but she refused point blank in a bilateral conversion.

Germany has since softened its position in respect of the anti-drone weapon system. Ukraine will get half of its orders this month. But the blockade for the US-based anti-materials rifles persist. We don't yet know whether the new German government is taking a different position on this issue, but note that the defence ministry is in the hands of the SPD. During the election campaign, Robert Habeck, now economics minister, supported arms sales to Ukraine, a position that caused an outcry in Germany.

13 December 2021

So what was all the fuss about?

Thankfully, the UK dropped its demand that the role of the European Court of Justice must be removed from the Northern Ireland protocol. Lord Frost came up with this crazy demand just days before the European Commission was to publish its offer to reduce trade frictions. It was never going to go anywhere. No way would the EU agree to this, and it was highly unlikely that the people in Northern Ireland would protest violently against the CJEU in trade disputes. So this was pure tactics from Lord Frost.

Boris Johnson now wades in and takes the CJEU off the table, though Downing Street plays down what this means, writes the FT. Seems like they are hedging their bets. Brussels took the message at face value and is now preparing to talk about subjects that both sides could find a compromise on, for example, on access to medicines and the burden of customs and regulatory checks on goods, writes the Irish Times.

In Northern Ireland, meanwhile, the DUP leader wrote to Johnson that more needed to be done to avoid a collapse of the Stormont government. For the Irish, this is a smoke screen. Jeffrey Donaldson, the DUP leader, is just addressing his own constituency at home, while leaving enough room for London to negotiate a better deal. Stormont's power-sharing arrangement collapsing is the last thing Northern Ireland needs in the middle of another Covid wave, warns Sinn Fein.

Finally, a note on another outstanding dispute between the EU and the UK, on fishing rights. Another 23 fishing licenses have been issued for French fishing boats. This is like pulling teeth, one a time. We are getting there.

10 December 2021

When the party ends

No, the party scandal will not bring Boris Johnson down. It is another of these mini-scandals that beset the Johnson administration right from the start. The only thing that could end his reign is a no-confidence vote by his parliamentary party. Many Tory MPs are only there because of his massive election victory two years ago. As much as they might fume about Johnson's behaviour, they have not got anybody right now with who can plausibly claim that they could win another election. That might change at one point. More likely, it will not.

Johnson’s big vulnerability is not crimes and misdemeanours, but the British economy. What worries us is the failure even to create a narrative for a post-Brexit world, let alone produce an agenda. If that failure is accompanied by macroeconomic disturbances, especially rising inflation, the game is up. The big prize in British politics will go to the person with the plausible claim to make Brexit work. We think it would be the ideal campaign slogan for the next election, but it would require some ideas. The pandemic gave the Johnson administration some cover. But as the country emerges into a post-pandemic era, the government will need to shift gear and turn its attention to creating the economic conditions for the post-Brexit economy to flourish.

Right now, the UK is living off past achievements. We reported earlier this week that the UK is the leading country in Europe for high-tech start-ups. Some of them will be the high-tech giants of tomorrow. The high tech sector, especially fintech, is the UK’s big opportunity. If Brexit is used as an opportunity to create a regulatory framework fit for the 21st century, the government could easily win the election against an opposition that has yet found its own post-Brexit agenda, and whose leaders were some the most prominent advocates of the failed second referendum campaign.

But if that opportunity is missed, and the UK stays in the regulatory regime it inherited from the EU, baked in at the time of departure, even Brexit supporters will ask themselves whether it was worth it. Unless Johnson gets a grip, the answer will be no. And it will be obvious to a lot of voters.

9 December 2021

La vie est belle: pensions edition

Pension reforms are notoriously difficult, and yet they are unavoidable in countries with pay-as-you-go systems, amid rising life expectancy and shrinking working life populations. France had its go with pension reforms, but these efforts were either stopped by protests, or not enough to solve the deficit problem. The latest was initiated by Emmanuel Macron, who started out with great ambitions. Negotiations became complicated, events intruded, like the gilets jaunes and the pandemic, with the result being that his pension reforms never saw the light.

The case for a reform still persists. Dominique Seux looked at the latest OECD data, and found that France has every reason to reform its system. According to their data, French men spend more of their life time in retirement than in other comparable countries, one half of their working life. France also has a higher life expectancy, four years higher than in Germany.

For pay-as-you go systems with unchanged age profiles, it means that there are fewer young people to finance the retirement of an ever-increasing number of retirees. Looking at the numbers since 1970s until 2020, the OECD data show that the gap between average retirement age and life expectancy increased by some 7 years that need to be financed. In France, men enjoy 23.5 years of their life as pensioners, while women spend 27 years in retirement.

