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27 March 2024

Price cap cakeism

One of the many lessons from Clausewitz’s On War that remain relevant to modern times is that warfare is, as much as anything else, a contest of wills. The capabilities anyone can muster matter little if they either do not want to fight, or are not mentally prepared for the consequences of doing so. Pain thresholds are easy to ignore, because they are difficult to quantify. But they matter hugely.

This is something we risk learning, to our detriment, in our own economic struggle against Russia after its invasion of Ukraine. Our sanctions against Russia, both on finance and energy, have been designed to maximise the impact on the Kremlin, but only insofar as the negative short-term consequences do not rebound on us. This is, we think, an approach that has run out of road, especially as Ukraine fatigue on weapons deliveries sets in.

Another example of how this has a real-life impact comes to us from the Dallas Fed. It recently published an interesting working paper on the different effects the two main oil sanctions the west used against Russia had on Russian oil prices. One of these was the embargo which western countries, namely European ones, enforced against Russian oil. The other is the now better-known G7 oil price cap.

What the paper found is that the embargo did have a material effect on oil prices. But inasmuch as the price cap itself had an effect, this was limited to the opportunity cost Russia bore when it has to assemble its so-called shadow fleet of tankers to circumvent the cap. The most obvious example of the cap’s failure is how benchmark prices for Russian oil have frequently exceeded the $60-per-barrel cap limit since the summer of 2023.

Instead, the fluctuations in Russian oil discounts seem to have more to do with global oil prices. When there was a glut, and oil prices were relatively weak in early 2023, it was worse for Russia. As oil prices rose again, Russia’s situation improved.

This is relevant to the wider issue of how far we are prepared to go for Ukraine because of the purpose the oil price cap was supposed to serve. The idea was that, instead of a total ban on tankers carrying Russian oil using western-provided maritime services, like insurance, you’d have the cap. Russia’s oil revenues would be limited, but without disruption to Russian oil supplies, and therefore the global market.

There is always an argument to be made for trying to design a policy optimally, to raise the benefits and limit the costs. But this is just a foreign policy equivalent of having your cake and eating it. It is a sign of what is becoming more evident now. Vladimir Putin’s big advantage over us is how much he is prepared to put his own country, and the world, through for the sake of victory in Ukraine compared to us.

27 March 2024

Trying to make sense of the US Congress

The US Congress is inching towards a Ukraine aid bill, but the obstacles and risks remain formidable. The Atlantic did a good job of trying to disentangle the legislative choices ahead, which are so hard to comprehend for Europeans not versed in the intricacies of US legislative procedures. 

The US Congress is currently on holiday, as is most of the western political world. In the US, this is called recess. Behind the scenes, Mike Johnson, the Republican Speaker of the House, will be negotiating both with Republicans and Democrats to allow him to bring forward the bill. As the Atlantic writes, he has four choices, each with different implications for Ukraine.

The first would be to introduce the bill already approved by the Senate after the recess. Secondly, he could draft his own competing legislative package that would include various contentious Republican demands, again after the recess. Choices three and four are so-called discharge petitions, legislation the House can approve during a recess. Here, too, the same options apply: a Democrat-led version based on the Senate draft, or a Republican-led version. In the US, recess legislation requires a two-thirds majority.

Johnson's problem is that his once slim majority has eroded and that he is facing a leadership challenge from the far-right of his own party. In his public comments, previously he said the only version of a Ukraine bill that could pass would be on discharge. 

He may opt for amendments, for example, a loan-only military aid programme, a problem that could end on the plate of the Europeans who will probably end up as the ultimate guarantors of all Ukrainian debt. 

There is a scenario where Johnson colludes with the Democrats if they protect him from a no-confidence vote. But that would end his political career beyond the current term. There are still also scenarios of gridlock where the only legislation Republicans could approve would carry so many sticks that Democrats would vote against it. The big risk is that Johnson brings forward legislation so contentious that it faces defeat.

Another factor is timing. The advantage of passing an unamended Senate bill is speed. It could move straight to the president for signature. If the House passed a different bill, it would go into what is known as a conference committee, made up of members of both houses. After that it goes back to a vote in both the Senate and the House. This is how legislation dies.

