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24 February 2023

Can the EU have a war economy?

The EU was build to ensure peace amongst former warring nations by integrating their economies and allowing their people to move freely across borders. Today we are living in a world that goes against this principle, even if the aggressor comes from outside the EU. We erect walls at EU’s external borders and cut economic ties to Russia; we look to enhance our own military capacities and industries to support Ukraine, and eventually ourselves. Our defence industries were made for peacetime, with occasional operations here and there. This is about to change for the sake of Ukraine.

The arms industry in Europe is preparing for full order books since the EU's member states have vowed to supply Ukraine with arms. Thales, Dassault, Leonardo, BAE Systems or Rheinmetall are expected to benefit from future orders even if the war in Ukraine has not yet translated in concrete orders. Olaf Scholz may talk about the Zeitenwende, and even gave his green light for the exports of Leopard tanks to Kiev. But the number of member states who actually deliver has dwindled. The Netherlands and Denmark won’t deliver, Sweden did not respond, Finland has found three and Spain six tanks to send to Ukraine. This is not a decision to be taken lightly.

Last year Emmanuel Macron surprised everyone by announcing a shift towards a war economy. But industrial mobilisation is not that simple, writes Les Echos. Since the WWII, the defence industry was meant to produce only the minimum of what is needed during peacetime in Europe. It takes 2-3 years to mobilise those industries and societies. A war economy means putting the capacity to produce military equipment at the centre of the administration’s pre-occupation. In France, this is what the Direction générale de l'armement (DGA) is doing.

For a start, there will be more money, €400bn for the 2024-2030 period, a 30% rise compared to the previous budget. Then there is the defence industry with its list of demands. They want long term contracts with a predictable stream for production; they also asked for more pragmatism from the administration rather than engineers fretting about particular details of their order that cost a disproportionate amount of time and money to produce and deliver; and they need assured access to raw materials, competences and financing.

Priority access, as it is granted in the US, is legally not that simple in Europe. So if they really want to prepare for a war economy, how would they secure supply chains? How to split the costs between industries and governments? And how to ensure enough man power to get the economy up to speed? The education ministry is in contact with the educational authorities to recreate a new apprenticeship for welding with the backing from the defence sector. They also look into creating a reserve of former employees in the defence industry. As for financing, the ministry for the armed forces promises to actively campaign for investments in defence and to encourage the creation of investment funds dedicated to defence.

The other big question the DGA is looking at is whether France has the industrial and technological base capable of increasing its production. Of the approximately 4000 companies deemed useful to French defence, only 200 SMEs declare that they cannot envisage an increase in pace. The DGA is monitoring the situation and has set up an industrial affairs department to work towards consolidating the sector.

When we read about the DGA’s agenda, we find it hard to see how Germany can go along with France on this. It requires much broader and deeper reflection over the eventual consequences of such a war economy in a European union that was built for peace. Times may have changed, but a war economy does not sit well with the principles on which the EU was founded and the way it was set up. It goes against the EU's DNA. The EU never was only about trade or product standards, but a project in pursuit of a higher goal. The big European thinkers of the early years of European integration knew that. That overarching vision is absent now. 

23 February 2023

Russia kicks France out of Africa

While Europe is focusing on helping Ukraine to win against Russia, Russia is making inroads, and winning hearts and minds, in Africa against former colonial powers from Europe. Over the past months, French troops have been kicked out of Mali, Burkina Faso and the Central African Republic. Their role has often been replaced by the paramilitary Wagner group, run by Vladimir Putin ally Yevgeny Prigozhin. The speed with which this has happened makes observers wonder which country is next, according to Politico.

Not that the record of French interventions has been great. Despite their decade-long presence in its former colonies, those countries are still amongst the poorest in the world and the security situation has worsened. France has also neglected the power of story telling and did not do enough to counter misinformation and fake news. The influence of Russian propaganda is massive, and a whole network of troll farms, pro-Russian influencers, movie productions, fake social media accounts and links to local media are being deployed in what is known as the Prigozhin galaxy. The Russian state-backed RT and Sputnik are upping their presence in Africa after being banned in Europe. But Radio France Internationale was banned in Mali and Burkina Faso, and France 24 was suspended in Mali. There had been waves of crude false accusations against the French. A cartoon film makes the rounds, depicting the French as the zombies and Russian mercenaries as the ones to save the day. These images tap into past wounds and stories of colonialism, passed on from one generation to another, appealing to young African men.

