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6 March 2024

Kids are stupid

That famous line from Home Alone characterises Germany's pension politics quite accurately. The coalition has just come up with a plan to increase the pension contributions for employees and employers by 1.1pp to 22.3% respectively by 2035, at which point pensions will constitute a total of 44.6% in wage costs. The idea is to allow a stronger pension payouts in the future. Olaf Scholz said this was a matter of decency and respect - and he added that it would be great for the young generation too.

The retirement of the baby boomer generation has led to an imbalance in pension contributions. The way to solve this is through a later retirement, lower pension increases, or higher contributions. The SPD, a party supported mostly by older people, unsurprisingly supports higher contributions. The SPD is looking after its own.

When we talk about how ageing societies affect future inflation, this is one of the channels through which it happens. Under the current system, the generational imbalance would have been absorbed automatically through lower pension increases, which is why the SPD was so keen on this reform. As a sweetener for the FDP, there will be an element of investment brought into the new system. The hope that this would further forestall increases in contributions beyond what has now been agreed. Starting at a time of historically high asset prices, and falling domestic productivity, we doubt that German pension funds that invest domestically will yield high returns. 

This pension reform is another of these policy train-wrecks like the German-Russian friendship ten years ago, the depletion of defensive capabilities, or the 2035 deadline for cars, as described above. Coming at a time when industry suffers a competitiveness and labour supply shock, another cost-push shock is exactly the opposite of what the German economy needs right now. 

In Germany, singles face an average tax and contribution rate of 48.1%, against an OECD average of 34.6%. It is unsurprising that young people find it unattractive to enter the labour market, when for a little less net income, they can draw on welfare payments. Young people behave rationally when they regard pension contributions as a tax because it has become a redistributive system. So this is a policy based on the idea that kids are stupid. And we all know how that story ends.

5 March 2024

Western apathy over Gaza

This is a decisive week for Gaza, with ongoing last-minute talks about a ceasefire before Ramadan starts. It is also a decisive week for western politics. The immorality of silence is becoming a political problem for the west. Haunting pictures of children who died of dehydration and malnutrition in Gaza are the latest horrors of this war. Since Hamas’s terrorist attack on 7 October killed 1200 Israelis and traumatised Israel, more than 30,000 Palestinians died in Gaza, 25,000 of them women and children. Gaza is being reduced to rubble, with 70% of buildings destroyed. The water supply is at 7% of what it was before the war. Food supplies have run out.

Israel’s indiscriminate military response that accepts killing so many civilians as collateral damage will not have its desired effect of defeating Hamas. But it is turning the world against Israel. Nor will collective punishment lead to the release of its hostages from Hamas. Instead, a new generation of radicalised militants is growing up in the Middle East, that can be relied upon to threaten Israel in the future. This long term scenario of prolonged insecurity in the region is what should inform the short term choices.

Pressure is now growing massively in the West for government to shift their position. The conflict affects us directly with our communities of Jews and Muslims amongst us.

The US administration has so far been ineffective in convincing Benjamin Netanyahu and his government to opt for a targeted military approach or a humanitarian pause. US counsel has been ignored by Netanyahu’s government, while weapons and the diplomatic umbrella continue to be given to Israel.

Joe Biden’s words of condemnation of Israel’s choices seem without consequences. This moral signalling gesture has turned into a farce and there are now likely domestic consequences for the Democratic party ahead of the elections in November. Black community members and their sense for racial discrimination are starting to question Biden’s commitment to stopping indiscriminate bombing of Palestinian civilians. Donald Trump even was running ads in Muslim communities in Michigan, a state with a relatively large American Muslim community, thanking Biden for standing with Israel.

Biden’s airdrop of 38,000 food parcels after the aid convoy incident, where over 100 were killed while trying to get food from the aid trucks, looks more like a PR stunt rather than a solution. It falls short of the actions needed to get aid trucks and water supply into Gaza. More political signalling is coming from Washington in recent days. Biden received Bruno Gantz in the White House. Kamala Harris, the vice-president, called for an immediate ceasefire. The Americans also sent a diplomatic envoy to Lebanon to seek de-escalation in an increasingly confrontational exchange between the IDF and Hezbollah in the north of Israel. Again, there has to be done more than just signalling to have any effects on the ground.

