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10 February 2023

Fortress Europe and geopolitics

Building walls around the EU’s external border is on the agenda for the EU summit on migration today. Is Fortress Europe the response to managing migration? Have border walls ever worked in history? Is this symbolic move not against what we stand for?

Since the migration crisis in 2015, fences and walls have been erected by 12 member states over 2000 km of the EU’s external borders. More projects are in the pipeline, for example along the Bulgarian border with Turkey, or Finland’s border with Russia, or Poland’s one with the Russian enclave of Kaliningrad. With the multiplication of border fences, mobile or fixed, comes the call on the EU to finance them. So far the European Commission has resisted this call. But what is striking is that this idea of a border fence or wall is taking hold in our societies. It is not exclusive to countries like Hungary. There are 12 member states who applied for funding, mostly from eastern Europe, but also including Austria and Denmark.

Are we facing the prospect of a new Berlin Wall around Europe? Even if it is not as rigid and complete as that, symbolism matters. In a week where Volodymyr Zelensky is welcomed on red carpets across Europe, it reveals our own hypocrisies. The EU welcomed some 4.5m Ukrainians who fled the war since it started. They have been given temporary protected status which gives them the right to work and access public services and benefits, rights that typical asylum-seekers do not get. The temporary protection directive has been in place for around 20 years, but has only been used in the Ukrainian crisis, despite attempts to activate it for other crisis points in the Mediterranean in 2015.

The differentiation between those who are welcomed and those who are not will create its own momentum in politics at home and abroad. African countries are already attuning themselves to Russian propaganda blaming Western sanctions for the food crisis they have to endure, according to Euractiv. The EU just launched plans to counter this disinformation campaign, which is spread in African countries by China and Russia. But the damage is already visible, as diplomats and European soldiers are being told to leave Mali and Burkina Faso, where they were leading anti-jihadist defence and security missions. In their place will be mercenaries from the Kremlin-linked Wagner Group. Building a wall will just further Russia’s hold in Africa.

Worst of all, it does not solve the migration problem the EU already has. Lack of staff to process asylum demands and a lack of appropriate housing are just a couple of the problems member states face. Burden sharing in the EU under the Dublin agreement never really worked, and neither does the rule of registering in the country of entry into the EU. We are also completely ignoring the wider geopolitical ramifications. There are walls in our minds in the way we think about migration. 

9 February 2023

Politics behind NI protocol ruling

Sometimes we read the news about a problem solved that we never thought was a problem to begin with. One of those stories yesterday was that the UK Supreme Court ruled the Northern Ireland Protocol to be legal. It had not occurred to us that this could have been in doubt. A closer look, however, reveals that this story is not about the protocol's legal status, but about politics. Here are some aspects of the case, as listed by the Belfast Telegraph:

It is the first time ever that all unionist parties came together for their appeal to the Supreme Court. It was a legal route for unionists to express their anger at a time when it looked like the situation would end up in street disorder. It brought them together with political resolve behind the case. Now, two years later, the situation is different. The verdict of the supreme court tells them that they lost. Where will the dream of a united unionist front go from here? The court’s verdict is a reminder that reality is different and that unionism does not represent a majority: that is the job of parliament.

Even legally speaking, there was some clarification in the sense that the Supreme Court considers the Protocol of constitutional significance. Not only does it change how laws are made and restrict Stormont’s scope to legislate in devolved areas, it has changed the Act of Union, which created the United Kingdom in 1801. This ends a debate between scholars, journalists and politicians who had argued otherwise.

The only way to restore the Act of Union, or even to give the DUP a fig-leaf to say it had happened in line with one of their seven tests for re-entering Stormont, would be to bring fresh legislation to the Commons. But this is what Rishi Sunak may not want to do to avoid opening up the debate and scrutiny amongst Conservatives, or a comparison to Boris Johnson. The verdict also dismisses the need to hold a referendum over those issues. The Good Friday Agreement does not change the constitutional status of Northern Ireland, other than on the question of whether or not they want to be united with the Republic of Ireland or stay within the UK.

The case may be closed for the Supreme Court, but the politics of it will continue.

8 February 2023

What if Britain could build?

