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26 October 2020

Risks of rising inequality

As the second wave spreads, the world is coming to the realisation that the pandemic will not be over any time soon. One of its most significant impacts will be to exacerbate income inequality.

The World Bank previously reported that the pandemic had thrown between 88m and 114m people into extreme poverty, by far the largest increase since it first started tracking this metric 30 years ago. Between 703m and 729m people are now living on less than $1.90 a day, up from 615m in 2019, with numbers expected to rise further in 2021.

Interestingly, the report found that new demographics are being pulled into extreme poverty. Prior to the pandemic, extreme poverty was concentrated in communities of young, rural, and uneducated workers. Now it's spreading to congested urban areas, educated populations, and those working in informal services, construction, and manufacturing. We see the same trends unfolding in Europe.

On the same day the World Bank released this assessment, Swiss bank UBS published its own report which found that that world’s billionaires did extremely well during the first wave by betting on the recovery of global stock markets. Their fortunes rose by 28% between April and July 2020, while the total number of billionaires also increased.

France's gilets jaunes protests show why the social risks of such a rapid increase in inequality should not be ignored.

Adopted in 2013, the French carbon tax regime sets a price per tonne of CO2 emitted, which increases year on year. Because it raised the cost of fuel and disproportionately affected low-income workers, the carbon tax was the starting point of the gilets jaunes protests.

The tax generates around €9bn annually although most of it goes to the general state budget rather than green spending. 2018's planned carbon tax increase pushed up the price of petrol by €0.03 per litre. But the cost of increasing the tax that year was much higher than the revenues it would have generated.

The Local reported that in addition to a €10bn package of measures for low-income workers that Emmanuel Macron announced to quell the protests, the gilets jaunes also cost tens of millions of euros of damage to French motorways and tollbooths, and €10m of vandalism damage to Paris in 2018. The consumer industry lost an estimated €2bn to closures and vandalism that year, meaning the cost of the protests, not including damage to secondary cities, was more than €12bn.

We’ve argued that the recovery will not be V-shaped, and indeed that we are entering a scenario that is beyond the descriptive powers of the alphabet. We’ve also noted that rising anti-government sentiment and anti-mask protests are being co-opted by far right movements, making violent confrontations far more likely in the future.

The argument is not about the risks of sustained high levels of public debt versus premature fiscal tightening. It's about who can afford to pay more. Even before the pandemic, the IMF said raising income tax on the wealthy could be done without harming growth. In its October 2020 world economic outlook, it recommended governments consider raising progressive taxes on more affluent individuals, and suggested hikes to high income brackets, high-end property, capital gains, and wealth taxes, a crackdown on tax avoidance, and a global digital tax.  As the pandemic grinds on, recovery policies that fail to take this into account will cost countries dearly. 

23 October 2020

How to live with stop-and-go restrictions

Covid-19 figures in France are not good. There are early warnings that between 70% and 90% of ICU beds could be occupied by the end of the month. These are alarming forecasts. Most of the French regions are in orange or red zones, including some that were not heavily affected in the first wave. More testing may explain parts of this, but not all of it. And we still know little about the virus and its mutations. 

A wave of new restrictions is about to unfold. Ireland entered a national lockdown, and Belgium is considering it. France, even if the numbers have reached alarming levels, prefers to avoid lockdown. The cost of the first wave is heavy enough. Instead, the country is imposing a curfew. After the prime minister's announcement yesterday, curfews now cover 60% of the population. Curfew is not lockdown. It starts at 21h, so people can still go out to dine. However, the curfew could be bought forward to 19h if figures continue to rise. Then, even restaurant visits may be gone. The French government assured that assistance will continue for service providers such as restaurants and event organisers, and that those working in the cultural domain could expect some support too. Will this be enough to contain the virus without killing the economy, the service sector in particular? 

According to the French institute Rexecode, the first curfew measures on metropolitan areas will cost 0.4 points of GDP in the last quarter of 2020. Yesterday's extension to 38 new regions will only increase the bill. Earlier this month Insee, the national statistical institute, lowered its forecast for this quarter's GDP. It expects a decline by 1%. It can only get worse.

We still know little about the virus and it may well be that we are all pinning our hopes on a vaccine that will not be ready or effective any time soon. We do know that the pandemic will end eventually, though. The question is when, and for how long we can sustain an economy that was unprepared for this. As John Maynard Keynes famously said, markets can remain irrational longer than you can remain solvent. 