There is so much debate in Europe about sending military weapons to Ukraine, but the same standards and considerations are not applied when it comes to sending weapons to Israel. This may be about to change, but only ever so slowly, it seems. Some 200 legislators from 13 countries signed a common letter to call on their governments to stop selling weapons to Israel citing violations of international law. The signatories include 76 from France, 34 from Spain and 43 from the UK,  with only 6 from Germany. Germany is not only an important military supplier to Ukraine, but to Israel too. Israel gets 28% of its military imports from Germany, predominantly air defence systems and communication equipment. Its figures increased tenfold after Germany ramped up its exports to Israel in November last year. One could say that the German economy too boosted its war economy, with Rheinmetall expanding to serve Ukraine too. Germany has its historic burden towards the Jewish community and Israel weighing on its judgement calls, but that makes Israel not more secure in the future.

There are judicial facts also created on the grounds in Europe. In the Netherlands, a court ruled last month that exports of parts for military fighter jets are be halted after human rights groups sued the government. Belgium and Spain have also ceased military cooperation with Tel Aviv in recent weeks. More needs to happen to make it clear to Israel that they cannot continue like this.

EU governments, meanwhile, continue to struggle to define a common position. The most united front was against an Israeli military operation in Rafah where only Hungary was objecting to it.

Both the US and Europe are likely to emerge from the war in Ukraine and Gaza with their human rights records tattered. A lesson that hopefully leads to a more structured approach towards moral dilemmas in the future and less lecturing others about human rights that we ourselves seem to have troubles to uphold.

4 March 2024

Far-right, front and centre

Jacques Chirac offered his successor Francois Hollande good advice: never talk about your opponent, because that's what makes him exist, and puts him at the centre of the game.

Hollande’s successor seem to be completely oblivious about this. Emmanuel Macron talks as if Marine Le Pen is the only opponent in town, allowing her party to turn the European elections into a national contest.

The cordon-sanitaire many countries have adopted against far-right parties does not seem to stop people from voting for them. The AfD may have lost some ground after revelations that some of its members met with neo-Nazis and extremists to discuss deporting immigrants from Germany. But the party still polls in second place after the CDU at 19%, according to Politico’s poll of the polls. Vlaams Belang also thrives on being the outcast party in Belgium, with 41% of the Flemish saying they could vote for them, according to a survey in De Standard. Nationwide, they poll at 25% ahead of the N-VA, with their gap widening ahead of Belgian elections in June. Austria is heading for elections in September, and here too we see that the FPÖ recovered remarkably well after its Ibiza-gate corruption scandal, enlarging itself by taking minority positions to lead the polls with 27%. Immigration is one of the central themes for all of these far-right parties. And there are the anti-vaccine and the anti-Ukraine aid supporters in the mix too.

It does not help that centre-right parties adopt policies advocated by the far-right. The French government accepting the principle for a preference of French nationals over immigrants into some of the social and housing services in their immigration bill last year, boosted, not deflated the spirits of the Rassemblement National. Whether they are burning or building the bridges to the far-right, it has the same effect, putting them at the centre of the game.

We find parallels of this phenomenon with Donald Trump in the US. Dividing the political landscape into outcasts and democrats puts the spotlight on the outcasts. And those voters, who cross the Rubicon to back the outcasts, stay loyal and won’t easily switch back into the mainstream. A survey from De Standard into what motivates Vlaams Belang voters seem to confirm this. A protest vote and desire for change motivated their voters right from its beginnings in 2014. There is now also an annoyance against the cordon sanitaire that fuels their determination. Loyalty is visible, 91% who voted for them would vote for Vlaams Belang again. About 84% of those polled are pretty certain about their choice, the highest score amongst all parties.