It’s rare that so many of a relatively large economy’s problems stem from one clear cause with an obvious solution. But that is the case in the UK, where planning restrictions have limited labour mobility, affected UK investment, stopped high valued-added industries from growing, compromised energy security and inflated the cost of public sector infrastructure. A cause for optimism about the UK’s economy is that it is hard to think of another European country with such an easily fixable problem at the heart of its economic malaise.

What makes us more pessimistic is that addressing this fact has become a taboo which all major political parties have bought into. Changing what you call the department for business or science still seems to be more popular than doing something pro-business or pro-science. It is rebranding the rentier economy, not replacing it with something else.

The charge sheet against the UK’s planning system is a long one. The most obvious problems are with housing, where lacklustre housebuilding means that supply fails to keep up with demand. That, combined with the last decade and a half’s spate of loose monetary policy, has meant house prices rising at a much faster rate than wages. House price growth outstripping wages, productivity, or other asset returns has meant growing as a share of total assets in the UK since the 1990s, crowding out other investment. It also limits labour mobility, which is a further drag on productivity, perpetuating the negative feedback cycle.

The UK’s urban areas are growing at a similar pace, which is a bad sign for overall economic growth given the differences in economic performance and productivity between them. Oxfordshire is in one of the UK’s best-performing regions for labour productivity, but Oxford, its largest city, is barely growing. Poor housing affordability also threatens to cause another productivity and wage stagnation-based negative feedback loop: emigration.

Obstructive planning laws have wider impacts than this. One of the UK’s more promising industries is life sciences, thanks to its high-quality universities and a large, centralised health system which facilitates clinical trials. But the Oxford-Cambridge arc, in southern England, has a shortage of laboratory space. While you might be able to argue that white-collar workers priced out of big, well-off cities can telework from cheaper areas, if you’re a biotech business you need a lab.

Another area which the UK government is rightly keen on promoting and developing is its tech industry. Tech businesses also need supportive infrastructure, however: data centres. These facilities are energy hungry. This is a problem if you’re a country which has effectively banned new onshore wind turbines, or has problems expanding your electrical grid due to land use restrictions.

There are two pieces of good news, however. The first is that this is not a difficult problem to solve, policy-wise. We have seen a lot of comparisons between the UK and Italy recently, especially after last year’s mini-budget fiasco. But Italy has a variety of complex and deeply rooted structural issues that will take time to fix, even with the will to deal with them. The UK, on the other hand, will be halfway there if it makes it easier to build stuff.

The other piece of good news is that the political will part may someday be there too. Some of Liz Truss’s smarter acolytes, like Simon Clarke, have turned to planning reform as a central part of their vision for the UK. There are now more young centre-right activists pushing to do something about the planning system. Some exceptions, like Clarke, aside, the Conservatives have become a party of pensioners. That is not a viable strategy, and they risk of learning that lesson the hard way. What will be interesting to see is whether the pro-reform wing of the party can prevail amongst what is left of the Tories after the next election.   

7 February 2023

NI protocol 2.0

A new proposal for the Northern Ireland protocol is on the table, and it's now up to Rishi Sunak to decide what to do next. We have yet to see the details but from all we know, the EU has accepted that goods from Great Britain to Northern Ireland do not have to go through the same checks as those destined to cross the boarder into the Republic of Ireland.

Tom McTague for UnHeard makes the point that the proposal is similar to the one Theresa May had suggested with her red and green lanes. Why go through all this pain and blame to come up with the same solution? We argue that one of the reasons is that both sides were not ready for a compromise back then. That the UK voted to leave the EU prompted Brussels to ring-fence the single market. Now that some normality and predictability has returned, and real effects have been tested, the case for compromise can be more easily made.

Another reason is that they were technically not ready for such a procedure. The UK only last year merged five databases on customs declarations, safety and security declarations, and ferry manifests. This allows some real-time data monitoring on goods passing into Northern Ireland. Even if it does not include all the data the EU would like, it seems to have been good enough to move forward.

The two-lane proposal means that trusted traders would use the green or express lane for goods destined for Northern Ireland, with minimum paperwork and no checks. Goods destined towards the Republic of Ireland would enter via the red or standard lane and thus be subject to standard EU checks. This applies to manufactured goods, but also to animal and plant products, so-called SPS checks. This was something that the EU had previously insisted was impossible. The various grace periods the EU granted the UK may have helped to show that this is practically feasible, and thus allowed a softening of their position.