We know that Donald Trump is personally opposed to aid for Ukraine, as are some Republicans. But this is not the main reason why this package is stuck. It is stuck because the issue is not sufficiently important to a sufficient number of legislators to override the domestic issues they care about more. 

Whether or not this package succeeds is ultimately less important than what happens in November. If Trump wins the presidential election, all bets are off. There is some movement in the opinion polls in some critical swing states towards Biden. Just as we should not dismiss Trump - as Europeans habitually did until not to long ago - we should also not take his victory as given. 

27 March 2024

How to think about disruption

When something bad in our world happens, the natural response is often to shift wildly from complacency to panic. Either we all overreact at the beginning, and then calm down a bit later, or we don’t take a problem seriously enough until it is too late. But, in a more disruptive world, the best thing we can try and do is see through things towards the longer-term, and interconnected, implications.

Yesterday’s Baltimore bridge collapse is a case in point. At first, aside from the human tragedy, the economic implications seem scary: Baltimore is a major port on the US east coast. Then, in context, it’s less dramatic when you consider Baltimore is responsible for only about 3% of US shipping on the east coast and Gulf of Mexico.

But the impact of a prolonged port closure would hit specific sectors harder. It is the most important port in the US for car trade, with more than 750,000 passing through it in the past year. It is also not necessarily a one-off, since much of the US’s infrastructure is in a bad state. The bridge collapsing is not the sort of thing that matters on its own. It’s when other things happen at the same time, maybe to the car industry, that it has an impact.

Another example is the impact of Houthi attacks in the Red Sea. The impact of diversions on global container shipping has been absorbed by over-capacity in the market. Maersk, one of the world’s largest shipping firms, gave a downbeat assessment of its profits for 2024 last month. But the root cause was the oversupply issue, even if the Red Sea also has an impact.

Instead, where this should be more concerning is how it fits into a pattern globally. Along with recent Ukrainian attacks on Russian oil refineries, what the Red Sea disruption shows is how easy it has become for someone in the right place at the right time to do this kind of thing. Lower-cost drone technology, plus US foreign policy’s recent indecisiveness and European ineffectuality, have played a role in both. The real concern should be things like this happening more often as US hegemony recedes, and the world becomes a more multipolar, and possibly chaotic, place.

We therefore encourage readers to try and think about the bigger picture when looking at any of these news stories. One will often find that there’s no reason to panic. But there can be one to be concerned.  

26 March 2024

It's the housing, stupid!

Simon Harris, Ireland’s 37 year old education minister, was elected to take over from Leo Varadkar as Fine Gael party leader. He will take over also as prime minister once parliament is back from its Easter break. Harris was the only candidate coming forward in this leadership contest. He now has less than a year to establish himself as leader of a party that is trailing behind Sinn Féin in the polls. If Sinn Fein were to win next year’s elections in March with the 28% predicted in the polls, it would need a coalition partner. Both Fine Gael and Fianna Fail, which are at 20 and 18% in the latest poll, have excluded a deal with Sinn Féin, though Fianna Fail is perhaps less adamant about it.

In his first speech as party leader Harris took several swipes at Sinn Féin and moved the goal posts for the centrist party a smidge further to the right. He inherits a thriving economy with full employment and no budget worries, unlike other European countries. But the lack of affordable housing is the number one hot topic, and one where Sinn Féin scores particularly well. The country also has seen the largest influx of immigration over the past years, which is exacerbating the housing crisis. Anti-immigrant protests started popping up since last year, driven by fringe groups or locals who oppose the housing of asylum seekers in their communities. The lack of access to education, healthcare and mental health services is also linked increasingly to the lack of affordable housing.

It is not clear what Harris can do about this housing crisis in less than a year. But by taking a tougher stance on immigration, he may tap into the anti-immigration mood in the country and attract those falling out with Sinn Fein over its open door policy.

Blaming the housing problem on immigration is a sign of desperation in a country known for its hospitality. Compared with other EU countries, Ireland has no significant far-right political party, but lots of micro parties, including the Irish Freedom party, Ireland First and the Nationalist party. One of the reasons for this exception in Europe lies in Ireland’s history and its armed conflict, the Troubles, from which a strongly nationalist Sinn Féin emerged. Being nationalist on the left made any emergence on the far-right unnecessary. But if immigration is now becoming an issue in Ireland, the mix could become toxic. It already served as the impetus for a bunch of conspiracy theorists to block access to parliament and to organise riots last winter.

