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31 August 2023

Europe needs to rethink Africa

The latest coup d’état in Gabon, whether the preceding elections were rigged or not, de facto reduces the number of western styled democracies in Africa to 14 out of 54 countries in total. According to the map in Les Echos, the number of authoritarian regimes has risen to 22 countries.

We have seen more military coups in Africa recently. Gabon is the seventh since 2020. Not that military coups are a new phenomenon. Out of at least 242 successful military coups that have occurred globally since 1950, Africa accounts for the largest number at 106, according to Al Jazeera. There are 54 African countries, and 45 have seen at least one coup since the 1950s.

What does this mean for Europe? There is first and foremost a question of responsibility, not only due to the colonial past and the many links European countries still have in Africa. Young Africans can no longer understand why their countries are raw material rich but amongst the poorest countries in the world. This logic has to change for there to be a lasting impact. Climate change is an important factor here, a result of western industrialisation, yet its effects are felt in Africa without any means to combat it. For years now, they no longer talk about aid, but reparations payments to African countries to amend for past deeds.

As Adam Tooze wrote in the FT, the previous Niger coup is embarrassing for France and the EU, in the sense that it is showing how ineffective its foreign policy strategy in the region, the Sahel Alliance, is to ensure security through the pursuit of its development goals. Europe is no match for China in terms of funding infrastructure, nor is it living up to the difficulties African countries are facing on climate change and poverty. To really make a difference and achieve sustainability goals in low income countries, a recent estimate puts the requirements at $1.3tn per annum as from 2025. A tall number, but compared to the $100tn the global economy is producing annually, this seems possible if only countries were to agree on how to raise those funds. But Europe is far from getting seriously engaged in Africa.

What happens in Africa also directly affects Europe through supply chains. African countries are raw material rich, supplying the world, including Europe, with important metals and minerals to their supply chains. Niger’s recent coup put into doubt uranium exports to France, which gets 25% of its needs covered from there.

Gabon’s coup has multiple impacts for natural resource supply chains. Gabon is a sizeable oil exporter, and a member of Opec. Its oil is also relatively high-quality, which is especially important in a world where Russia's invasion of Ukraine has upended oil product supply chains. The coup also had an impact on manganese markets, since Gabon is the world’s second largest exporter in this metal. Manganese is an important ingredient for a variety of important alloys and to deoxidise steel. It is used in dry cell batteries, in ceramics, rubber and glass making.

The French company Eramet, which sees 60% of its turnover come from manganese, saw its stock exchange prices fall by 22%. The same thing happened to other French companies engaged in Gabon’s raw materials. Whether threats of disruptions for raw material exports to Europe come to the fore is still not clear yet, but it will be part of the strategic rethink the EU has to do on Africa.

30 August 2023

Economic costs of geopolitics

While the 1990s was an era where economics trumped politics, we are now living in an era where the relationship is reversed. In the volatile world of today, security concerns are key.

Economic sanctions have become the western weapon of choice against political adversaries, even if we do not see much evidence that they have achieved their stated goals in the case of Russia. Sometimes a threat of sanctions is enough to affect trade. Geopolitical tensions between the US and China keep everyone on their toes. Tensions between Iran and Israel do this in the Middle East. In Africa, several nations have gone through a coup d’état recently, the aspirations of their new leaders for decolonialisation could shake up the raw material mining market, which is critical for green industries.

The IMF calls the process economic fragmentation. We could describe it better as a process of political fragmentation with economic ramifications, but it is in the latter that the costs of those political fault-lines become most apparent. Their research has shown that foreign direct investment and financial flows follow geopolitical alignment.

In a recent blog post, the IMF puts some figures on it. Since 2019, trade restrictions have tripled to almost 3000 last year, increasing costs for traded goods and services. Other forms of fragmentation include technological decoupling, disrupted capital flows and migration restrictions. Cost estimates of fragmentation vary, but the IMF puts it at 7pp of global GDP in the long term. This is massive, the equivalent of the GDP of France and Germany together.

