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5 November 2021

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We read with some amusement a recent article by Joseph Stiglitz and Adam Tooze in Die Zeit, in which they warned against Christian Lindner as a future finance minister. This went down in Germany like a lead balloon. Worse, it has strengthened the spine of conservatives everywhere in the country, to such an extent that the FDP is now feeling emboldened to push really hard for Lindner to take the job. We don’t know whether FAZ’s reporting on this issue reflects wishful thinking, or the current state of the debate. Yesterday, they had a long interview with Lindner on the stability pact reform. This morning, they report that Robert Habeck may become interior minister. That is a story that really surprised us, because he has not talked about immigration and policing. But, in any case, the media coverage seems to be moving in the direction of Lindner as finance minister.

If Lindner gets the job, we will have to ask the question of the extent to which Stiglitz and Tooze have inadvertently helped produce such an outcome. The German economist Lars Feld, previous a member of council of economic experts, replied in a comment in the same newspaper that the purpose of this highly unusual intervention is to weaken the fiscal stance of the euro area as a whole. What appears to be an ad-hominem attack has a much wider purpose. We agree that with Lindner as finance minister, it will be harder to reform the stability pact in the direction the rest of the world seems to prefer. Whoever becomes finance minister in Germany will have a disproportionately large influence on this debate, especially since the new coalition is mostly preoccupied with domestic policy issues.

Germany’s conservatives don’t have a problem with Habeck, who thinks and talks very different from the way Greens normally talk. Habeck has expressed an interest in the job, but does not seem to be as desperate as Lindner, who does not want to become anything else. The Greens might trade in the finance job if they can get something big in return. The trade off could prove to be the most tricky part of the coalition talks, and a potential stumbling block if any of the parties revolt. Whoever gets the finance job would have to sacrifice quite a bit to appease the party that doesn’t get it.

Those who intervene from abroad are almost certainly not aware of these subtleties. If a left-leaning Nobel Prize winning economist warns against a German politician, the most likely effect is that it will end up strengthening him. It is called the law of unintended consequences.

3 November 2021

Who would vote for Zemmour?

How can politicians get voters’ attention in times like these? France is six months away from their presidential elections, and we have yet not seen any project from the candidates, observes Cecile Cornudet. Instead, Eric Zemmour and his polemics have set the pace, forcing the candidates to respond after ignoring them first, while Emmanuel Macron takes out the cheque book. This has not diminished the attraction of Zemmour.

Ideas have been floated around to make a buzz in the media. Macron’s government just came forth with a new project for the youth, and Xavier Bertrand is not as centrist as everyone thought when he suggested that the prosecutor should directly pronounce certain sentences. Anne Hildago is also treading a fine line: she stands for ecological transition, but also for a cut on petrol taxes. Marine Le Pen is fighting Zemmour with an arsenal of purchasing power measures: lowering VAT on petrol, abolishing TV licences, and a full tax benefit for a second child. None of them has come up with a vision or a project, at least not yet. How will voters decide what to vote for if the programme consists of a series of buzz-feeding ideas? An electrified electorate is just what would suit Zemmour well. He certainly caught everyone by surprise.

How could Zemmour climb so fast and furiously? Le Figaro compares two polls from Ifop and the Jean-Jaurès foundation, identifying potential voters for Zemmour, the undeclared candidate. Both polls confirm that the main victim of Zemmour’s rise is Marine Le Pen. Amongst the polled were about 34% (Ifop) or 42% (Jean Jarré) former Le Pen voters. What's also clear is that Les Républicains have much to lose if Zemmour were to run. They stand to lose about a quarter of their voters, 25% of those who would have voted for Francois Fillon, or 20% if Xavier Bertrand were to win the nomination. But Zemmour is not only triggering a recomposition of the right.

Zemmour also seems to mobilise the undecided, or protest voters. Ifop finds that 20% of those who would vote for him abstained, or gave a blank vote in 2017. Also, those polled would be more likely to vote if Zemmour were to run in this election. This goes two ways: people either vote in support, or to prevent him, by voting for other candidates. This race is thus not only about what the candidates offer, but who can mobilise those voters.

2 November 2021

Zaev: the tragic fate of a pro-European

Zoran Zaev resigned as prime minister of North Macedonia after his party lost local elections. The conservative opposition group VMRO-DPMNE won the second round of voting in most municipalities last Sunday. Zaev stayed true to his promise to step down if they lose Skopje, the capital that an independent opposition-backed candidate won.