The tricky part of the proposal remains the erection of physical checkpoints for those goods passing into the Republic and the jurisdiction question. The NI interior minister suspended construction of such checkpoints after threats from unionists. Is the new proposal more palatable to unionists? The protocol, in its current version, foresees that European Court of Justice having the final say in Northern Ireland, a position rejected by Brexiteers and Unionists while the EU cannot accept any other jurisdiction if Northern Ireland would continue to function as if it is in the Single Market. Is there an alternative to this binary choice? Or if the ECJ remains in place, is Sunak the man to convince his backbenchers to back the deal? It is hard to see Sunak being able to pass the protocol without a vote in parliament, which will open up the whole Brexit debate over Northern Ireland.

6 February 2023

iPhones still available in Russia

There is more evidence that western sanctions are not achieving their stated goal - to deprive Vladimir Putin of the financial means to wage war. As it turns out, sanctions are also missing their secondary goal, to create political pressure on Putin from his own luxury-goods deprived population.

Die Welt has a terrific report from Moscow that shows that virtually all western luxury goods are available not through official channels, but through a highly efficient grey market. This list of goods includes iPhones and Mercedes-Benz cars, despite the fact that both manufacturers are no longer supplying their goods to Russia and have closed their local operations.

This is how Die Welt described the transaction chain for a luxury car:

A car is bought in Dubai and transported by ferry to Iran, then across the Caspian Sea to Kazakhstan. There it is registered in the name of a fictitious local buyer, who then sells it on to Russians and has it rolled across the duty-free Russian border by a car carrier.

This is a long chain with a lot of middlemen, who all make money from the transactions. For iPhones, the chains are simpler. They get shipped in small parcels from Kazakhstan. The problem for Russian buyers of western goods is not availability but price. Imported sanctioned goods are more expensive, in some cases double the original price. It has become a fashion statement in Moscow to wear something, or own something, that is on the sanctioned list: Sankzionka, as the Russians refer to goods on the sanction list.

The Russian government is officially allowing those grey imports. The volume of those imports has been reportedly around €20bn in 2022, according to Russia’s ministry of trade. Kazakhstan is responsible for 18% of all imported cars, despite the fact that the country has no car industry of its own.

Another channel is through long-distance commuters, for example between Moscow and Dubai. They buy goods while abroad, and take them home in large suitcases and boxes. A number of Russians are also allowed to travel to Europe and the US, for example people with a dual nationality. Most of these commuter shoppers would buy goods on order. Russia’s largest classified advertisement portal has a popular section Goods from Europe, often with an extra charge of only €15 per delivery. Apart from Dubai, Turkey is another source of western goods.

The economic sanctions have, of course, material effects. On us. And on international supply routes. China’s Belt and Road infrastructure plans are effective suspended. The Northern route, through Russia and Belarus, suffers from the collateral effect of western sanctions. The southern route, through Turkey, is still not operational.

Now that the relationship between China and the US has entered deep-freeze, we can consider the China-Russia relationship to be the most important relationship on the Eurasian continent. Russia is only a small economy, but it is still a large regional power.

3 February 2023

Too weak to withstand recessions?

Eric Le Boucher made an excellent point in his column for Les Echos, arguing that societies have lost the capacity to deal with recessions. This is not only since the whatever-it-takes policy of the ECB or fiscally as a response to the pandemic or the energy crisis. In fact, this is a trend that goes back much longer. Recessions have gotten rarer and shorter over the past 200 years. And it is a predominant phenomenon of the western world.

Since ancient times, generations were used to the cycle of good and bad years. This was evident in agriculture, less so when manufacturing started to take over in the 19th century. Then came John Maynard Keynes, who suggested that the hardship of recessions could be buffered by state intervention. Financing people through recessions was extremely successful, and a great way for politicians to get re-elected. Between 1870 and 1945 the US was in recession 40% of the time, 20% from 1945 to 1980, and only twice since then, in 2009 and 2020, according to Rushir Sharma from Rockefeller International. Europe, too, does not seem to have recessions any more. There is a lot of talk about a recession since the pandemic, but it never really came.