How to work and plan in such an unpredictable environment, where restrictions can be imposed like an on/off switch? Some businesses won't survive the second wave, let alone another year of roller-coaster restrictions. In times like this, predictions won't help. Instead, we have to rely on risk scenarios like in proper conflict zones. The pandemic makes us realise how much we took for granted.

22 October 2020

Watch out for the political fallout of CAP reform

We had little time to study the compromise reached by EU agriculture ministers in the early of hours of yesterday morning. Having now looked at the details, it is even clearer that the big greening of European agriculture is not going to happen. The EU's green deal is a noisy photo op with a veggie burger.

The long-awaited reform of Europe's common agricultural policy is now effectively postponed until after the next budget period, after 2028. The biggest weakness in the proposed deal is not the 20% to be reserved for eco-schemes, as opposed to 30% demanded by the Commission and agreed by the European Parliament. It is the fact that it fails to reform the nature of the CAP. Furthermore, even this reduced ambition is not real. Member states will run these according to their own political preferences. This reform runs the danger of becoming just another relabelling exercise. 

All the big parameters of the CAP remain unchanged. It constitutes a third of the total EU budget. Of the CAP money, three-quarters goes directly to farmers. The fundamental principle, that the bigger your farm the bigger the subsidy, will be the same. What the reform is trying to do is nudge up the relative proportion of environmentally-related spending, also known as eco-schemes. The way the compromise works, according to FAZ, is that the present system will effectively continue until 2025. No farmer will suffer any shifts in income streams until then. FAZ writes that the eco-schemes would only lead to a redistribution of incomes in the final three years of the EU's budget period: 2025-2027. 

What we should watch out for is the impact of the obviously failing green deal on political coalitions in Europe. Germany's CDU/CSU and SPD support the compromise. But the Greens and environmental groups are hopping mad, more so than we have seen them for a long time. A new gulf in politics is opening up. If the current coalition manages to get a majority again in the 2021 elections, which is unlikely according to the polls right now, we would not rule out another re-run if only to avoid the political conflicts that would arise otherwise. A CDU/CSU/Green coalition would lead to radical policy shifts for which classic centrist coalitions are unprepared. 

21 October 2020

Doubling down - EU/UK edition

One of the mistakes some EU officials have been making in the last few years is to draw their intelligence about UK politics from their usual, mostly pro-European, sources. Tony Blair's personal interventions in Brussels had a disproportionately strong effect on opinion, and were instrumental in the EU's fateful decision to play along with the opposition in the House of Commons by forcing several deadline extensions last year. 

Reliance on poor intelligence leads to poor judgement. This problem persists today. Judging by some of the comments we have read over the last week, everybody seems to be doubling down on the mistakes they made before. The issue is not what we think about Johnson as a prime minister, on which there seems to be a consensus in Brussels and national EU capitals. It is about what he will actually do.

In this context, we noted a report this morning that the EU's strategy was now based on giving Johnson bragging rights. Letting him decide when to return to the table and declare victory, and then force him to concede on all the substantive issues. The EU should prepare itself for the possibility that this might not be the trajectory in the next four weeks. We think the UK may well return to the negotiating table. We think a deal is possible, but it will have to include a readiness by the EU to compromise as well. Judging by the discussion in the European Council last week, that has yet to happen.

We do not claim to have any special insights into the ever-changing mind of the British prime minister, but we do know that he is surrounded by advisers who accept a no-deal outcome, and some who advocate it. We also know that, for all his displayed buffoonery, he has been strategic about Brexit, even now in the middle of a returning pandemic. We don't think there is a link between a pandemic that will most likely have subsided by next year, and the UK government's position on future EU/UK relations. We also don't see the frictional cost of a no-deal outcome relative to a deal to be nearly as crippling as some of the forecasts suggest. Most of the friction will come from the end of the transition period itself. The main difference between deal and no deal is tariffs. The weighted most-favoured nation tariff for UK imports is around 1.6%, which is within the magnitude of exchange-rate movements on a moderately turbulent day in the forex markets. It would be another mistake to rely on the idea that Johnson will fold because of economics.

20 October 2020

Barnier's overtures rejected

Michel Barnier tried to undo some of the damage done last week by the European Council, by offering a genuine concession: the EU is now willing to discuss legal texts. This is exactly what the UK had been demanding for some time now. But that concession was not enough. A UK government spokesman noted politely that Barnier's offer to intensify the talks was welcome, but that there is no basis for discussions unless there is a fundamental shift in the EU's approach. In other words, the UK is expecting nothing less than a reversal of the council declaration, which boldly stated that all movement in the negotiations would have to come from the UK side. We think the declaration last week was an unnecessary provocation that has actually weakened the EU's position.