This is not so much about the strength of the opposition, but the weakness of Zaev’s party. They made tactical errors in Skopje. But most of all, the loss reflected voters' frustration with Zaev's inability to deliver on his ambitions to bring the country into the European Union, writes Der Standard. Northern Macedonia has translated many EU laws into national law, unlike many other Balkan countries. Yet, his country never got to see the results. Accession talks have been prevented first by Greece, then France and now Bulgaria.

For decades, Greece blocked any notion of the country joining the EU, claiming that the former Yugoslav republic's use of the name Macedonia was historical and cultural appropriation. But then in 2018, Zaev and Alexis Tsipras seized the moment of change. In return for Greek support, Zaev pushed through a change of the country’s official name, adding North as a prefix to Macedonia. This came with amendments to the constitution and various institutions on culture and language. This, though, was not enough. Once they were ready to negotiate, France put up the next hurdle, insisting that the enlargement process has to be overhauled before new members are to be taken in. North Macedonia may have the blessing from Brussels, but Bulgaria is still opposing it, due to disputes over history and language.

Zaev has been an unusual politician. He likes to keep his word, and he was an unrelenting supporter of EU accession. He is still proud of having kicked off negotiations, and getting North Macedonia into Nato. But he lost momentum in the country.

What next? For Zaev, his resignation is no reason for new elections. But his party and their allies only have a thin majority in parliament, with 62 out of 120 seats. The opposition is likely to make the most of the victory at municipal level, and will want to reproduce it at the national level. Those who opposed the name change, and all the bending and bowing to get into the EU, will back a new government that would change direction. A new nationalist momentum.

1 November 2021

A license to…fish

Tomorrow marks the end of a deadline for the UK to grant fishing licenses that the French asked for. Without change, France could retaliate. Boris Johnson and Emmanuel Macron met behind closed doors in Rome yesterday, but their messages still diverge. There is a cacophony of different signals, including threats to escalate and assurances to work it out in the next coming days. Both accuse each other of acting in bad faith. This is no longer about a dozens of fishing boats, but a wider political row that's being played out in the open.

On Twitter Lord Frost rebuked the French threats, warning that it will potentially lead to a breach by the EU of its Treaty obligations. Frost insisted that the UK is following its obligations, granting 98% of the fishing licenses. In response, Clement Beaune tweeted that London may have granted 90% of the fishing licenses requested by the EU as a whole, but only 60% for French boats. The promise was to grant licenses days after Brexit. Ten months have now passed, with 40% of licenses still outstanding despite additional proofs provided.

London came up with its own threat, saying it was actively considering launching legal action under the Brexit deal if France carried out its threat to increase controls on British exports arriving in French ports. Threat and counter threat, with no easy de-escalation, as the conflict is no longer only about fishing, but other political motivations.

It is not hard to see why London sees this as a politically motivated move. Jean Castex, French prime minister, wrote in a letter to the European Commission that the EU needs to demonstrate clearly to European public opinion that respect for commitments undertaken is not negotiable, and that leaving the European Union is more damaging than staying in. What exact damage was Castex was referring to? French retaliation measures? Or is there more to come?

No matter what these threats are about, there are still some French fishing boats out there without a license to fish. The Brexit deal allows fishermen to continue fishing in British waters, but they need to obtain a UK license, and proof that they have fished there in the past. This proof is more difficult to make for smaller French fishing boats, which lack technological equipment that is helpful for showing where they were and when. The French government argues that their fishing routes were common knowledge to the authorities on the Channel Island of Jersey, according to Euronews. The question is whether this is enough to qualify under the strict interpretation of the law. Paris accuses London of using two totally different interpretations of the Brexit deal when it comes to Northern Ireland.

Much more is at stake than just licenses for fishing boats. Both sides need to show restraint and willingness to solve this row. Doing this out in the open though may cheer up Brexiteers, and it gets Macron ready to compete with Michel Barnier over who is the toughest negotiator in town.

29 October 2021

Barnier: from the outside to the top

Michel Barnier went from being an outsider to become the frontrunner for the nomination by Les Républicains, according to the latest polls. There is still a month to go, and four televised debates with the other two candidates, Xavier Bertrand and Valerie Pécresse. Being a frontrunner is never easy, as they have the most to lose.

Party members alone will determine their candidate at the party congress early December. For them, Barnier represents loyalty to the party, an advantage over his two opponents. Bertrand and Pécresse both left the party after Laurent Wauquiez took over its leadership. Only now, in order to become their candidate, do they come back to become official members of the conservative family. Will party members welcome them?