More efforts to cooperate are needed to counter this trend. IMF Managing Director Kristalina Georgieva wrote in Foreign Affairs that policymakers should focus on matters not only relevant to the wealth of the nation, but the well being of ordinary people. The WTO is sounding the alarm bells too. At Jackson Hole, Ngozi Okonjo-Iweala, the WTO’s director general, warned against rising inflation and volatility as a result of fragmentation. If the world were to divide itself into two trading blocs, global GDP would suffer by 5pp with some developing countries facing a loss of over 10pp. The Brics morphing a trading bloc makes this scenario more likely.

The next G20 meeting will be in a week and a half in New Delhi. India is the host, and also member of the Brics. It will be interesting to see whether it can find a balance between the two worlds.

29 August 2023

Omtzigt, the post-populist

The biggest political surprise in Europe this year has probably been Mark Rutte’s coalition government in the Netherlands disintegrating early, plus Rutte’s own retirement from politics. But the Dutch surprises have kept coming. Now we have another one. Pieter Omtzigt, a popular MP formerly of the centre-right CDA, has formed his own party, the New Social Contract (NSC). The NSC is now leading in the polls, with early surveys putting them on an average of 20%, according to Politico’s poll of polls.  

Thanks to its relatively open political system, the Netherlands is often an early adopter of trends that subsequently pop up elsewhere in Europe. Far-right populism is a case in point. But Omtzigt represents a new evolution of Dutch politician, one which you could brand the post-populist.

Like the populists, Omtzigt claims to represent the common person against an indifferent political elite. Where he’s different, however, is that his pitch to voters is more about process than policy. Omtzigt is not a hard-liner on immigration like Geert Wilders, and he is not set against environmental policies in the same way as the pro-farmer BBB. He ruled out working with Wilders’ PVV in government, and declined an invitation to join the BBB.

Instead, Omtzigt cares more about government being transparent, thorough, and avoiding abuses of power. Despite formerly being part of a centre-right party, he teamed up with a socialist MP in 2021 to uncover the fact that the government, which his party was a part of, had falsely accused thousands of families of benefits fraud.

But one area where Omtzigt has more well-defined policy views is the EU. He’s a Eurosceptic figure, believing that the EU has overreached, and that national politics should not be subordinate to it. Several years ago, this wasn’t an uncommon position amongst the EU’s populists. Now it’s difficult to find anyone still focused on the EU. 

If Omtzigt tries to translate his views on the EU into action, he will run into the problem that the time to implement his ideal would have been 30 years ago. In practice, it will mean either a more intransigent Netherlands or one that pursues the UK route of trying to push for opt-outs on everything. Both of these courses would diminish the influence the Dutch have in the European Council, one of the legacies of the Rutte years.

The kind of impact he has on the election, and the Dutch political landscape after, will be interesting to see. Omtzigt has said that he wants to stay an MP after the election. Since Dutch parliamentarians aren’t allowed to serve as ministers, that means he is ruling out him being prime minister or a cabinet member, even if his party comes first or joins a coalition. He’s also said that he doesn’t want the NSC to get too big too quickly. The only way he can avoid that while contesting the elections is by presenting a smaller list of potential MPs than the number of seats the party could expect to win based on polling. That may make the election even harder to call.

25 August 2023

How not to think about the dollar

We call it the snapshot fallacy. It is a version of the fallacy of composition applied to time. You take a snapshot of the current situation, find the reasons why things are the way they are, and then extrapolate into the future. It is a fallacy that will get analysts always to favour the status quo. 

The snapshot fallacy is everywhere in the debate about the future of the US dollar as the world's dominant currency. One frequently used argument is that the markets simply prefer the dollar, and that this is it. Or that the US is absorbing the rest of the world's savings surpluses. The US has been running large and persistent current account deficits, but it is far from clear whether this will continue. Nor is it clear that the markets will function in the same way in the future as they do now. This is a question about complex interactions of future trade flows, technology and politics. 

We understand that reserve managers or sovereign wealth funds have a high preference to hold their assets in dollars. Our point is that many global transactions that do not directly involve the US still have to be routed through institutions or banks directly or indirectly subject to US legislation. It is that part of the transaction chain we are talking about. If you run a trade surplus with the US, then for sure you remain dependent on the dollar for this portion of your trade.