Scandals seem to stick less with far-right parties than mainstream ones. They seem able to attract more young people than the average; more men, more less-educated people, more low income voters, and fewer people with a foreign background, as an anti-system party. The De Standard poll also suggests that voters are more likely to migrate to them as long as migration is the key topic. The reverse is true as well: if the N-VA was to put forward other topics, the chance of a migration of voters from Vlaams Belang to N-VA rises. So Chirac’s advice has an important corollary: do not focus on your opponents’ policies as if these are the only game in town. But that is easier said than done. Events intrude and circumstances dictate what the public cares for, in these polarising times it has helped far-right parties.

The FPÖ, for example, recovered remarkably quickly from only 11% in 2020 after the Ibiza scandal to get back on top of the polls with 27%. It were able to enlarge its pool of voters with minority positions, attracting Covid-vaccine sceptics to those opposing support for Ukraine. It is a tactic that also worked well for the AfD in Germany. On top of that, migrant inflows have reached levels that are even higher than during the migration crisis in 2015, while inflation and the energy crisis have eaten away peoples’ purchasing power. Kurt Nehammer’s ÖVP no longer can offer a credible alternative, his party is engulfed in various corruption scandals and its strategy to mimic FPÖ’s policies under Sebastian Kurz is no longer working. It seems voters prefer the original to the copy, as Jean-Marie Le Pen once said.

1 March 2024

Rule of law? Or political nepotism?

The rule of law procedure has predictably turned into a Doomsday Machine for European integration. It is nothing what the name says, but a political procedure to penalise one's opponents. The EU has now unblocked the funds from the EU budget and the recovery fund to Poland on the grounds that Donald Tusk had given assurances that everything will be ok. As FAZ wonders this morning in a headline: Does the EU apply a different measure to Tusk? If so, one should probably start to apply the rule-of-law procedure to the EU itself. This would be a form of political corruption.

A lot of money is at stake: €76.5bn in funds from the ordinary EU budget, and a further €60bn from the recovery fund, including €25bn in grants. The criticism relates to the recovery fund. Didier Reynders, the justice commissioner, said repeatedly that the funds would only be released if Poland changed the justice laws. With the election of Tusk that requirement suddenly fell. Now, they decided to give the money to Tusk even though he only promised the reforms. Tusk has a problem on his hand. He cannot deliver the reforms himself. President Andrzej Duda is blocking them. At the same time, he only gets the money because he is a member of the centre-right EPP, by coincidence the same family as Ursula von der Leyen. 

FAZ noted, politely, that the European Commission had some difficulty explaining the U-turn. The argument put forward is based on Tusk's recognition that he would accept the priority of European law. FAZ concluded that it had the impression that the Commission decided on the release of billions of euros based on political expediency. Whether this is factually true, or not, is irrelevant. We have no means to judge people's intentions. What matters is the outward appearance of political nepotism. 

Viktor Orbán has learnt how to play this game to his advantage, whereas the PiS government was never quite ruthless enough to do this nearly as effectively.

We are not surprised to see that the rule-of-law of procedure has turned into such a farce. If you want to salvage this monster, take it out of the Commission and the European Council, and place it into the Court of Justice, and let the court order a freeze of funds, and the lifting of the freeze. This would obviously require treaty change. There are limits of the things you can do inside of the current treaty.

29 February 2024

Russia's trade routes to Iran

There are some renewed efforts to put together a new Black Sea deal to allow grain shipping a safe passage. Recep Tayyip Erdogan announced that Turkey and the UN are pursuing a new safety mechanism for commercial vessels just days ahead of Sergey Lavrov’s visit to Turkey. This latest attempt comes after Russia withdrew from the original Black Sea Grain Initiative last July. Since then, land routes have been used more extensively and the ships that did leave Ukrainian Black Sea ports have been using Romanian, Bulgarian, and Turkish waters. But safe passage for commercial ships requires a military presence, which may no longer be possible to deliver if US Congress does not pass the bill for Ukrainian support, Volodymyr Zelensky tells CNN.