Apart from his loyalty, there are other advantages. Barnier has status, and looks presidential. He is assured of himself, and has international expertise. Bertrand would be the disruption candidate by comparison. Some big figures in the party have quietly moved behind him, like Laurent Wauquiez himself.

Would Barnier stand a chance against Emmanuel Macron? The polls find this unlikely. His manner of speaking reminds people of being in a conference, and he is no match for Macron’s dynamism. Could this turn out to be an advantage? Barnier avoids making promises. Instead, he prefers to be cautious with his words, so that later he can do what he had said.

The bets are on. Barnier has never lost an election since he was elected for the first time at the age of 22. The issue for the members of Les Républicains is whether to choose someone who represents them or someone who is mostly likely to win the presidency.

28 October 2021

What the fish..

Fish is a highly sensitive subject for Brexiteers, and for the French. Brexit changed the rules, and gave rise to a row that is now being battled out in public. The latest move comes from the French government, who have published a list of sanctions it will impose as of next week if its fishermen do not get their fishing licenses to continue fishing in British waters.

Under the new Brexit rules, French vessels can continue to fish in British waters if they have a history of fishing there. But they would need to have a UK-granted license for this.

France now claims that only half of the requested licenses have been granted, while the UK insists that it has granted 98%. These two numbers obviously refer to different things, but eventually the two numbers will be made relatable. We also may get an understanding of what the problem really is. Is the evidence about past activities from the vessels not enough? Are these delaying tactics with a political message behind them?

France has reported the issue to the European Commission and the other EU member states, in line with the provisions of the withdrawal agreement. They have yet to come forth with an opinion on the matter.

The French decided not to wait that long, to take matters into their hands, and press forward by threatening sanctions. Apart from banning vessels from reaching French ports, they also list delaying controls on boats and trucks, and if that is not enough, cutting off energy to Jersey.

The move will make it more difficult to negotiate a solution at a diplomatic level. It turns the fish row into political dynamite.

These are election times, and a crucial moment in EU history, as the departure of Angela Merkel leaves a leadership vacuum. Macron has assumed leadership by putting his foot down on fish. Will the others follow? We have our doubts. British mackerel is not to everyone’s taste.

27 October 2021

Zemmour - accelerating pacemaker

Eric Zemmour is determining the pace of the presidential race in France at the moment. With his polemic attacks and provocative appearances, Zemmour electrifies the debate like none of the other candidates. The dilemma for everyone else is to decide whether or not to react.

Marine Le Pen has no option but to counter Zemmour. It will be a fight to the bitter end for an electorate that had been in her camp quasi by default. Zemmour accuses Le Pen of not being able to win. She rebukes this by saying that he is not going to beat any of the other candidates. On every programmatic point he makes, Le Pen adds that she had said it first. And on the international scene, Le Pen makes sure everyone sees which league she is playing in, getting a courteous reception by Victor Orban.

The left is also united in dismissing Zemmour, being at the polar opposite end of what he stands for. Les Républicains are waking up to the idea that Zemmour is not simply going to disappear. There are two camps disputing whether to counter or accommodate his positions, familiar grounds given what they have been through since the Le Pen family showed up on the political scene.

What to do with Zemmour is the most difficult to answer for Emmanuel Macron, writes Nicholas Beytout. Macron is, like Zemmour, not a declared candidate yet. But, as president, Macron can also not simply campaign openly like Zemmour does. The result is that he makes sublime references, like in the Dreyfus museum, that not many get. This will not stop the ascent of Zemmour.

What makes us slightly optimistic, though, is that, as so often in French politics, a stellar rise is followed by a stellar fall from grace. as for when and how this will happen, we have no clue. It could be before the elections, but the turn in fate could also come after. How Zemmour will emerge from the fall may be even more decisive for long term politics in France than the mad race we are witnessing now.

26 October 2021

Erdogan wins

Turkey's diplomatic row came to a halt with a reassuring tweet that allowed Recep Tayyip Erdogan to step down from his order to declare ten Western diplomats persona non grata after they had called for a just and speedy resolution to Osman Kavala's case. The de-escalation statement, brokered by the US, and issued by all ten embassies, says that they comply with the Vienna convention on diplomatic relations' imperative to not interfere in a country’s internal affairs. 