Varadkar may indeed have chosen the right time to retire before it gets nasty. We ourselves observed that the coverage in newspapers like the Irish Times has become gloomier over the past years. This is despite a thriving economy and plenty of good things to say about Ireland, as we grew so used to reading. Paul Lynch, an award-winning novelist, imagined a far-right party in power in his book Prophet Song. Is this the end of the Irish exception? We hope not.

25 March 2024

Tanks for that, everyone

After years of arguing, it now looks like France and Germany are ready to start building a tank together. The idea of building a next-generation tank together, known formally as the Main Ground Combat System, first came about in 2017. Since then, the two countries have got stuck. But last week, the two defence ministers announced that they agreed on the details necessary to begin the development process properly. The earliest start date will be 2035.

What’s interesting is not so much that it’s going on, but why the negotiations got stuck, and the solution the parties found. The main difficulty on the new tank was how work would be divided between the two firms responsible, the German Krauss-Maffei Wegmann (KMW) and the French Nexter. They formed a joint venture, KNDS, in 2015 to work on projects together, including the tank.

Cooperating through KNDS allows the two firms to sidestep the other country’s export restrictions more effectively. But it does not get rid of haggling over who does what. This is an inevitable feature of still nationally concentrated defence industries. When governments make announcements that they are going to spend billions of euros on a new tank, or plane, or whatever, they need to have some economic benefits to show for it. How you distribute those benefits is one of the most politically sensitive parts of any negotiation like this.

In the end, the agreement between the two seemed to tie together three projects. One was the tank, which KMW will take the lead on. The other is a mostly Franco-German project to develop a new fighter jet. France’s Dassault will apparently be the senior partner in that project. Finally, the two defence ministers announced that KNDS will also set up a new facility in Ukraine, to help make replacement parts for both countries’ materiel there.

What should worry anyone who’s interested in seeing more defence-industrial integration in Europe is that it took this long to reach a fairly logical conclusion. It makes total sense to think of the tank and plane projects together. Since KNDS exists in the first place, cooperating on replacement parts for Ukrainian equipment is also not surprising. But this has taken years to get off the ground. We would suggest that the future of European defence integration will look like the past without some fairly radical changes to how it is funded.

22 March 2024


De-industrialisation has many faces. A more subtle aspect is a decline in industrial nationalism. In the UK, the Royal Family drives Audis. We are not at the point where the German chancellor drives a Tesla. But a symbolic shift did happen yesterday when the German national football team dropped Adidas as their sponsor after 70 years, and is switching to Nike. The US company is said to have offered €100m in sponsorship, from 2027 to 2034. 

It is quite something for the DFB, the German football association, to be criticised by a Green economics minister for lacking patriotism. Robert Habeck said he cannot imagine the German team without the three stripes. 

In the commercial world of sports, €100m does not appear to be a lot of money. But it is a lot of money for the DFB. It is a not-for-profit organisation that sponsors amateur football - aside from running the national football teams. Adidas is believed to have offered only half as much. They needed the money.

It is a tale of how patriotic industry-based models end. People just cannot afford this any more. High profit margins are what used to feed the model. De-industrialisation does not begin with off-shoring, but with a squeeze on margins. This is what is happening in the car industry, for example. The profit margins for electric cars are much lower. That in turn has a whole number of consequences. There is less money for activities with doubtful commercial returns - like trade fairs, corporate junkets, or the sponsorship of unsuccessful football teams. Maybe we should look at this story in a different way. Adidas, too, has other priorities now.

21 March 2024

Varadkar's moment to quit

Leo Varadkar chose his moment to step down as Ireland’s prime minister. The surprise announcement yesterday had its shockwave effect and prompted the question why now? Varadkar himself said that he wants to give his successor sufficient time to establish themselves before accompanying candidates in local and European elections, and a year ahead of national elections. He also wants time for himself to reflect on what to do next. How to quit a job well depends on spotting when chances are about to turn. It is a matter that defines one’s own reputation and lays down the path for the successor.