The Guardian concludes that the standoff continues with only four weeks until the next European Council. The diplomatic activity going on in the background now is to find a face-saving way out of the mess. This means we are in a talks-about-talks phase of negotiations, as opposed to talking directly. Angela Merkel's overtures on Friday were not deemed to be sufficient. Unanimously agreed Council conclusions weigh heavier than a politician's later emollient words. We think the European Council made its third tactical error during these negotiations. The first was to bet on an extension, and the second to insist on sequencing. The combined result of all of these mistakes is that the deal will ultimately require more concessions in a shorter period of time than would have been necessary otherwise.

The EU relented also on another UK request. Instead of a permanent office in Belfast, it is now happy with a team of border officials in Northern Ireland.

The probability of a deal remains impossible to calculate because it will depend on whether Boris Johnson wants one or not, and whether he is ready is to compromise on the level playing field. He would need to do this. Another necessary condition is for Emmanuel Macron to drop his extremism on fisheries. Our hunch remains that this will happen, but we can't be sure. We are hearing reports that Johnson is dithering, changing his mind from one day to the next. The big danger we see is that Macron will make it easy for Johnson to pull the plug. The process will not survive another accident of the kind we had last week.

19 October 2020

Where now for liberté, égalité, fraternité?

The savage murder of Samuel Paty may be a decisive moment for France. After Islamist terrorists targeted journalists, cartoonists, young concert goers, Jews and the police, the decapitation of a teacher who taught his students the freedom to think, speak and draw hit a central nerve of the French nation. This was an attack against its republican values, culture and identity.

Teachers are the backbone of a society. Who would risk their life to show what freedom of speech means in a democratic and secular system? How will they stand up in their class this morning and talk about freedom if they have to fear that some of their pupils or families might agree with the assassin? This is a reminder that freedom cannot be taken for granted and that, for some teachers, it may become a daily battle against fear. The murder comes as the perpetrators of the Charlie Hebdo attack five years ago and their accomplices stand trial, and shortly after a meat-cleaver attack by an Islamist radical outside the former headquarters of the magazine. Freedom is a fragile value and needs to be protected, writes Le Monde in an editorial

France has the largest Muslim population in Western Europe, with about 5m people, and Islam is the country’s second largest religion. Of the young people who consider themselves Muslims, one in two prioritise the laws of Islam over those of the Republic according to Michaël Prazan. For decades, certain subjects have become taboo in multi-religious classrooms. How far will this go? How can one teach a young person to make his or her own choices free of influence, in line with Republican values? If teachers cannot talk about the Charlie Hebdo caricatures in school, it suppresses a brewing conflict that calls for political intervention and change.

Emmanuel Macron addressed the nation and called on citizens to stay united against fear. He led a first government meeting on the response yesterday, setting priorities for more measures to combat radical Islam, protect teachers and monitor social networks. 

The immediate danger has been identified.The Élysée is considering police security for at-risk teachers, the education minister created a free call number, harassing parents will be identified and punished, and the national education curriculum on freedom of expression will come back in full force after the autumn holidays.

But what about the medium to long term? Cécile Cornudet wonders whether these policies will be enough to change course given that some families are living in a parallel society outside the values of the French Republic. They are making war against the values taught by schools, and ideology is winning over part of the educational machine. Will Macron's call to stand united still resonate with people who are becoming less and less willing to join him? The thousands of people gathering this weekend may be comforting, but what about the days after? Macron provides a sense of purpose and resolve in this crisis for the French Republic. If he fails to foster unity, he could splinter French society even more and give Marine Le Pen a boost. 

16 October 2020

How Erdogan plays the EU

While EU leaders drag their feet on whether to impose sanctions on Turkey, President Recep Tayyip Erdogan is creating a new Turkish empire using proxies, and tapping into the Turkish and Islamist communities at home and abroad. The EU fails to see the bigger picture. This is not about drilling ships entering Greek waters, but about facing up to the biggest threat in our immediate neighbourhood. Erdogan inspires Turks and Muslims with a vision of a modern empire stretching from Africa through Europe to Asia. You may not see New Turkey on the map, but it is becoming a reality.

In pursuit of this geopolitical masterpiece Erdogan uses all means to keep Europe disunited and morally compromised. It is not difficult to imagine the EU responding in the same way it did to Slobodan Milosevic: unable to act while a humanitarian crisis is unfolding at its doorstep.