Erdogan might have rowed back from expelling the diplomats, but he clearly won this round. He turned this diplomatic spat into a personalised matter of national pride, contenting himself that the ambassadors had learned their lessons. Mustafa Sentop, the Turkish Parliament's speaker, said Turkey's constitution banned discussion of ongoing court cases including national politicians, and that the envoy’s statement was a clear and disrespectful interference. Even some members in the opposition agreed that the West went too far, while at the same time warning that Erdogan was using the spat to distract from real problems at home. But Erdogan, by finally not going through with the threat to escalate the diplomatic spat, prevented economic fallout that would have wreaked havoc on the already weakened Turkish economy. Everyone is relieved, life goes on, and Erdogan is back in charge. A bold and risky play with expectations that paid off for him.

There is already one clear victim of this diplomatic manoeuvring: the entrepreneur and philanthropist Osman Kavala himself. A call that was meant to help him after four years in prison without sentence nor evidence has turned into a showdown of international power wrestling and domestic point scoring.

We still do not know who initiated the call amongst the ambassadors. Some reports suggest it was the US. Others noted that the UK, Spain, and Italy were conspicuously absent. The ten ambassadors who signed the call were from the US, France, Germany, Netherlands, Canada, Denmark, Sweden, Finland, Norway and New Zealand. All of them did their mea culpa and tweeted or re-tweeted the statement that they would abide by the Vienna convention, and not interfere in domestic affairs. From the Western perspective, there is still a debate about whether the ambassadors overstepped the boundaries between external and internal affairs with their calls to apply ECHR rulings for Council of Europe members such as Turkey. Or whether it was the role of ambassadors or government officials to issue such a reminder. But these are sideshows now.

The West emerged from another episode of fire fighting diplomacy with Turkey. Erdogan won this round. Will Europe wise up enough to play the next?

25 October 2021

The next Navalny

It’s not big news at the moment, but the story of Mikheil Saakashvili, the former Georgian president, might be in the headlines more soon. Saakashvili returned to Georgia this month after eight years in exile. He was arrested on October 1, having been convicted of abuse of power in absentia in 2018, and has been on hunger strike ever since. Last week a medical team revealed that he is in extremely poor health, and that his starvation is exacerbating a rare blood condition. He received a blood transfusion on Friday, and his doctor has recommended hospitalisation. Close associates worry he will not survive. There are echoes of jailed Russian opposition leader Alexei Navalny here. 

Saakashvili first swept to power in the bloodless Rose Revolution of 2003. Grassroots protests over disputed parliamentary elections ballooned into regime change, and he was front and centre. He brought a pro-western agenda with him. 

Saakashvili served as president from 2004 to 2013, during which time Georgia experienced unprecedented economic growth and a marked reduction in corruption: he famously fired more than 10,000 traffic police officers in 2005. Relations with the EU also hit a high when Georgia joined the Eastern Partnership in 2009. 

But Saakashvili’s reform agenda drew the ire of Vladimir Putin. His tenure was marked by the Russo-Georgian war of 2008, which saw Russia occupy Abkhazia and South Ossetia, later recognising both as independent states. The war came just months after Georgia received assurances of eventual Nato membership at a summit in Bucharest.

As early as 2010, Saakashvili was facing accusations from opponents of concentrating power in his own office, and using riot police to crush opposition rallies. The Georgian Dream party, led by billionaire oligarch Bidzina Ivanishvili, brought UNM’s reign to an end in 2012, and Saakashvili himself was constitutionally barred from seeking a third term. UNM accepted the outcome, marking the country’s first peaceful transfer of power, and Saakashvili left Georgia in 2013. The charges brought against him afterwards were widely viewed as political. 

He had been living in Ukraine, where he obtained citizenship, supported the Euromaidan movement, served as governor of Odessa Oblast, and later headed the executive committee of the National Reform Council. His return to Georgia surprised many, and came in the midst of Georgia’s local elections, which will conclude on October 30. 

So why come back now? As Saakashvili wrote in a letter to EU leaders, Georgia has been backsliding democratically in recent years. From media crackdowns to voter intimidation and electoral fraud, there is a very real fear among Georgia’s pro-western forces that the country is slipping back into Russia’s orbit. This fear seemed to be confirmed a few weeks ago, when the government declined to apply for the second tranche of a €150m EU macro financial assistance package in order to avoid obligations to reform its judiciary. 

We think Saakashvili miscalculated when he decided to return. Though tens of thousands took to the streets to protest his arrest, regime change seems unlikely at present. Saakashvili lacks support from neighbours and European allies because no one dares risk antagonizing Russia. Too many are dependent on Russian gas, and Europe’s energy crisis will get worse before it gets better. Georgia itself is economically dependent on Russia, not only for energy: its exports there more than doubled between 2014 and 2019.