We cannot easily project past trends into the future. Health is an important factor behind these trajectories too. New pandemics may come and change the age profile in a country. What it does still tell us, though, is that there is no way around pension reform.

8 December 2021

Unicorn in the room

This big report from yesterday gives a good illustration of where innovation is taking place, and where it is not. The answer is mostly in the UK, with Germany hanging on in there. Southern Europe is nowhere. Here is the result for cumulated venture capital invested.

These charts reflects venture capital investments in high tech industries. So far this year, $100bn has been deployed in Europe this year alone, a 10-fold increase from 2015. The total number of unicorn has grown from 223 to 321, according to a report by Atomico, a venture capital company.

As the reports noted, Europe now has the strongest startup pipeline ever, now on par with the US for the first time. Europe, including the UK, now accounts for 33% of venture capital invested globally in investment of up to $5m: the early stage start-ups. Since we know already that Europe slept through the first stages of the digital revolution, these latest data for the small scale starts-up are encouraging because these are the likely big businesses of tomorrow.

The unicorn in the room is that these data lump the UK and the EU together, which hides the underlying picture of the UK as the leader, with a wedge that continues to widen. Germany, Spain, and the Netherlands have two cities each among the top 20, the UK has five. Europe's top city is London. The capital invested in London is almost three times as much as that of the next placed city, Berlin. Post-Brexit UK had a massively successful year. The gap between the UK and Germany has widened since Brexit.

We have been arguing that Brexit will ultimately be good for high tech companies, especially high tech service providers, because the UK will be able to give itself a tailor-made regulatory systems for this new industry. This will require deviations from EU regulation in several fields, including data protection. The UK benefits massively from the presence of the City of London, and from the fintech sector as an important source of technical innovation. One area where the EU is doing well is crypto finance, because it is beginning to adopt an intelligent regulatory framework.

The northern continental Europeans are doing also relatively better in the category of the larger deals. The largest deal this year was a Swedish company, Northvolt, with another Swedish company in third place. There are four German companies among the largest ten VC deals.

7 December 2021

Towards Pécresse-Macron?

The first poll after the election of Valérie Pécresse as the candidate of Les Républicains suggests that she would qualify for the second round against Emmanuel Macron. Pécresse's nomination boosted her poll ratings by a stunning 7 percentage points. She is now at the same level as Marine Le Pen, who lost 3 percentage points in the Ifop-Fiducial poll. These are early days, and mean nothing other than that Les Républicains are back in the game.

It looks like this election will be fought on the right. The left is divided behind its three candidates: Anne Hildago, Yannick Jadot and Jean-Luc Mélonchon. Marine Le Pen and Eric Zemmour will fight to the end for the far right. Zemmour, will he be the game changer? His electrifying performance in his first rally with 13,000 die-hard fans had its moments of violence against protesters and the press. For Zemmour, who promotes law and order, fans like this are a handicap. Also, can he talk convincingly about subjects other than immigration?

But Zemmour has the capacity to disturb. He already had an impact on who became the candidate of Les Républicains. By declaring his candidacy a day before the first round vote, he boosted to the top the surprise candidate Eric Ciotti and kicked out the frontrunner, Xavier Bertrand. Ciotti and Pécresse qualified for the second round, two surprises in one go. The results mean that the centre of gravity moved further to the right for Les Républicains. This in itself is quite a stunt. Where those voters end up voting next April, for Zemmour or Pécresse, depends on how Pécresse can reach out to this faction of the right.

Pécresse understands what is at stake. He first visit yesterday was to Ciotti in his constituency. The signal she wants to send is that she is the candidate of the right. But how far will she go to integrate their interests into her programme? Does her elite background boost or compromise her credibility?

The only candidate still missing is Emmanuel Macron. President, but not yet declared candidate. How long can he hold out before this becomes insincere? By not declaring his candidacy, he avoids the traps of his predecessors. Overconfidence, unpreparedness or too much fanfare cost them votes. To be president and candidate at the same time takes skill. The pandemic and its fifth wave, which seems more manageable without major restrictions, is a gift for him, an occasion to talk to the French on television without campaigning. But it is clear that he is campaigning already. Macron pronounces himself on everything, omnipresent everywhere and every time, writes Cecile Cornudet. The image this creates is that he is the president responding to the general interest, whereas candidates are concerned with special interests. Being presidential is his advantage. So far, this has worked well for him. Every poll so far has him winning the next elections.