There are many reasons why countries would want to become independent from the dollar. Transaction costs are one. An increasingly important one has been the avoidance of US sanctions. The US applies economic sanctions directly and indirectly. The sanctions against Russia are direct. But they apply to non-US banks too because the US can ban any bank from dollar markets. It is the network effects and micro infrastructure of financial markets that allows the US punch well above its economic weight. 

Indirect financial sanctions are a powerful mechanism on which US foreign policy has become increasingly reliant. But as the Europeans found out themselves, they are not compatible with principles of democratic rule. The US and the EU have imposed similar sanctions in respect of Russia. Here it does not matter much. But in the future the US and the EU may disagree over China. 

We recall in 2018, during the Trump presidency, when the then German foreign minister, Heiko Maas, suggested that the EU free itself from dependence of the US by adopting its own international payments channels. We are only another Trump presidency away from that situation. The snapshot fallacy is on Joe Biden staying president forever. 

Efforts to wean ourselves off dollar independence will not depend on some uncertain innovation in artificial intelligence or computer science. The technology behind it is the blockchain, which has proved very stable. Whether countries will succeed in becoming more independent of the dollar will depend entirely on politics. If the Brics countries want to do, they can do this. 

The instruments of choice are central bank digital currencies. Bitcoins are not it. To release their value in a fiat currency, you are back in the financial market. But if Russia and Iran, for example, develop a crypto platform through which they settle their bilateral trade, it is possible for them to transact without routing this transaction through any US-controlled institutions. 

There are still many unresolved questions. Financial markets do a lot more than settle bilateral trade. How would this system handle changes in exchange and interest rates? Will there be digital futures and options markets? It is not the currency itself that is the problem, but the micro market infrastructures that supports it - or not.

Our point is that the use and abuse of the dollar as a sanctions tool has given other countries an incentive to develop technologies that make them less dependent on the US currency. It has nothing to do with whether a Norwegian fund likes dollars.

24 August 2023

Germany's climate misses

Of the three parties to enter Germany’s traffic light coalition, the Greens came with the clearest agenda: putting Germany on a path to net zero. The targets the government has come up with have since been more ambitious: 65% emissions reduction compared to 1990 levels by 2030, and carbon neutrality by 2045. On current form, however, neither of these will be achieved, and they probably won’t be without resolving the political problems that knocked the Greens’ agenda off course in the first place.

On Tuesday, two separate reports came out, which demonstrated how far off the pace in Germany is. The first, from the ERK, a council of climate experts set up to advise the government on policy, said Germany would be between 152 and 226m tonnes off of the 2030 target. Transport emissions will be especially bad, falling 117-191m tonnes short of the government’s goal.

The second, from the UBA, the federal environmental agency, added that neither planned nor existed government policy would get Germany to the 2045 target either. That report claimed those policies would leave it 86% and 82% of the way there respectively.

The other problem is that the shortfall could see Germany fall afoul of its European commitments on climate too. As part of the rollout of carbon pricing to buildings and road transport, Germany committed to reducing its buildings and transport emissions by 50% compared to 2005 levels by 2030. This was part of a set of differentiated country-specific targets designed to cut emissions in these sectors, responsible for 60% of EU emissions, by 40% compared to 2005 levels by the same date.

But buildings and transport are the problem, and the reason why Germany will miss its internal 2030 target according to the aforementioned ERK report. As Nikolaus Kurmayer, writing for Euractiv, points out, that may mean Germany is 150m tonnes short by 2030. EU legislation stipulates that Germany would have to negotiate deals with countries that overshot their emissions targets to buy credits for their unused allowances. According to Kurmayer, that cost could be anywhere from €7.5-30bn if the credits are available at all.

These are, however, politically contentious areas, because of the more direct and obvious impact cutting emissions in these sectors can have on consumers. The government faced a backlash for its attempts to cut emissions in both, first in the form of political wrangling over the EU-level internal combustion engine ban, and then after its proposed 2024 boiler ban. What this meant is that the government decided to move towards an all-inclusive emissions reduction plan, rather than a sector-specific one.

