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7 January 2021

Röttgen is catching up

This morning is a good moment to remember that it is not the presence of intruding events that matters, however bizarre they may be, but how our political systems react to them.

In Europe, meanwhile, the story that caught attention this morning is a poll in Spiegel, according to which Norbert Röttgen has leapfrogged to become the most popular of the three CDU leadership candidates. Do not read too much into this. The decision will be made by 1001 CDU delegates in an online poll. Some delegates struggle with internet connections, which tells us that we should be even more careful than normally about projections. What is also becoming clear from the polls is that a large majority of CDU members and the population at large favour Markus Söder as the CDU/CSU’s chancellor candidate, no matter who wins the CDU leadership contest that kicks of next week.

A Spiegel/Civey poll has Röttgen at 32%, Friedrich Merz at 29% and Armin Laschet at 12% in the general population. Among CDU voters, Merz leads with 38%, followed by Röttgen at 29% and Laschet at 11%. These numbers would favour Merz, but delegates may have their own agenda. Men outweigh women two to one. There are 18 MEPs, 149 MPs and a further 225 elected representatives at state, regional and local level. That means more than half of the delegates are not elected politicians.

One of the trends that favours Röttgen is the popularity of Söder. With Röttgen as CDU leader, chances are that CDU/CSU would opt for Söder as their joint candidate for the September elections. The Bavarian prime minister remains one of Germany’s most popular politicians. Over the last few weeks he made overtures to the Greens in preparation for what could be a CDU/CSU/Green coalition. As we reported yesterday, the SPD is now repositioning itself politically, and will most likely end up as the largest opposition party in the next parliament - on current polling trends. Röttgen is also benefiting from the extraordinary weakness of Laschet, once considered the frontrunner.

But don’t count him out yet. He is the state premier and CDU leader of North-Rhine Westphalia, the largest voting block. He knows a lot of the delegates personally. If he manages to come second in the first online round of polling - ahead of Röttgen - he might be able to win a run-off against Merz if delegates want Söder as chancellor. Merz never let anyone in doubt that he wants Merkel’s job. So if you want Söder, your best bet would be to vote for either Röttgen or Laschet. You would only vote for Merz if you want him both as CDU leader and chancellor.

These strategic considerations and the novel online voting procedures make the poll hard to predict. In terms of European policy, Röttgen is the only one with a clear foreign policy agenda. He is the only candidate who actively supports Emmanuel Macron in the fight for strategic autonomy. Merz is astonishingly ignorant of all things European. We would categorise Laschet as an old-school pro-European corporatist.

7 January 2021

Vaccine blame game has started

Vaccination procurement is now a thing that, in the EU at least, is associated with the word scandal. At the moment, people may blame the EU - or rather the Council of Ministers who took the decision - for the choice to distribute vaccine orders among a large number of possible suppliers. But once people associate a rising mortality rate with a bungled vaccine procurement policy, expect to see a bigger backlash.

Yesterday, we noted a comment by Stéphane Bancel, the CEO of Moderna, in L’Express, who said that the roll-out of his vaccine in the EU won’t properly start until the second quarter. He criticised the EU’s delayed procurement of his vaccine and accused the EU of prioritising European producer interest over public health concerns.

FAZ, meanwhile, has details from Wednesday’s conference between Angela Merkel and the state premiers. She defended the joint procurement policy on the grounds that it would have been nonsensical for each member state to negotiate its own supplies. She acknowledged, however, that Germany did not get its proper share of the vaccines because it agreed to buy vaccines for some other member states.

We were intrigued by Markus Söder’s response to Merkel: the European way has its advantages, he said according to FAZ, but one should not forget national priorities either.

7 January 2021

In defence of democracy, or not

Yesterday was not a great day for democracy. Hours before Trump-supporters stormed the Capitol, authorities in Hong Kong launched a sweeping crackdown, arresting 53 pro-democracy politicians. These were the most vocal pro-democracy voices remaining in the city.

It is worth noting how EU leaders have responded to these events. Ursula von der Leyen, European Commission president, Charles Michel, European Council President, and Josep Borrell, EU high representative, tweeted their dismay and support for American democracy. It fell to Peter Stano, Borrell’s spokesperson, to speak out on Hong Kong. Ouest France reports that he called for the immediate release of the 53. He also said the EU will respond to Hong Kong’s national security act, under which they were arrested, with sanctions - provided this is accepted by member states.