Al-Monitor writes that the new mechanism would be much less comprehensive than the original one, which involved Russian, Ukrainian and international inspectors to inspect ships going from and to Ukraine. It also may offer more concessions to Russian grain exports, one of the key demands from Moscow.

We also note that business between the two most sanctioned countries in the world, Russia and Iran, is thriving. Iran’s exports to Russia have surpassed the $2bn mark last year according to Iran's ambassador to Moscow. This is a considerable jump from the figures the previous years, and a 30% rise throughout the year, according to the Tehran Chamber of Commerce. The total value of bilateral trade between the two in volume reached $4.9bn in 2023 according to Iran’s official statistics. A Russian economic delegation with 170 representatives was in Tehran this week as the two countries held the 17th round of their joint economic commission. The two sides have pledged to increase trade tenfold over the coming years.

What facilitates their trade is their own banking solution, which the two countries set up last year to circumvent the dollar. The two central banks managed to connect Iran’s Sepam national financial messaging service to Russia’s SPFS messaging service, its equivalent to the Swift system. In connection with this new system, Russian banks started operating offices in Tehran, and offered credit lines to ease exports from Russia to Iran. There are similar plans in Iran for exports towards Russia. Intensifying trade with Russia is part of Iran’s Look to the East strategy that aims to neutralise the effects of US sanctions by expanding into new markets.

28 February 2024

How to get from here to there

If the late Jacques Delors had been asked to draw up a fiscal union for the EU, he would have come with a similar construction as the one he proposed for the euro: a detailed multistage plan with targets and deadlines. A fiscal union will eventually require a treaty change. But there is a lot we can do already. 

The EU has exhausted virtually all alternatives, from the failed Lisbon agenda under Barroso, to Juncker's investment plan - a headline number with no substance - all the way to the recovery fund. The latter is based on existing treaty laws that allow the EU to raise money on behalf of member states. But it is not a sovereign debt instrument because the member states are ultimately in control of whether they honour the debt or not. This dichotomy is reflected in the pricing of EU-issued bonds. 

We reported on Mario Draghi's intervention at the Ecofin in Ghent, in which he warned about the massive financing needs for the next ten years. This cannot be achieved through more fiscal tricks like the recovery fund, which is a political Doomsday machine that relies on intra-governmental transfers. The EU needs a sustainable way of funding.

While a treaty change will ultimately be necessary, there is a lot the EU can do already under existing treaty laws. Andrew Duff and Luis Garicano have come up with the idea of a two-tier federal budget the EU could already adopt for the next seven-year budget period from 2027-2034. The lower of the two tiers would be essentially the same as the current funding mechanism from national contributions based on gross national income. This is the tier that would deal with the common agricultural policy and structural funds. The higher tier would be more flexible, and used for macroeconomic stabilisation, climate change investments, digitalisation (still a thing in the EU), defence and security, a functioning bank resolution and deposit insurance mechanism, and the accession of Ukraine. Ursula von der Leyen may give the impression that the EU can do it all, but the reality is that an under-funded hyper-active EU is setting itself up for failure. 

An expanded two-tier budget would constitute an intermediate step towards a fiscal union. It is an old idea. The authors remind us of the 1977 MacDougall report, which foresees a pre-federal budget accounting for some 7% of GDP. Ultimately, we think this is approximately the right target number even today. We are talking about a small fiscal union, not a large state. 

As part of an intermediate solution, the EU could trigger a passerelle clause that would allow the change of a legal procedure:  Ministers could decide to lift the required unanimity for budgetary policies and adopt qualified majority voting. Passerelle is a French word denoting a small bridge. You need unanimity to end unanimity. It may fail for the exact same reason as a treaty change may fail. But it is a technically easier first-stage procedure than a full-blown treaty change.

Technically, this is the way forward. It can happen politically if the urgency is more broadly understood. This is not the case now.