France has been slow to respond and counter those misinformation tactics. France is seeking a more supportive role, working with African armed forces rather than despite them. And the French foreign office created a unit to spot early signs of misinformation, as well as a back office to help countering them. Emmanuel Macron is also heading to Angola, the Democratic Republic of the Congo, Congo-Brazzaville and Gabon next week. This comes after Sergey Lavrov toured Mali, Mauritania and Sudan in January.

22 February 2023

Russia's next annexation

Süddeutsche Zeitung and a group of continental European media organisations got hold of a 17-page document mapping out a strategy for Russia to annex Belarus in this decade. As ever, we report on leaked documents with caution. The vast majority of leaks in newspapers are not the result of investigative reporting, but of governments abusing the media to their own advantage. The document, dated from 2021, is entitled strategic goals of the Russian Federation in Belarus, and maps out short-, medium- and long-term strategies until the year 2030. The experts consulted by the media, and western intelligence agencies, who looked at the document concluded that it was credible.

The overarching strategic goal is to maximise Russian influence in Belarus in the fields of social policy, trade, the economy, the sciences, education, and culture. Russia wants Belarus to harmonise its constitutional reforms with Russia’s. The short-term goals were earmarked to have been completed last year. The medium-term ones go until 2025 and the long-term objectives until 2030. One of the specific goals is to support pro-Russian forces in politics, the military, and the business community. It involves the total removal of trade barriers, and the integration of Belarus' sole nuclear power station in the grid of the newly-created union. All Belarusian freight transports through the Baltic states would be diverted to Russian ports. There are also hints of a common currency.

Russia is not planning an invasion. Belarus' compliant dictator is a co-operative player from Moscow’s perspective. But Russia is clearly aware that there will be opposition to the annexation. The first part of the plan has already been enacted. Belarus' economic dependence on Russia has grown.

The west has blocked $18bn in Belarus' exports. Belarus managed to compensate a large portion of that in rising exports to Russia. Belarus is now redirecting its entire trade from the west towards Russia and China.

21 February 2023

The dilemma with the NI protocol

Robert Peston made the point that no matter of how many technical solutions the EU and the UK find for the Northern Ireland Protocol, the fundamental problem for Unionists is not solved as it is a matter of principle. The protocol keeps Northern Ireland in the single market, so that when the EU changes relevant laws, Northern Ireland would have to comply with them without having a say. There is a democratic deficit, as Northern Ireland will have no say in Brussels' decision making. It also means Northern Ireland is treated constitutionally differently from the rest of the UK, something that may in practice become more relevant if or when the UK and the EU decide to follow different paths for their goods and service markets.

How did they end up at this place? No checks the land border between Northern Ireland and the Republic of Ireland is considered paramount to peace on the island. The lack of a hard border and associated infrastructure like checkpoints is a fundamental principle of the Good Friday Agreement. But after Brexit this means that Northern Ireland goods and services have to comply with EU standards for the Single Market and may deviate from the UK standards. It requires checkpoints for goods trade before they enter the Republic of Ireland, something unionists are vehemently opposed to.

Brussels may offer Northern Ireland a voice in those new laws, but a voice is neither a vote nor a veto, Peston insists. And the technical solutions won’t solve this fundamental issue.

Technical solutions are currently being finalised between the parties. It includes a distinction between goods that come from the UK which are meant to stay in the region and those that are destined for exports to the Republic. A technical solution could even be found for the role of the European Court of Justice: Its role cannot be completely abolished but it can be greatly diminished, modelled on the precedent of the European Free Trade Association.

A breakthrough is expected at any moment, though the precise moment seems to be slipping. It may be postponed once again this week. But no matter how clever this solution, the fundamental dilemma for Unionists is there to stay. Can they come to terms with this?

20 February 2023

US-China: this is not a cold war

Dominique Moisi made an excellent point in his Les Echos op-ed dismissing the idea that the US-China confrontation today is a kind of new cold war, similar to the one the US had with the USSR. Not only are the US and China economically dependent from each other in a way the US and the USSR were not, but the two also know much less about each other.

The US had a fairly good understanding of the USSR back then, but is much more hazy when it comes to China today. There are several reasons for this. Back then, the US had a defined strategy of containment of the Soviet Union, first formulated by George Kennan in his well-known 1947 Foreign Affairs article. There is no equivalent for China today.