Turkey already has a presence in Africa, the Middle East, Europe and Asia. It has military bases in Libya, Azerbaijan, Iraq, Qatar, Syria, Sudan, Somalia, Northern Cyprus and Albania. It is militarily engaged in civil wars in Libya and Syria, and now in Azerbaijan against Armenia. This way Turkey is extending its reach into the Caucasus. Once the Turkish military puts its foot down, it creates realities on the ground. The buffer zone in northern Syria has turned de facto into a Turkish administration zone, with Turkish lira and products circulating. There is no need to change border lines, as unity with Turkey is an everyday experience. From Africa to Asia, Erdogan is mobilising his supporters.  

Erdogan knows how to engage the large Turkish communities abroad. The biggest Turkish diaspora is in Germany. Traditionally voting for the SPD, though increasingly also for the CDU and the Greens, the majority supports Erdogan. Over the past months he has played a diplomatic game with Angela Merkel. In the end Erdogan got what he wanted: no sanctions from the European Council, but instead a carrot and the threat of a stick that may or may not be decided in December. This way he showed the Turkish diaspora what he is capable of doing. 

Erdogan is a master of manipulation and turning arguments upside down. He sent refugees towards the Greek border to remind the EU what they could expect if they crossed his red lines. Turkey has crossed Europe's red lines many times, but there were no consequences. He sends out drilling ships into Greek waters, calls them back just in time for the EU summit, and sends them out again, blaming Greece for not having kept its promises. Who is holding Erdogan accountable for his aggressive acts? Europeans still do not seem to want to see through his tactics.

Only Egypt has so far had the guts to set out red lines in Libya. And Turkey abided. This is the way forward. If Europe cannot get its act together and decide on what those red lines are, there will be no stopping Erdogan. Refugees are hostages to his games. They are used as a threat or bargaining chip with the EU. And the men are being trained and sent into his proxy wars in Libya or Azerbaijan. Erdogan might present himself as a protector, but in reality he is using them. 

The EU plays its part by allowing him to do just this. Compromised by the deal they struck in 2016, which we called then and now the EU's pact with the devil, Europe is at risk of selling its soul once more. 

In Turkey, economic favouritism and an increasingly nationalist agenda are polarising society. Since the failed coup in 2016, Erdogan has been purging the military, media and schools of all those who could turn against him. Oppression, intimidation and violence have become normal. This week alone, the Turkish government detained or forced out of office 59 of the 65 elected Kurdish mayors. 

Turning orthodox churches into mosques he also wins support from popular Islamists and nationalistic conservatives. He peppers his speeches with words like survival or native and national, to foster unity in his constituency at home and abroad. Where there is no Turkish community, he uses the Muslim Brotherhood to shore up support. Many of their leaders are living in Turkey or Qatar. The Islamic group already calls him khalifa, the leader of the Islamic world. Accordingly, he portrays himself as the spiritual counterpoint against Israel.

So Europe may end up with a wave of refugees either way, be it Syrians or young Turks who do not share Erdogan's vision for 2071, the 1000th anniversary of the Battle of Manzikert which marked the beginning of the end of the Byzantine Empire in Anatolia and the start of the Turkification era. Once again, Europe's foreign policy appears weak, compromised and unprincipled. 

15 October 2020

Why Macron fights for fish

We wouldn’t usually write so much on fish politics, but the issue has somehow become one of the biggest obstacles to a EU-UK trade deal, as well as a potential source of EU disunity.

We’ve already noted that France’s hard-line stance on fish is putting it at odds with Germany. Mujtaba Rahman argues that France's aggressive negotiating position stems from a desire to become the EU’s foreign and security hegemon, as well as from domestic political pressures. As a result, Macron has been unwilling to sell out French fishing communities. But this is a strange hill to die on.

As in the UK, the industry’s economic contribution is small in France. Total sales were around €2bn in 2016, and OECD statistics show that less than 14,000 people were employed in the fishing sector in 2018. Employment in fishing has fallen by 8% since 2011. But the fishing industry, like agriculture, is symbolically important in France. And northern French fishermen take the majority of their catch from British waters.

Macron might be worried about Xavier Bertrand, a high-profile former member of Les Républicains and potential 2022 candidate who is close with the industry. Bertrand is president of the Hauts-de-France region. He served as health minister under Jacques Chirac and labour minister under Nicolas Sarkozy. Last month he attended the general assembly of the Coopérative Maritime Etaploise, where he called for arm-wrestling with the UK in fisheries negotiations.

More good optics for him. Bertrand has recently been spotted in meetings with a string of senior right-wing political figures, including LR president Christian Jacob. Rachida Dati supports his candidacy, and Le Journal du Dimanche reports that he will meet with Nicolas Sarkozy next month. With the help of LR deputy Julien Dive, he has also been meeting with parliamentarians this week, and is set to meet with senators next week. His think tank La Manufacture has been mobilised to develop an election campaign strategy, and a recent Ifop poll put Bertrand at the top of the list of potential right-wing candidates.