 

27 February 2024

From manufacturing back to farming

Last week farmers entered Madrid, Athens and Brussels with their tractors in protest. Emmanuel Macron discussed new measures with farmers at the agricultural fair in France. Yesterday, the EU's 27 agriculture ministers welcomed the latest proposals of the European Commission to reduce red tape, plus emergency brakes for Ukraine imports, but called for more ambitious measures. Farmers in Poland continue to be unhappy about the measures taken. Eight train wagons were forced open, with Ukrainian grains spilling on the rails. After the wave of re-industrialisation, are we now seeing the wave of re-agriculturisation?

Ahead of the European elections in June, agriculture has become a campaign topic where conservatives and the far-right are expected to score points. A lot of focus in the current debate is about how to get farmers through tough times and lessen the burden of new environmental norms on them. There are a lot of specific local issues that only regional or national governments can deal with. At EU level, there is the medium to long-term future of the Common Agricultural Policy. The CAP needs reform if we are serious about the green transition and about Ukraine as a future member of the EU. EU trade deals would have to be reconsidered if the farmers’ demand for mirror clauses were to be implemented. Inside the EU, the biggest topic for the new European Parliament and Commission will be how to bring agriculture and the green deal together. Imposing more norms won’t do it this time. The question will be how to incentivise farmers, rather than constraining them.

Can the environmentalists and farmers talk to each other? It's difficult to see at the moment. Macron’s plan for a conference with both stirred up new protests at the agricultural fair, so that plan had to be abandoned. Farmers have to see some results first from the promises that politicians have made.

Financially, there is little member states can afford to do. Not abolishing the diesel tax brakes is a common response of many member states, except Germany. Greece also offered concessions include support for energy costs and lower VAT on fertilisers and animal feed in Greece. The French government promised some €400m, and Macron added some new promises last weekend for extra regional funds for farmers in precarious situations. How will they counter-finance this? Bruno Le Maire started consulting with banks and insurers to see how it can be done without an additional burden on his budget. Easier finance, more environmental incentives rather than prohibitive norms, and price guarantees are supposed to make farming business more viable. Food security is all of the sudden at the top of the political agenda too. The big re-orientation is just about to start.

26 February 2024

Orbán's power gamble

Victor Orbán and Recep Tayip Erdogan know one or two things about the power of keeping someone waiting. The two countries were holding off Sweden’s bid to join Nato, delaying several times for different reasons.

Sweden, as an old Western democracy, had to swallow its pride when its government agreed to adopting its protest and terrorism laws to get the approval from Ankara so that it could join Nato. Prime minister Ulf Kristersson also had to retreat from his earlier insistence that he only would travel to Budapest once Hungary signed off on Sweden’s Nato bid. Instead, Kristersson went to meet Orbán, and chipped in some fighter jets to sweeten the deal so that Orbán would finally give his green light to Sweden’s Nato accession. A deal on defence and military capacities to rebuild trust, as Orbán put it. The deal was to purchase four new Swedish-made Saab Gripen C aircraft and extend its support and logistics agreement for its existing Gripen fighters. which make up the whole of Hungary's small airforce. Kristersson’s visit to Budapest looks to us like the road to Canossa, with Orbán visibly enjoying the whiff of old imperial flair.

The power was on Turkey’s and Hungary’s side, once Sweden decided that it wants to do whatever it takes to get into Nato. One of the tactics employed was that Erdogan and Orbán kept Sweden guessing what was required to get their approval. The list of grievances kept changing. Turkey increased its demands for prisoners to be extradited, or laws to be changed. For Hungary it was first about the respect for Hungary, Sweden’s keen support for rule of law procedures in the EU, and now a visit to Budapest with a military deal in the luggage. One may call this childish, as a Swedish MEP did, but in Erdogan’s and Orbán’s world, this trick helped to signal more power to the outside world and boosts their leaders’ ego. It made Sweden bow to their demands. Don’t expect Orbán to become any easier inside the EU.

23 February 2024

Is Tsipras back?