Then there is a lack of understanding of the others' culture. There are many Chinese students passing through Western universities gaining deep knowledge of our societies and values. No such immersion has taken place the other way around. It is thus very easy for Americans to suspect a spy in everything Chinese, be it the people or balloons flying over US territory.

We only have a vague idea of what China is trying to achieve: to retaliate for what it suffered through the country's so-called century of humiliation, from 1815 to 1978. This is why communication is so important. But there is no red telephone line as it used to be between the White House and the Kremlin. Could Taiwan be the next Cuba? Who and how would the two sort out a crisis like this?

The West's strategy should be thus be more modest, one of avoiding worst outcomes. Moisi argues that China, by supporting Russia, does not become the XXL version of Russia: they are too sophisticated for this. A clear strategy from the West is still missing, and the potential for a fear-driven response is large. What is necessary instead is a relationship based on realistic goals.

17 February 2023

Le Pen to benefit from pension debacle

The pension reform bill is up for a vote in the National Assembly today and then it goes to the Senate. The tumultuous battles in the assembly will leave scars for all parties, except for Rassemblement National. No one seems to have noticed that the one to benefit from the chaos others have produced is Marine Le Pen, warns Nicolas Beytout. Her party was the only one united in this debate behind her leadership. All other groups disintegrated over internal disunity.

Nupes are probably the worst hit. The Socialists, Communists and the Greens withdrew their amendments ahead of the vote today, leaving La France Insoumise alone in keeping its amendments in. This is the end of its strategy of protest via obstruction orchestrated by Nupes. Their goal, to force the government to renege, did not succeed. And Jean-Luc Mélenchon won’t be the leading figure of the street protests as much as he would like to. Trade unions have kept their distance from LFI's leader. What will remain of Nupes, an alliance that won the left parties more seats in the legislative elections, after this debacle over the pension reform is over?

The other wounded party in the battle are Les Républicains. The pension reform debate, so politicised in France, divided them. Different personalities are defending different directions for the party, and no side is ready to concede to the other. This is a schism similar to the one over Europe in times of the Maastricht Treaty, according to Beytout. The schism is over which way to go in order to regain popularity: to be lax or rigorous, austere or generous? The party will not emerge from this episode unscathed.

Then there is the presidential majority, the coalition of parties formally aligned with Emmanuel Macron, itself. Disunity is less loud, but still noticeable. The sporadic outpours of Francois Bayrou or the silent treatment of Edouard Philippe suggests that not all are united behind this particular reform or the way it was dealt with by the government. The left wing of the majority is still uneasy. On top of this are rumours that Macron disagrees with Elisabeth Borne’s concessions on the reform to get the backing of Les Républicains. All of this does not present Macron's faction in the best.

Rassemblement National is the only party standing united behind their leader. Le Pen just has to wait for after the pension reform to cash in. The next crucial debate is on immigration, another opportunity to score points. Le Pen is clearly getting her troops ready. What does it mean for the next presidential elections in 2027? Once Macron will be out, he won’t have a third term. The field is wide open, and, at the moment, it seems that Le Pen is the only one of the potential candidates with enough authority to make it to the finish line.

16 February 2023

Last of the great independence movements

With Nicola Sturgeon, so goes Scottish independence, the last of Europe's great independence movements. Sturgeon's successor will try to keep the torch lit. But the momentum for Scottish independence has been fading for some time. Sturgeon left in part because she knew that she would not achieve her greatest goal.

So why did it lose momentum? We have been told endless times that it was not a question of whether Scottish independence will happen, but when. Brexit should have settled the issue in favour of independence. The unity of the UK was one of the strongest pro-Remain arguments in the Brexit referendum. Scotland held its referendum on independence in 2014, two years before the Brexit referendum. With Brexit, the Scottish independence movement gained its first plausible narrative ever - that of independence within the EU. What should have helped as well is the deep unpopularity of the Westminster government.

We see Sturgeon's failure is part of a broader European phenomenon. Regionalism has died a quiet death wherever you look: in Italy, in Spain, in Belgium. Long-standing readers may remember the times when we wrote extensively about the Vlaams Blok and its successor, the Vlaams Belang, in Flanders and the independence movements of Catalonia. The Flemish parties were on the far-right, and sought devolution. Catalonia's independence movement was a coalition of right, left and centrist parties that sought formal independence through a referendum. Catalonia and Caledonia wanted independence through referenda, but their supporters were mostly middle-class. They were not the types ready to die for their ideals, or go to prison. We recall when the Catalan leader fled the country after the police issued an arrest warrant, in a mysterious caper that involve swapping cars under a bridge near the French border. That Catalan independence dream died under that bridge.