Varadkar’s resignation speech was reminiscent of Jacinda Arden, former prime minister of New Zealand, with her frank acknowledgement that does she no longer has enough juice in the tank to do this job well. The mood and the tone of Varadkar’s less than 10 minute speech was similar. With some emotion, Varadkar said that after some soul-searching, he decided to leave for private and political reasons.

This resignation also reminds us of Stefan Löfven, who resigned as Sweden’s prime minister two years ago to give his successor enough time on the job before heading towards elections. It did not work out for Magdalena Andersson, his chosen successor, after the elections. But as a handover, this is as good as it gets in politics.

The other parallel with Löfven’s resignation is that it came on the heels of some proper defeats. In Löfven’s case, his government lost a no-confidence vote over rent controls when he lost the parliamentary support of the Left party. Varadkar’s leadership has come under pressure from inside his own party. There are already 11 MPs elected in 2020 who left the party over disagreements with the leadership. Behind closed doors, Varadkar was also held responsible for this month’s sound rejection of the government’s proposed changes to the constitution in the family and care referendum that should have sailed through given the backing of most opposition parties, writes the Irish Times. None of those rifts will be discussed in public, so as to avoid losing further votes to Sinn Féin. Upcoming local elections also are set to deliver a defeat for Fine Gael, and would have made his resignation a much more embarrassing event. So it may turn out to be the best moment for Varadkar to leave before things turn ugly.

The succession race already began in the media. Simon Harris, the education minister, has emerged as the immediate frontrunner. But Paschal Donohoe or Heather Humphreys are also strong contenders, should they choose to run.

20 March 2024

EU is losing the business community

A survey amongst small and medium-sized companies in Germany has registered a massive shift in sentiment against the EU. Over-regulation by Brussels is cited as one of the main factors that drives companies to relocate production from Europe to the US. 

The survey comprised 1000 companies, a representative sample of small and medium sized companies. It was carried by Stiftung Familienunternehmen und Politik. 

Our experience has been that EU officials have a tendency to dismiss complaints about bureaucracy. They should note that business, especially the German Mittelstand, used to be one of the strongest pillars of political support for European integration. The shift in their position is not only extreme in degree, but also extremely worrying. The headline number is that 90% of small and medium-sized companies are unhappy with the EU to varying degrees. Many had to hire staff to fulfil regulatory reporting requirements, for example on GDPR. A majority of companies believe that Brussels is heading in the wrong direction. 

The EU's supply chain directive, which was passed against German opposition, is considered to be the latest in a long string of anti-business legislation. We wrote that it was watered down almost beyond recognition, yet for German companies it goes too far. It piles on the many, mostly pointless, bureaucratic requirements they already have to undertake.

A majority of these companies believe that the negative business environment will persist for the foreseeable future. Some positive attitudes have been expressed too. Businesses see freedom of movement as a big benefit to them, and would like to see this freedom extended. This is telling us that they are not supporting Dexit or other forms of disengagement.

Whereas countries only have the binary choice of staying in the EU, or leaving, companies have a third choice. They can relocate part of their activities. This is not about closing a factory here, and reopening it there. It is about new investments. They are shifting investment out of Europe. 

We think this is a perfectly rational way for companies to react to what many see as a hostile business environment. They save on bureaucratic compliance costs, become less reliant on increasingly fraught maritime transport, and less vulnerable to trade sanctions if they produce closer to where they sell. The US has become very attractive for European producers, not only because of the Inflation Reduction Act. If Donald Trump gets elected, the avoidance of punitive tariffs will become another factor.

19 March 2024

Michel's rosy war economy

When Charles Michel, the European Council president, calls on Europe to switch to a war economy he does not mean that we need to collect all our steel to melt it so that our soldiers can fight against an enemy that attacks us on the ground. In his letter, Michel uses those big words of war to advocate two things: supporting Ukraine with the weapons they need and relaunching our European economy by focussing on the defence industry. Behind his appeal is the assumption that if the EU cannot provide a good response and Ukraine does not provide enough support to stop Russia, we will be next.