We’ve noted that many of Macron’s recent policies and speeches have been aimed at attracting and retaining voters from the right. But as we’ve argued, no deal will be much worse for French fishermen than what the UK is offering now. Macron has been slipping in the polls as the pandemic drags on, and last night’s curfew announcement probably won’t help. He has very little leverage and the UK knows it. His best option now is to climb down. 

14 October 2020

Free movement in the second wave

Travelling in Europe is a haphazard enterprise in times of Covid-19. Destinations can turn into red zones from one moment to the next, triggering lockdowns and quarantines. Dos and don'ts are fragmented and constantly change, not to mention all the new forms to be filled out before entering another country. Now that the second wave is in full swing, uncertainty weighs heavily on travel. One might as well cancel all plans, hibernate and wait for better times, hopefully by next year.  

Entering the second wave, member states responded in an uncoordinated way once more. Belgium was the first country to impose restrictions on travel to and from other EU countries last month. Other member states followed with their own lists of selected travel restrictions. Only France, Sweden and Portugal left their borders completely open, Jean Quatremer observed. 

What happened to free movement, one of the pillars of the single market? National health concerns override these principles. But, by doing so, they also risk undermining the meaning of free movement in Europe. There are no complete border closures in the second wave, and it is unlikely that we will see them. But imposing a 14-day quarantine is not dissimilar to closing down the border. It is not only a direct order, but one that works by discouraging travellers.

There has been some effort to coordinate better. Yesterday the Council adopted the European Commission's recommendation to coordinate restrictions of free movement in response to the pandemic. These are guidelines only, and still have to be implemented by member states. But it is a step forward and will most certainly lead to more clarity and a better overview about the European case responses, if only to find out how fragmented those really are. 

Member states will have to submit a weekly harmonised set of data to the European Centre for Disease Prevention and Control (ECDC). These include cumulative Covid-19 cases over 14 days, the number of tests and the positive outcomes. On this basis the institute will publish a map of Europe, classifying every region according to three colours: green for those with less than 25 cases per 100,000 habitants or less than 4% positive test results; orange with between 50 and 150 new cases but less than 4% positive results, or less than 50 new cases and more than 4% positive results; red with either more than 150 new cases or more than 4% of positive test results.

Once the region is orange or red, member states can respond by imposing quarantine, lockdown or tests. The only travellers exempted are those with essential functions such as students, journalists, cross-border workers, diplomats and employees in the transport sector. This is a plus. But uncertainty for travel remains, with the full array of measures available and little time to adjust to changes. Member states have to inform the ECDC only 24 hours in advance before imposing a new measure. This is not much time for travellers to change their plans. The UK gave 48 hours for holidaymakers to return home before quarantine in August, leading to panic returns at exorbitant prices. The European Commission suggested five days in its proposal. But member states prevailed in their desire to hold all the cards.

13 October 2020

Smoke and mirrors: Russia sanction edition

We never cease to be amazed that German media reports on sanctions against Russia don't even mention Nordstream 2. The pure hypocrisy in Europe's policy towards Russia and China is probably easier to see from the outside than from within. At no point have Europeans dealt with the fundamental issue that the pursuit of geopolitical goals comes at a cost. You can't be a trade-surplus-maximising Mercantilist and a global policeman at the same time.

In their meeting in Luxembourg yesterday, EU foreign ministers signed off on a Franco-German proposal to target Russia for sanctions because of the Navalny poisoning. Concretely, the French and Germans want to draw up a list of individuals to target by the end of the week. According to the report, the list will also include the research institute that developed the nerve agent novichok. But obviously, these sanctions are being drawn up in such a way that no EU country is in any way affected. Heiko Maas likes to talk about sanctions against Russia, but we should always remember that he and his party are supporting Nordstream 2. Russia sanctions, like the Juncker investment programme, fall in the smoke-and-mirrors category of EU politics. The policy produces a lot of visuals and noise, but ultimately makes no difference. In the meantime, the gas keeps flowing. 

We agree with Germany's principled position that decisions on EU foreign and security policy need to be taken by qualified majority vote. That would indeed be a first concrete step towards a more strategic approach. We also agree with a recent discussion paper that the direction of travel should be to leverage soft-power instruments. But it is crucial to understand that there are political and economic costs to be paid if you impose real sanctions as opposed to this symbolic stuff.