We have been arguing consistently that the idea of regional independence with the EU is a non-starter, and that the EU should encourage it. Spain would have vetoed Catalonia's accession. It never made sense for Scotland to open its non-existent borders with the EU's single market, while erecting an external EU border - for immigration and customs - in the middle of the UK. The irony is that the EU makes independence feasible on one level, yet impossible on another.

In Spain and Italy, nationalists have turned to other political parties to express their grievances. The regional nationalist party is no longer the main actor on the right. In Italy, Giorgia Meloni's Fratelli d'Italia have supplanted Matteo Salvini's Lega as the main party of the right. In Spain, Vox caters to the ultra-right. France has Marine Le Pen. The Scottish still have the SNP, but we would not be surprised if the UK, too, at some point establishes a viable party on the far-right, as the political alliance that constitutes the Conservative Party has become fractured. The UK's electoral system is not conducive to splintering, but we have seen the havoc that Nigel Farage and his various outfits have managed to create without even gaining a single seat.

The biggest change of all, and perhaps the most plausible explanation for the death of independence movements, is that the world has bigger problems now than it did in the first two decades of this century. Geopolitics is back. So is inflation. We have an energy crisis. Global warming is progressing at a faster pace than previously estimated. Regionalism is clearly not the answer to any of those problems.

15 February 2023

Shocked about the electro age

When a large economy like Germany makes itself dependent on a few highly specialised industries like mechanical and chemical engineering, it creates a whole of number of vulnerabilities hidden from public view during the good times. We have just been through an energy shock. The biggest shocks, however, from which there is no escape, are technology shocks. You can't blame the German car industry for failing to be leaders of artificial intelligence systems, or electric batteries. But they could have invested in them. Even if these technologies are developed by others, the German car makers had enough money to own a good chunk of them.

Regular readers will recognise that the slow death of the German car industry was one of our main themes in the 2016-2019 period: the period of the diesel scandal and the rise of electric vehicles. German society as a whole was in denial over this at the time. But is now starting to shift. FAZ had a comment recently noting that a secular decline of the car industry would be catastrophic for Germany, though it was still complacent in its conclusions. Yesterday, a commentator in Germany's main evening news hyperventilated about the electrical age, as he called it. As we reported in our briefing, Ford is closing down its factory in Saarlouis and will cut jobs in other European plants, including Cologne, its European headquarters. VW has postponed a previously planned factories in Wolfsburg, and both VW and Audi are likely to close down further factories in Germany by 2025. The car components industry is bleeding even more. He concluded that Germany was just in the process of losing part of its wealth, and criticised over-regulation and the German government for failing to produce a coherent strategy for cheap energy.

We have news for him. No government policy can save the fuel-driven car, just as no policy could have saved the typewriter. The game is over. The European Parliament yesterday voted to end the fuel driven car and light trucks by 2035. But that decision was on the cards for a long time. While 2035 is the deadline, most of the impact will happen before. Today, it is easier to find a petrol station than a charging point in many places in Europe. That situation will reverse well before 2035.

By 2035, Germany will have gone a good distance in its energy policy transition. The electricity generated by renewable sources will then be used to charge electric batteries, or produce green hydrogen, but it won't be used to make diesel factories more competitive.

But Germany will try to preserve what it can. We expect current and future German governments, for example, to foot-drag on driverless technologies as a protectionist measure. It will backfire on them because the technology will be developed by others. When you no longer own the technology, your policy choices are more limited.

Why is Germany so sluggish in its response? Government policy enters the picture in many ways, but we would like to point to two specific factors. One is the lack of independent voices in the media. The car boys - men mostly - were in control of the information flows. They regularly get invited to expensive junkets with the car bosses. Some German car companies provide journalists even with discounts for news cars. Tesla does not. Journalists love to write about power battles inside VW, but never cared much about external technology shocks. Even now, they mischaracterise the nature of what is happening. It is not the electric age Germany is struggling with. It is the digital age. What they still don't see is that the modern generation of cars are digital devices at heart.