The Syriza saga has some Greek drama qualities, with clashing protagonists and party styles. The latest turn of events is that Alexis Tsipras showed up after months of silence to call for a new presidency elections to stop the demise of the party. The timing of his intervention was just hours ahead of the party congress and completely changed the scene. Stefanos Kasselakis, the new Syriza leader, had to adapt his opening speech, and other speakers were sidelined. Kasselakis took up the gauntlet, saying find me an opponent and let’s go. He seemingly enjoyed his rock star-like appearance on the stage of the opening of the congress meeting last night. What happens behind the scenes will look more like a fight between strong personas with the daggers pulled out.

In his statement, Tsipras lashed out not only against Kasselakis, who he accuses of wanting a three-year blank cheque without accountability for electoral failures. He also pointed fingers at those who disagree silently in the background, waiting for an election failure to speak for them. Tsipras condemned those who left Syriza too, for seeing Kasselakis as an opponent just because they lost against him in the leadership contest, and for causing with their departure further fragmentation inside the party.

Euclid Tsakalotos, his former finance minister, is one of dissenters. Tsakalotos put the blame squarely at Tsipras's feet. The rot did not start with the election of Kasselakis, he assured, but with Tsipras in 2019, when Syriza lost with a slight gap behind New Democracy. Tsipras failed to produce a plan for how to change the party, tackle the aggressive rhetoric from the conservatives, and address the party’s credibility deficit. It was also Tsipras who changed the election system for its leaders, direct election by the members, which meant someone could show up on election day, pay €2 to register, and vote. This resulted in a party with a rock star-style leader, but without a debate on politics or ideology.

22 February 2024

War fatigue ahead of elections

The EU and the US are heading for elections this year with support for Ukraine on the line. Joe Biden and Olaf Scholz seem to have come to the conclusion that the war cannot be won with all of Ukraine's territories reclaimed. It is ultimately for the Ukrainians to decide how to proceed with the level of support they get from the EU and the US.

For a settlement, states would first have to define what a meaningful agreement with Russia looks like. Ukraine would need credible guarantees from the EU and the US to be able to accept any territorial losses. A West Germany scenario as advocated by Ivan Krastev is in discussion, where unoccupied Ukraine would become Nato member, putting red lines up for Russia, while granting it some territorial concessions. Both sides win something.

The mood has been clearly changing in the US and in Europe towards Ukraine. Frontline states, which had been the most supportive for Ukraine at the beginning of the war are now amongst the most sceptical about Ukraine’s chances to win. The support package, which is crucial for Ukraine’s military campaign, has been stalling in the House of Representatives.

An ECFR poll confirms an unsettling war fatigue, with European citizens preferring the EU to push for a settlement in seven out of the 12 EU countries. Poland may still be the keenest military supporter, but only 17% there think that Ukraine can win. And there is no appetite to fill the gap if the US gets out. If Donald Trump were to win the elections and pulls out of supporting Ukraine, a majority of Europeans in nine countries would want the EU to maintain its level of support or reduce it in line with the US.

Then there are conflicting interests inside the EU. Farmers have been protesting for more safeguards against agricultural imports from Ukraine. The EU Council adopted yesterday the European Commission’s proposal to extend the solidarity lanes for Ukraine exports. The proposal had widespread support, except from frontline member states Poland, Hungary, Romania, Bulgaria, and Slovakia. To appease them, the Commission had introduced safeguarding measures: a brake on Ukraine’s exports of poultry, eggs and sugar if they exceed the 2022-2023 level.

But this may not be the last word on those emergency measures. MEPs in the Agriculture Committee (AGRI) have produced 127 amendments to extend the list of products on this list and change the threshold to pre-war trade volumes in 2021 instead. How many of those proposals will be taken up by the trade committee is the next question. The Commission will have to negotiate with parliament to get this draft legislated. Protests, meanwhile, continue. At the Polish-Ukrainian border they escalated on Tuesday with a near-total blockade, prompting Kyiv to call on the Commission to take action.