The heavy hitters were quiet on Hong Kong. We noted, however, that Norbert Röttgen, one of three CDU leadership candidates, was quick to make the link between the mass arrests and the recent EU-China comprehensive agreement on investment (CAI).

The EU went on the defensive, dispatching its spokesperson to argue that the CAI is a sectoral deal, and that human rights and rule of law issues are the subject of a specific dialogue with Beijing. But as Noah Barkin, a visiting fellow at the Germany Marshall Fund writes, China’s behaviour over the course of the year will be seen through the prism of the agreement. If Beijing continues down its current path, opposition to the deal in European Parliament will harden. Expect fireworks when the time comes to ratify the CAI.

7 January 2021

What about data markets?

Much attention has been paid to data transfer adequacy agreements between the EU and US and EU and UK. Less to EU-China data transfers, although these could prove more problematic, particularly in light of recent EU efforts to increase investment in China.

A story in the Washington Post on Tuesday caught our attention. It concerns Jack Ma’s fall from grace. The billionaire Chinese business magnate and controlling shareholder of Ant Group was set to launch what might have been the world’s largest IPO last year, but it was halted by Chinese authorities at the last minute. Ma hasn’t been seen since in public since October.

As it turns out, data disputes led to his downfall. Using Alibaba consumer data, Ma had previously assisted the government in tracking criminal suspects and silencing critics. But he baulked at sharing lucrative consumer data from Ant’s financial services arm. The breaking point for Xi Jinping, the Chinese president, came in October when Ma delivered a speech criticising financial regulators in China.

Ma’s story is interesting for several reasons. First, it shines a light on Chinese efforts to rein in tech giants and end data monopolies, similar to those of the EU with its recent digital services act and digital markets act. It demonstrates what can go wrong when influential executives challenge the power of the Chinese Communist Party.

Perhaps more importantly, it also highlights an area that has been largely overlooked in debates about the EU-China comprehensive agreement on investment (CAI): data markets. The CAI doesn’t include any measures to address data. This might prove to be one of its biggest failings.

In September 2020, China launched the global initiative on data security, viewed by many observers as an attempt to write the global rulebook. It includes strong localisation requirements and the right for different jurisdictions to govern data and the digital economy as they wish.

Like the US clean network programme, it is largely a diplomatic exercise. But China is also currently drafting data legislation that could be more consequential for the EU. Unveiled in October last year, China’s personal information protection law is modelled after the EU’s general data protection regulation, GDPR, according to the International Association of Privacy Professionals, IAPP.

Like the GDPR, the draft law proposes clear and specific extraterritorial application to overseas entities and individuals that process the personal data of users in China. Definitions of personal data and processing are close to those of the GDPR. Any non-Chinese organisations or individuals that process data from Chinese users will be required to set up a dedicated organisation or appoint a representative in China, as well as report relevant information of their domestic organisation to Chinese regulators.  

This is important in light of the CAI, which opens sectors including telecommunications and cloud services to limited investment from EU companies. The IAPP writes that it will bring significant impact to companies with operations in China or targeting China as a market, even if they have no business presence in China. 

Chinese companies processing European data are, in theory, subject to similar rules. GDPR requirements have already caused problems with the US and UK – the CJEU’s Schrems I and II decisions saw data transfer agreements between the US and EU struck down in 2015 and July last year. British companies, meanwhile, could face up to £1.6bn of post-Brexit compliance costs if a data adequacy agreement with the UK is not reached. They have been given a six-month grace period while the two sides work to hammer out a deal. 

But as the German Council on Foreign Relations reported last month, EU-China data transfers could be a far greater cause for concern. According to the council, the US has rightly noted that the EU pays little attention to data transfers to authoritarian nations. This is a major concern given the expansion of Chinese tech companies in the EU:

“Today, Chinese social media platforms such as TikTok, Europe’s second most downloaded app, and WeChat are aggressively expanding in Europe, Africa, and East Asia. Given China’s techno-authoritarian legal culture, the relationship between Chinese tech and the government, and the government’s right to demand broad access to company data, questions about EU transfers to Chinese companies must be asked – even if they have adopted GDPR compliance as company policy.”

Dutch, Danish, and French authorities are already launching investigations into TikTok. In mid-December, Euractiv reported that TikTok will be among the first social media platforms subject to scrutiny by the European Commission under new digital legislation. Platforms like TikTok would be required to allow access to data in order to monitor compliance with rules aimed at preventing illegal content, negative impacts on freedom of expression, or on electoral processes.