All that does, however, is transfer the political ramifications of the plan somewhere else, and delay the inevitable for cars and heating, which will have to be decarbonised at some point. The chemicals and car industries are already angry because the EU will replace their current emissions allowances under the current carbon pricing regime with its new external carbon tariff. They are also upset about high energy prices, which they claim make them uncompetitive even without the green measures. At some point, Germany will need to choose between driving its cars or making them in order to hit their own targets.

The problem for Scholz’s government is that you end up in a position where you’re pleasing no-one. Germany’s slow de-industrialisation has very little to do with the costs of the green transition. It will continue regardless. Green-minded voters will now instead see headline after headline about missing climate targets, as they also see photos and videos of dried-up lakes, flooded houses, and burning forests.

23 August 2023

Two modes of destruction

The wildfires in Greece have spread with incredible speed over the past four days, leading to mass evacuations and 20 dead so far in the affected regions. Since last Saturday, the national weather service Meteo recorded 300 wild fire outbreaks. A first analysis via satellite photos show 400,000 acres burnt to ashes as a result of high heat and strong gusts of winds. The outbreaks cover various regions throughout Greece, including one on the outskirts of Athens. The coverage and intensity were unprecedented, as the press representative for the fire brigade calls it.

Greece is one of the Mediterranean countries most affected by the wildfires. Droughts and wildfires have been happening with greater intensity over the past couple of years all over Southern Europe. It often has a political cost attached to it once the blame game starts. In Greece, this is already happening as the opposition accuses the government of being complacent and unprepared since the start of the wildfire season.

Against this dramatic backdrop, Kyriakos Mitsotakis held his informal Balkan summit with the aim of talking about EU enlargement with leaders of the Western Balkans, Moldova and Ukraine. From the EU side, Ursula von der Leyen and Charles Michel were present too. But it was the surprise visit of Volodymyr Zelensky that got all the media attention. Zelensky secured from Mitsotakis an agreement to train Ukrainian pilots on Greek soil and to help secure Black Sea grain exports, as well as on Nato and EU membership. The Balkan states also put up a show of unified support for Ukraine against Russia, in front of a horizon of burning forests.

A cartoon in Kathimerini illustrated Zelensky's dialogue with Greek Prime Minister Mitsotakis:

Zelensky: “Half of our country is destroyed!

Mitsotakis: "Ours, fortunately, much less!”

22 August 2023

Need for cash in a cashless world

Paying in cash is becoming rarer, a trend that has accelerated since the pandemic. Some small retailers or cafés do not even have a tilt for coins anymore and only accept payments by card and phones. There are social consequences too. Less tech-savvy people will find themselves disadvantaged, people selling magazines or beggars no longer can count on people carrying spare coins. Cash has advantages for the holder, allowing private payments, and being a tangible measure for how much money one has left to spend. With virtual money, this overview can get confusing: passports have to be remembered and changed, while online fraudsters and technical glitches add an additional anxiety unknown in the world of cash.

The ECB data confirms the trend away from cash. In 2016 and 2019 cash dominated in sales points like shops and restaurants, representing 79% and 72% of transactions respectively. In 2022, this share has come down to 59%. Public health measures during lockdowns turned contactless payments into a safer choice. This trend continued as people got used to effortless payment by just tapping their card or phone onto the cash point machine.

In an ongoing survey, the ECB found that cash is still the preferred medium of payment for 22%, while 60% appreciate having cash as one of their payment choices. The ECB is working on a digital euro itself and counts to offer this as another choice of central bank payment.

There are huge differences amongst member states, however. In Finland and the Netherlands, cash represents only 20% of transactions for small amounts, whilst in Italy 69% of transactions are in cash and for more significant amounts.

Amid this new trend, banks have adapted their cash access strategies. In the UK, where we live, many local bank branches closed down, especially in rural and suburban areas. Supermarket ATMs became the go-to for cash, while getting help with banking matters not covered in online Q&A help pages becomes an odyssey. In France, several banks agreed to offer joint cash access points and to more than half those by 2025. Financial regulators have to call retailers and banks to order repeatedly for their obligation to continue to offer access to cash and acceptance of cash payments.