What Michel wants concretely is EU targets to buy twice as much weapons from European defence producers by 2030; to use the profits from Russian frozen assets to finance weapons purchases for Ukraine; to facilitate financial access for European defence industry, including by issuing a European defence bond and getting the European Investment Bank to add defence purposes to its lending criteria. Michel sells it to us as a way to create jobs and growth. It is to provide more clarity to companies with multi-annual defence contracts to increase their capacities. And by investing in defence industry, the EU is boosting its technology and innovation, a confident Michel reassures us.

What Michel talks about is not a European Union we recognise any more - nor one that would work in practice. Perhaps that will be Vladimir Putin’s greatest triumph that he changed the DNA of our union. 

The attempt to base economic integration and economic stimulus on defence creates precedents. If we build up a defence industry, we need conflicts to feed them. Beyond Ukraine, will we do the same for Georgia? Would we want our economy to depend on wars in Africa to prop up our GDP growth data? If the US decides to retreat, does that mean we need to pick up where the US left?

Michel wants a geopolitical Europe, and finishes his letter with the familiar cold war phrase that if you want peace you need to prepare for war. This is not a cold war but a hot war in Ukraine. Are those weapons in Michel’s war economy to speak for our failures in diplomacy? What is our historic contribution to this conflict? Should we not start from there?

The language Michel uses is dramatic and dangerous. Some of our older citizens still remember what it means to live in a war economy. Michel’s loose talk is disrespectful. And it is insincere to suggest that we need a war economy to help Ukraine. He focusses on the bright side of this war, the solidarity the EU shows with Ukraine and the economic growth that could come from an increasingly thriving defence economy. Michel is deliberately ignoring the dark side of this war, with the many tough life-and-death decisions to be taken. Just look at Israel to see where this has gone.

Is Michel acting alone, or is he building a case for leaders like Emmanuel Macron or the next European parliament? Macron recently talked about European troops in Ukraine and a defence union. We think this loose and un-coordinated talk is careless. It gives rise to fear narratives that the public is not in the position to judge within a rational framework. It does not solve the more fundamental disagreements amongst European countries either. Then there is the European Parliament which is expected to swing further to the right after the elections in June. We have to resist the temptation to reduce our policy options to defence-only. Europe will need to a lot more, in terms of diplomacy especially, to become a geopolitical player in its own right.

18 March 2024

Trump's European friends

In 2016, a populist uprising in Europe presaged the election of Donald Trump. We make no causal inferences here, but we could see a stream of events happening this year. Polling would suggest that the European Parliament shifts to the right in June, and that Trump will win the US presidency. A lot of things will intrude into these scenarios. But it is worth thinking this particular scenario through to the bitter end.

Previously we asked the question how a social-liberal Europe will deal with Trump. Maybe the question should be how a conservative Europe will deal with him. If Trump gets elected, two of his European counterparts will be Giorgia Meloni and Viktor Orbán. During Trump's four-term presidency, the socially conservative Friedrich Merz might become the next German leader. France will also have a new leader. Could there be a transatlantic alliance of the right? 

That would be the ultimate irony, and something centrists should be watching out for. We would argue that the threat to them is not Trump, but a structural shift in European politics to the right. Trump will undoubtedly court Europe's right-wing leaders as he did recently with Orbán, whom he described as a fantastic leader. This episode should serve as a reminder that Trump is not breaking with Europe as such, but with liberal Europe. Even the Nato-defence spending target is in reach. What has he got to complain about?

This is where centrist-liberal Europe has failed - to make itself independent of the US in defence, macroeconomic policy, and innovation. We left the most lucrative and strategically most important areas of 21st technology to the US and China, retreating to the field of regulation. Here at Eurointelligence, we have been poking fun at the EU's phantom programs, like Juncker's investment plan, the recovery fund, and tons of programs that have acronyms as names, which are hard to remember and even harder to see the point of. The macroeconomic reality is that the EU's annual budget is 1% of GDP. The EU, as it is constituted today, is a geo-economic irrelevance. On our calculations, it would take a fiscal and capital markets union that can lever some 5% of GDP and a much broader-based single market to make a difference. Liberal Europe has missed the moment. The euro crisis was perhaps the most obvious one to move forward.

For the right, however, the EU as it is constituted today, makes the perfect vehicle to promote socially conservative policies, and place Europe in the junior partner role forever. In other words, an EU that is fit for Orbán and Meloni.