But as we've seen with previous EU efforts to curb big tech, enforcement efforts could take years and have been stymied in the past by European courts - see Apple's tax bill. And as Ma's case demonstrates, enforcement in China can be much more heavy-handed. As economic ties between China and the EU deepen, we expect this issue to become more pressing.

 

7 January 2021

Private debt - the next battle?

Public debt accumulated over the course of 2020, but so did private debt for companies that saw their activities put on hold during the lockdown. Their debt could be fiscal, social or financial, we have yet to see the figures. State guarantees helped enterprises obtain bank loans. Governments also allowed companies to defer payroll taxes to avoid going into administration. For France this resulted in a 36% fall in bankruptcies compared to 2019. This year we will see three effects playing out for the corporate sector that are likely to trigger a wave of liquidations: First, weak firms that survived solely on state aid last year will die their delayed death. Second, the lockdown effect on economic activity is likely to continue in 2021, and will be more severe in some sectors, like hospitality or travel, than others. Third, accumulated private debt will burden the relaunch of economic activity and keep investment low, while at the same time productivity will take a hit through social distancing measures. 

The economic research unit CNP, attached to the prime minister's office in France, issued a report yesterday calculating the possible fallout for this year and next. They defined three categories of retail business with a loss of productivity and a rise in debt. Their 2021 and 2022 simulations suggest bankruptcies will rise by 2.2% in the least-affected sectors and by 25% for hotels and restaurants. This corresponds to an UMih survey that shows 30% of bar and restaurant owners expect to close their business in the months to come. 

Even for those companies which have the capacity to survive, there are obstacles on the road to recovery. There are high-performing small firms that had troubles getting access to loans. It will be essential to ensure that those businesses survive and thrive. Viable but indebted firms exit the pandemic with their balance sheet weakened by accumulated debt, which will weigh on their recovery and investment prospects.

What will be key to their recovery is what will happen to private debt in 2021. The CNP suggests two ways the state could help: Renegotiate loans between creditors and businesses via commercial courts. Or encourage creditors, via a form of subsidy like a tax credit, to accept a loan reduction. This incentive would leave the choice for a loan reduction with the banks. We already see political trouble with this idea of directing taxpayers money while keeping banks in charge of who will receive, or not, a loan cut. The CNP said the pool can be limited by allowing only those who are already under administration to apply for this form of tax relief. We are only at the beginning of this debate.

7 January 2021

Return of the fiscal doom loop

Zsolt Darvas warns the European Commission not to repeat a cardinal error of the eurozone crisis. Behind what is popularly known as austerity stands an important technical concept - the output gap. It is defined as the difference between actual output of an economy and its estimated potential. A positive gap means growth is above potential - an indicator that the economy is overheating. Likewise, a negative gap means that the economy is operating below capacity. The metric is used as a beacon for monetary and fiscal policy. If the estimate is wrong, as it was during the eurozone crisis, so is the policy response. If you overestimate the impact of a shock on potential output, the result is that a country has to run a much tighter fiscal policy than would otherwise be warranted. This debate is not new. What Zarvas does, is focus on an aspect of this procedure that is not so widely known. It works backwards. The pandemic not only reduces the output gap estimate for the current and future years, but also for the past. As Darvas puts it:

“It would be a rather bizarre situation, however, if a shock in 2020 changed our view of fiscal policy in 2018 and before – or in other words, if the future changed the past. But this is what is happening.”

The way the output gap is measured is through statistical methods that rely on past data. Roughly, the potential output constitutes an average measure of GDP over a period of time. If a country is hit by a severe shock, not only does actual output fall, but so does the potential output.

In applying the deficits rules, the European Commission also takes past deviations from potential output into account, as future policy has to compensate for past mistakes. Darvas notes that the fiscal rules are currently suspended. So none of this matters right now. But when the suspension ends, there is a risk of another period of austerity - resulting directly from a faulty measure of the output gap.

He is right to raise alarm bells, especially in view of what happened last time. We are moderately confident that the EU won’t repeat that mistake this time. The EU is not going to change the fiscal rules, but there is room for manoeuvre to apply the rules more intelligently. The output gap calculations are not mandated by any primary or secondary legislation. They are policy.

We would expect the European Commission to revise that fateful mechanism eventually. If not, the EU would create a positive incentive for a member state to leave the eurozone - in the sense that such states could achieve a higher rate of growth and employment simply by escaping a toxic output gap calculations trap. We think that even the most stubborn defenders of rules-based policies would not be quite so reckless. Even without an accelerated doom loop, the fiscal rules would require a large degree of fiscal tightening after the crisis. Austerity is very likely to happen in any case. This would make it much worse.