A second problem is the disappearance of entrepreneurs from the German economic scene. The industries on which Germany has become reliant were founded decades ago by real entrepreneurs. A  managerial class has taken over. Managers are focused on other managers, not on entrepreneurs who challenge the rules. When your head is immersed in diesel fumes, Elon Musk is a man who is easy to underestimate.

14 February 2023

Could Russian gas make a comeback?

Whilst in most of Europe the energy relationship with Russia is effectively dead, in one corner of the continent it has sprung back to life. Austria, the first western country to sign import contracts with the Soviet Union back in the 1960s, has seen flows of Russian gas return recently. What has arisen is a very difficult political situation for the government there to navigate, which other European countries and the EU will have to reckon with in time.

The crux of Austria’s problem has to do with how the pre-Ukraine war energy relationship with Russia worked contractually. Whilst European gas buyers increasingly switched to relying on spot market purchases, most Russian gas was still bought and sold via long-term contracts. This increased after August 2021, when Gazprom stopped selling gas on the spot market via its electronic sales platform.

When Russia began restricting gas flows to Europe last summer, they did so not by cancelling extant long-term contracts or delivering less spot gas, but by delivering less than they were obligated to. This has put European buyers in the weird position of being able to receive the gas, and in some instances being contractually obligated to, legally speaking, but not actually getting any supplies from Gazprom.

This is the problem Karl Nehammer, the Austrian chancellor, faces. There are no EU-level sanctions on gas imports, and European buyers are obligated to receive, or at least pay for, minimum volumes of gas under the contracts’ provisions. So there’s nothing anyone can do to stop Austrian buyers like OMV taking the gas, and not taking it potentially causes more problems than it solves. As Nikolaus Kurmayer, writing for Euractiv, reports, 70% of Austria’s gas supplies still came from Russia as of last December.

The question is what to do about the longer-term energy relationship with Russia given how many of these agreements, which sometimes run into the 2030s, are in place. Contracts which expired in 2022 accounted for the equivalent of 12% of the volumes Russia delivered to the EU in 2021. There is the prospect of Russia flooding the European market with gas once the war ends, or even before that, producing an oversupply situation and dampening investment cases for alternatives.

For the firms involved, this is especially difficult. Russia’s shut-off last year means they are now exposed to considerably more political risk than before. It will be hard for creditors and investors to look at exposure to Russian long-term contracts in the same way again knowing that there’s a possibility of something like Uniper’s implosion last year repeating. At the same time, now there’s no real alternative to waiting until the contracts expire, a slow exit from the legal relationship.

13 February 2023

Le Pen's issue with Meloni

Is Giorgia Meloni a promise or a burden for Marine Le Pen’s own ambition to get elected as president of France? At first sight, one could argue that the more Meloni succeeds, the better it is for the far-right in Italy and France. The regional elections in Lombardy and Lazio, the two most populated regions, which started yesterday and end today, suggest that Meloni’s candidates will win. There is momentum behind Meloni and it seems to continue.

Fratelli d’Italia and Rassemblement National also come from a similar political background: anti-immigrant, anti-Brussels and defending the small people against the elites.

But the transition to power looks like a suicide. Once elected, Meloni has done none of what she said she would. Meloni took advice from her predecessor, Mario Draghi, adopted an austerity budget, and put up no fight against Brussels, but instead maximised the funds they could get.

This is a problem for Le Pen, argues Eric Le Boucher. Does she also has to renounce all her former convictions and become orthodox if she wants to get into the Elysée palace? Would she have to give up her promises of a retirement at 60, a 10% salary increase, the restoration of the superiority of French law over European law, or protectionism at France's borders?

Looking at various far-right or populist movements, the only one elected that stood up to their former convictions is Victor Orbán. All the other movements mellowed once in power.

France is not Italy. In Italy, a politician may get away with changing positions, which is not so easy in France. Le Pen already had to renounce some of her previous positions but for good reasons. Exiting the euro or the EU is no longer an vote-winning position after seeing what Brexit did to the UK.

When it comes to migration policies, both still sing from the same hymn-sheet, But it is a European issue that needs structural responses, not stunts. Meloni sent a ship with migrants away so that France has to take them in, with the French reminding Italy of its own EU obligations in response. There is no strategy to bring about a solution. The more Meloni fails in this matter, the more difficult it will be for Le Pen to campaign on this issue.