And things are even worse at the EU level. 

Keen to distract from the Sofagate scandal, Charles Michel made the bold and foolish decision to mediate between Georgian Dream and the opposition parties last spring. Believing he could score a quick and easy win, Michel convinced Georgian Dream to agree to strategic reforms and a provision setting a mysterious minimum threshold of 43% support in the local elections. Had the party failed to exceed the threshold, it would have triggered a snap election. Except Georgian Dream later withdrew from the agreement, leaving Michel with egg on his face. 

Though Saakashvili’s return pushed his party several percentage points higher in the elections, forcing runoffs in some areas, Georgian Dream ultimately took 46% of the vote. Saakashvili has since made a personal entreaty to Michel from prison to ask for help, while a group of former and current European officials signed a letter of support calling for his release last week. The EU remains silent.

This is unfortunate because working to secure Saakashvili’s release would make Michel a hero in Georgia and other Eastern Partnership countries, where the economic benefits of closer ties with the EU have not been keenly felt. It would mean undermining an oligarchic system heavily influenced by Moscow. Ivanishvili is a major shareholder in Gazprom, meaning that Georgian democracy, too, is controlled by Russian gas. It would also send the message that the EU is capable of intervening to uphold its own values and support one of its longstanding champions. 

Of course, regular readers of Eurointelligence will know that we do not expect the EU to do the right thing. The energy crisis is more pressing, and the EU cannot count on American support when confronting Russia. Like Navalny, Saakashvili might soon be forgotten. If he survives, that is.

22 October 2021

Estonia's crypto crackdown

Estonia’s Financial Intelligence Unit announced last week that it has now revoked 2000 virtual asset service provider licenses, Vasps, granted to crypto firms, the latest development in an ongoing crackdown that started in June 2020.

It kicked off when companies that had failed to launch operations within six months of licensure had their Vasps revoked – that wiped 500 off the board – and the FIU continued thinning the herd throughout 2020. By the end of the year, 70% of Vasps – 1808 in total – had been revoked, with FIU citing the growing risk of money laundering and terrorist financing.

The reasoning was a little different this time around. There were the usual concerns about money laundering, terrorist financing, scams and hacks, but Matis Mäeker, head of the FIU, also told Eesti Ekspress that the Estonian crypto industry contributes nothing significant to the country’s tax authorities, nor does it creates jobs. He called for stricter capital requirements for the industry, which could include a requirement to hold a minimum of €350,000 in cash or securities, compared to €12,000 at present.

More significantly, Mäeker called for a total reset of crypto regulations in the country, arguing the government should turn the regulation to zero and begin the licensing process from scratch.

The Estonian case is interesting because the country was once widely viewed as a crypto trailblazer, passing a series of laws aimed at encouraging development of crypto exchanges and initial coin offerings, or ICOs, in 2017. But as Cointelegraph reports, the regulatory landscape in Estonia has evolved since then, and the country’s Know Your Customer regulations are now more stringent than what is required under EU law.

This is a teachable moment, both for governments and the industry. It is becoming increasingly obvious that speed, agility, and reactivity will be essential to regulate such a fast-evolving industry. But revoking the licenses of an entire industry sends the wrong message and will damage investor confidence, as well as trust between the two sides.

On the industry side, many stakeholders are pro-regulation, but legitimacy will entail paying taxes. Much like the Gafa big tech companies, the crypto industry has been reluctant to do so. And we see a bigger problem looming on the horizon, in the space where crypto and big tech converge.

Earlier this month Fabio Panetta, an ECB executive board member, warned that Gafa companies’ fast-growing financial services pose a threat to the banking sector because their size, large customer base and access to user data makes them more relevant to global players in the market. He also highlighted the rapid growth of crypto assets and stablecoins, and warned that if the two industries should converge – that is, if big tech begins issuing stablecoins – it would alter the functioning of global markets. According to Panetta:

“As the assets managed by stablecoins increase, banks’ funding conditions could become more expensive and volatile. For instance, competition for liquid resources would make these more scarce, and thus increase their price, forcing banks to turn to more expensive forms of short-term funding.”

Opposition to the crypto and DeFi industries is justifiable under the argument that it will starve governments and the banking system of the resources they need to function. But as we’ve been arguing, regulating the industry will prove difficult because it is decentralised. Estonia could be the canary in the coal mine. It will be interesting to see what the FIU does in the event companies with revoked licenses continue operating.