6 January 2021

Upsetting the balance

All eyes will be on the German elections in 2021, but smaller member states including Portugal, the Netherlands and Bulgaria will also go to the polls. As we saw in Romania last month, upstart far-right parties hold the potential to dramatically alter the political landscape in all three countries. 

In Romania the far-right AUR party rose from relative obscurity to take nearly 9% of the vote in last month’s national elections. Its strong performance surprised observers, and came at the expense of the ruling National Liberal Party. Ludovic Orban, the incumbent prime minister, was forced to resign to keep the party in power.

In Portugal, where presidential elections are scheduled this month, a new far-right party holds the potential to make a similar impact. Like AUR, Portugal’s far-right Chega party was only formed in 2019, but has gained support quickly. It is third in the polls with nearly 8% support.

Marcelo Rebelo de Sousa, the current president, is considered a shoo-in. His highest-polling challengers are André Ventura, Chega leader and a defector from the centre-right PSD party, and Ana Gomes, a member of the ruling Socialist Party who is also considered populist. Her radical anti-corruption drive has left her without the support of her own party.

If de Sousa wins, it could cement the socialist-PSD central bloc, a fixture of Portuguese politics since the 1980s. But it would also strengthen the position of populist figures. This will have implications for the country’s 2023 legislative elections, if the deeply-divided Chega survives until then.

The far-right’s near-term prospects are better in the Netherlands, which will hold national elections in March. Polls from late last month indicate that despite its recent implosion in the wake of a hate speech scandal, the far-right FvD would still win four seats in the Netherlands’ 150-seat parliament, up from two in 2017. Geert Wilders’ far-right PVV would win between 19 and 23 seats, against 20 in 2017.  JA21, a new far-right party founded by former members of the FvD, appeared in separate polls for the first time on 20 December. Europe Elects reported it would take one seat.

Although his VVD is still leading in the polls, Mark Rutte’s ruling coalition has been rocked by a recent social benefits scandal. The Dutch prime minister may find it difficult to maintain the status quo.

The Christian Democratic Appeal, for example, is a junior coalition partner whose leader, Wopke Hoekstra, is running against Rutte. The CDA famously accepted the PVV’s tacit support to join a minority government with the VVD in 2010. It paid a heavy political price in later years, but recent political turmoil could tempt mainstream parties to shake hands with the devil again.

The ruling party in Bulgaria has already done so, to the detriment of EU enlargement. Boyko Borissov, the Bulgarian prime minister, is leader of the centre-right GERB Party. GERB is in a coalition with three far-right, nationalist parties including VMRO, the Internal Macedonian Revolutionary Organisation.

Borissov spent much of 2020 being battered by corruption allegations and mass protests. By mid-November he had survived five votes of non-confidence. He has made concessions to junior coalition partners as a result. Pressured by VMRO, Bulgaria blocked North Macedonia’s EU accession bid last month over a language dispute that boils down to nationalist posturing.

Bulgaria’s presidential elections will be held later this year, and could see Borissov square off against Rumen Radev, a member of the Socialist Party and a bitter rival. As of now, GERB is leading the polls with 28% support, against 25% for the socialists. The far-right could be kingmakers once more.

We highly doubt that far-right parties will win outright in any of these elections. But as Europe’s economic situation deteriorates in the wake of the pandemic, rallying cries against the elites will grow louder. This leaves members of the old guard faced with several unattractive options: co-opt far-right platforms in a bid to woo voters, share power with parties that will push them to implement those same platforms, or risk losing their jobs.

5 January 2021

Brexit trade deal - a role model for Turkey?

With some astonishment, we are reading what Friedrich Merz, the leading candidate for the CDU chairmanship, has to say about Turkey's relationship with the EU. In an interview with Deutsche Welle he advocates the EU/UK trade deal as a model for Turkey - as a way of integrating further with the EU without aiming for full membership. What he does not seem to know is that Turkey already has a closer relationship with the EU than the UK.