The market momentum out of cash is unstoppable. It will be up to central banks and the regulators to preserve cash as one form of payment. With digitalisation, the social contract behind money is changing. Fiat paper money was already a matter of trust in a society rather than value. It had a certain reach in society, but not beyond its currency domain. Taking money completely digital takes trust to another level. It propels money into a global playing field where everyone could access their euros wherever they are without any physical landmark of trust, such as one bank’s ATM machine.

Going digital has not yet seen any major crises emerge, except for those who fell for online fraudsters. Making money safe and secure requires a constant vigilance that is far more demanding than the occasional money printing machines discovered in somebody’s cellar. And it adds responsibility to banks and account holders that comes with its own anxieties. At the moment people still enjoy the comfort of effortless payments. Until the first crisis of trust emerges.

21 August 2023

Africa's role in energy transition

Our accelerated demand for climate-friendly energy, including electric cars, has massive consequences for Africa. Africa has 19% of global metal reserves that are required for a standard battery-powered electric vehicles and at least a fifth of 12 raw materials necessary for the energy transition.

Yet in the past, Africa has not benefited from its raw material wealth, and instead witnessed a history of exploitation. Raw materials were directly exported outside the country from mines owned by international investors, while the local population stayed trapped in poverty and had to live with the consequences of the mines’ deforestation and pollution.

This time it better be different. Current mines need to be de-polluted and new mines need more locals to be involved, not only in the mines itself but also in the value chains using the minerals. Their own energy needs will have to be addressed and not ignored as in the past.

Time is short to achieve climate change targets ahead of 2050. It takes on average 17 years from discovery to the start of a mine. It also needs good infrastructures and governance for a partnership to prosper. But there is hesitation amongst investors as the political landscape is changing fast in Africa.

As former colonisers, Western countries would do well to acknowledge historic errors to make a common partnership work in search for green and secure energy. France, for example, has major stakes in the economy in Niger, Burkina Farso and Mali, its former colonies. Its CFA franc are two currencies used by 14 African countries. France is deeply implicated institutionally, economically and politically. There are deep-rooted resentments in the population that have not been properly acknowledged. As a result, an anti-French and anti-Western sentiment has been thriving in the Sahel region. And it is showing its first manifest results.

The first sequence of rupture with France have appeared at the level of military cooperation. The junta which took over power in Niger ended military agreements with France, accusing it of meddling in its affairs. Burkina Farso and Mali acted similarly earlier. But this rupture will not stop with the military question. Economically too, the French will have to rethink their role. Why should Africa not adopt a currency of their own? Reports of stopping raw material exports like uranium or gold have been circulating through social media, but so far nothing has been enacted. These rumours are a sign, however, that the new regimes are flexing their muscles as Africa is courted by many countries, including China and Russia, for its raw material riches.

African countries have seen one coup d’état after another since 2020 in Mali, Chad, Guinea, Burkina Faso, and now Niger. Ibrahim Traoré, the young and charismatic military officer who took over Burkina Faso, is igniting the hearts and minds of many Africans when he calls for Africa to be self-reliant, resilient, and recognised for its role with a plea for a federation of African countries. How far this will go no one can tell at the moment.

For Europe, the energy transition constitutes an opportunity to reboot relations with Africa. In 2019, the richest 10% of the population living in Western countries and Southeast Asia accounted for 48% of global CO2 emissions, while the bottom 50% of the world’s population only accounted for 12%.

The climate change agenda could bring together Europeans and Africans as partners. But to reconcile, they will have to acknowledge their terms, which may not be acceptable by Western democratic standards. Something needs to give. There are risks on our side too. Western politicians and investors could push things too fast and too far for African countries. And there are old habits to kick. The US and France contemplated intervention in Niger, while being warned by neighbouring countries that they would see this as a declaration of war against them. Another conflict in Africa is the last thing France or the EU needs at the moment.

The surge for green energy resources in Africa and a revolutionary sweep against the reminiscence of colonising powers amongst African countries are two forces that could work against each other or for each other. At the moment it is not yet clear where this is heading, as the potential for a major blunder is big, both in the West and in Africa itself.

17 August 2023

Taxing for green transition

What is a political promise worth? When circumstances change, so does the value of a promise. Eternal values is only for a moment, and moments are short in politics. And when a threat can no longer be ignored, change is required.