The UK has left both the customs union and the single market. Turkey has been an official EU candidate country since 1999 and has maintained a customs union with the EU since January 1996. A Brexit model for Turkey would mean the very opposite of what Merz suggested: an exit from the customs union and a new trade agreement. Why would Ankara want to open this up? Even more bizarrely, Merz also listed Russia as a potential candidate for a UK-style trade deal. Is there a plan behind his assertions, or is this just an over-confident candidate exposing himself as completely out of his depth? Merz commands a lead in the polls ahead of the CDU's virtual party congress this month. If he is elected, and succeeds Angela Merkel as chancellor, we would expect a steep learning-curve period during which Merz would have to acquaint himself with the basic facts about the EU. Or not, in which case we will all be in a lot of trouble.

4 January 2021

Where are the bottlenecks?

One of the stories we highlighted before the Christmas break was about the European Commission's failure to order a sufficient amount of working vaccines. Spiegel reported that the Commission tried to achieve parity in the purchase of a successful German vaccine and a competing French product that later suffered a setback in testing. In Germany, Markus Söder already questioned why the Commission is not ordering enough of the BioNTech/Pfizer vaccines, so the story has already entered the German election campaign. During the holiday period the BioNTech chairman also criticised the EU's procurement policy.

FAZ did a good job this morning explaining what happened. In November, before any of the test results were known, the EU decided to hedge its vaccine procurement strategy by ordering 405m doses from Curevac, another German company, 400m from the Oxford-AstraZeneca vaccine, another 400m from Johnson & Johnson in the US, 300m from BioNTech/Pfizer and another 300m from the French Sanofi-GSK, as well as 160m from Moderna in the US. The BioNTech and Moderna products were the first to receive approval. The latest news is that the European Medicines Agency is unlikely to approve the Oxford-AstraZeneca vaccine in January. FAZ also cited the price difference as an issue that weight against Moderna and BioNTech. The Oxford-AstraZeneca vaccine costs only €1.76 per dose while the Moderna vaccine costs €18 and the BioNTech costs €12. The article said member states from central and eastern Europe had pressured the EU not to authorise too much spending.

The EU has since stepped up its orders for BioNTech, Moderna and the Oxford-AstraZeneca vaccine to a total of 860m, enough for the EU's population. There will be bottlenecks on the supply side, but so far the bigger blockages appear to be inside member states. During the first week of vaccination, Germany only managed to vaccinate 250,000 people despite the fact that it had already procured 1.3m doses. What happened is that several Länder can't cope with the distribution. The UK, meanwhile, has cleared the Oxford-AstraZeneca vaccine, which requires lower storage temperatures and is easier to distribute. We are therefore less sure than FAZ that the UK is only ahead of the EU in vaccination because it started earlier. 

28 December 2020

On how Brexit will shift European narratives

In addition to the hard issues discussed in our main story, one question of particular importance to us is how Brexit will affect European narratives - the stories we keep telling each other about the EU and European integration.

One of the few successes of the UK inside the EU has been to forge European narratives. The British invented the whole notion of euroscepticism. We did not have a word for it before. They also invented the even more insidious notion of euro-realism, which means essentially the same thing, except that it allows you to pretend to be pro-European when you are not. It was mostly an anti-integrationist narrative hidden by pseudo-categories. At its most pro-European end, it was a narrative of a Europe with inter-governmental co-operation. It was dismissive of the European Parliament and the European Commission, and contemptuous of eurozone integration in particular. Its language was that of pre-war diplomacy, with notions of alliances and coalitions. A concrete example is the common reference to the EU in the UK media as a bloc. If you want integration, you don't choose a language that puts the EU in same category as the Soviet Bloc. Brexit offers an opportunity for new story-telling.

The UK media have been, without a doubt, most influential in Brussels. British journalists have been the alpha-animals of newsrooms in the Commission and the Council. This is partly due to the English language advantage and partly due to the collective failure of the EU to create a common multilingual media space. It is legally impossible for French and German residents to watch each others' streamed TV channels. If you read Le Monde, Frankfurter Allgemeine, El Pais and Corriere della Sera on the same day - as we do - you get the impression that they are reporting on parallel universes. Some newspapers have forged cross-border alliances, but this had almost no real-world effects. We had first-hand experience of one such ill-fated attempt in the early 2000s.

Just as Brexit offers an opportunity for the UK to reinvent its economic models, it offers an opportunity for the EU to shift narratives. British newspapers and the BBC are foreign media now. We noted recently that none of them covered the EU's agricultural reforms. The lack of skin-in-the-game is already noticeable. Fast improving translation technologies diminish the inherent competitive advantages of English-language media. A gap in the market is opening. But it needs filling.

We are not sure whether European media will fill it. But we do expect UK narratives of European integration to fade over time. It may be a soft factor. But never underestimate the power of story-telling.