Ever since his election, Emmanuel Macron and his finance minister Bruno Le Maire have been promising no rise in taxes. Yet amid fiscal and ecological pressures, Bercy, the French finance ministry, is now preparing to raise some. According to Les Echos, those rises do not concern the main taxes, but focus on polluting transportation. The political challenge for Bercy will be to marry the image of a business friendly administration with an ecologically conscientious one that is doing its bit to green its own budget and shift incentives for its citizens towards less CO2 emitting transport. Lifting other taxes on companies is part of this balancing act.

Polluting cars will be the main target in the 2023 budget as are flights. Those projects, if implemented, will raise costs for motorists as motorway fees are likely to go up as a result of a higher tax on its operators. People will also have to pay higher taxes for heavy cars. Airplane tickets would see an increase in the eco-tax, more for business than economy tickets. And companies are incentivised to renew their car park towards electrical vehicles.

Those higher taxes do affect businesses, in particular the construction sector and delivery services. The current malus system taxes cars above 1.8 tonnes more on the grounds that heavy cars pollute more. This bar is planned to be lowered to 1.6t, which includes some of the vans including the Peugeot 5008 or the new Espace SUV from Renault. New car purchase subsidies are to linked to six criteria including one that excludes cars made in China. And brown subsidies such as the one for diesel used in construction and agriculture sector are also on the table for a potential chop.

Will the French be ready to accept a tax increase for the sake of the ecological transition this time after they rejected a small tax increase on diesel with the same aim in 2018 resulting in the gilets jaunes movement? This time taxes are more focussed on heavy cars and motorway charges rather than a general diesel tax hike that affects all cars. The measures also do not come out of the blue. A report by Jean Pisany Ferry on the macro-economic consequences of climate change raised the alarm bells. Consultations with various sectors are ongoing. Climate change is more visible today than it was in 2018. A tax hike for the ecological transition will probably be accepted. The bigger question is whether this collection of small measures will be enough to significantly shift incentives.

16 August 2023

Can Le Pen win without elites?

Can Marine Le Pen win any presidential election without the upper bourgeoisie class? This is an interesting question l’Opinion had a closer look at. In her 2017 and 2022 election campaign, Le Pen was running as the candidate of the people against the candidate of the elites. Le Pen is never seen with industrialists or one of those rich French patriarchs. She was always defending the small income earners but unlike the left she did not attack the rich. In 2022 she made her campaign in small towns and villages, more out of financial necessity than by design. This was in stark contrast to the other candidate on the far right, Eric Zemmour, who performed at mega rallies, backed and financed by rich donors from the right. Those oligarchs saw in him the saviour of a catholic France, an electorate Le Pen stayed far away from. The first round of the presidential elections eliminated Zemmour. Le Pen also succeeded in the subsequent legislative elections.

Will 2027 be any different? Le Pen believes that she can win the elections without relying on the rich and powerful. Her strategy towards capturing the Elysee palace is bottom-up.

But to win the presidency, she cannot completely ignore the rich and the bourgeoisie. It does not seem to be a class conflict for her. Le Pen and her party are not anti-rich like the left. Their programme even has some measures on donation and inheritance tax. They do take issue with some of the powerful elites, such as multinational companies she accuses of not paying enough in taxes and contributing to French society. And in her rhetoric she targets Medef, the employers organisation, as the ones who advocate immigration at the detriment of French employees.

To be seen representative as a president for all, it may well be enough for her to do what Francois Mitterrand did in 1981, lining up one or two who represent wealth and the bourgeoisie, who then make the case for Le Pen in the media.

How much is this image of being a candidate of the people worth without Emmanuel Macron as the counterpart? Her success is also the result of a rejection of Macron and what the elites stands for. A different presidential candidate who comes across less elitist may well succeed next time. Economic circumstances may change. Macron may achieve full employment by 2027. There would be less reason for people to be scornful at elites. Geopolitics may be such that people may only trust a candidate who is at home with the powerful in the world, rather than one who is focused on small-town politics.

What role the powerful are to play in society is an eternal theme at least since Aristotle. Le Pen is at least clear about where she stands. It’s a bet. The outcome is not a foregone conclusion.