The danger is that it gives people a false sense of security, and an exaggerated notion of what policy can achieve. It also created massive piles of debt for states that future generations will have to pay off, or that their creditors have to write off. This world, where no real long-term hardship exists, does not prevent us from pretending it does. There is no lack of complaints in German or French media. What would happen if a real recession where to hit them? How resilient would our societies be coping with what used to be natural cycles of life? Could the snowflake generation build up their lives from scratch? The skill-set needed to get through tough times is largely absent. Nor is our memory long enough to remember those times. We chase the good things in life.

2 February 2023

Are pension reforms really unjust?

French trade unions and opposition politicians have rejected the government's pension reform with the argument that it is unjust. Technically speaking, this is true. Every pension reform is unjust because one generation retires with better conditions than the other. But the confrontations we see on the streets and in the National Assembly suggest that this protest movement is not about an intergenerational conflict. Protesters compare increasing the legal retirement age from 62 to 64 to an extension of a prison sentence. They call for special conditions for those with longer careers, hardship at work, and women.

What does seeing work as a prison sentence tell us about the French relationship to work? The French are used to this expression: metro, boulot, dodo, referring to the repeated circle of daily struggles to get to work, work all day, and come home to sleep, with not much time to do anything else. This comes from a country that has a legal 35-hour week and the the largest numbers of years in retirement amongst OECD countries. The expected number of years in retirement for an average French worker is 23.5 years for men and 27.1 years for women in France. So is this all myth?

There are clearly those who find their work-life balance is off-kilter. One of them is Sandrine Rousseau, a provocative green politician, who defends the right to be lazy to be acknowledged at work. Before the pandemic, there had been a series of suicides in large companies, which sparked the debate about the quality of working life. Pressure at work, whether real or perceived, has been rising. At the other side of the spectrum we now have the worry, discussed in many talk-shows and social media, that the French got too lazy over the lockdowns and do no longer have what it takes to get the economy going.

A survey done by Institute Montaigne seems to give a different picture. About three quarters of the 5000 polled are satisfied with their work. They seem to put in more working hours. They are dissatisfied with salaries, recognition of their work, and career prospects. Over the past five years, about 60% find that their work load has intensified, and 26% of them consider it excessive. This factor, psychological or real, mostly has to do with the management. With the pandemic, there is a new division in the world of work between those who can telework from home and those who cannot. About 60% of those who cannot find this a source of huge frustration. Many also are looking to change their jobs either inside the same company or elsewhere. When it comes to the pension reform, most consider 62 as retirement age either appropriate (45%) or excessive (47%). There is a relative majority of those who want some transitional conditions at work some years before the retirement age.

So the protests are as much about the retirement age as they are about the quality of their relationship to work. This is also recognised by the government, which is set to run a new campaign on value of work. Is this just an empty slogan or are more substantial reforms coming? What we take away from this is that one cannot solve the resistance against later retirement age without addressing what happens at work before they retire.

1 February 2023

Europe is losing the AI battle

Having missed the first stage of the digital revolution, Europe is now in danger of missing the next big phase: that of artificial intelligence, a technology that is now experiencing explosive growth. The US is leading, followed by China, and this is pretty much it.

The German government has commissioned a study on large European AI models, which argues that unless the EU can develop its own technology, it will become dependent on the US, which would also mean dependence on a lower standard of data protection. The problem is that Europeans see artificial intelligence as a threat against which they want to protect themselves. It is hardly surprising that they are not the lead developers.

Can we stay outside and be happy? The problem is that ordinary companies will eventually need to buy AI-service and technologies to stay competitive. This is exactly what is now happening with digital technologies, which Germany in particular was reluctant to adopt. We recall when some large German companies deluded themselves in the 1990s that they could out-compete digital technologies through sophisticated analogue technology. Remember Francois Mitterrand’s and Helmut Kohl’s high-definition television? The EU is committing the same mistake on AI.

The issue is not research. Many of the world’s top AI researchers are European. The problem is computing power. Microsoft is about to invest $10bn into OpenAI, a open-source AI lab. The German government has a budget of €3bn to invest into a whole series of small projects. The problem is that the technology is moving at a faster speed than the debating schedule in the Bundestag.

The US is dominating the global market for cloud servers, which is already causing problems with the data protection standards for Europeans. With AI, the problem will be so much worse. If there is no domestic capacity, the EU will lose its regulatory powers.

What will need to happen would be a massive catch-up programme, but high capacity computing costs billions to develop. When we read the report in ARD Tagesschau, we can already see why the German and the European approach is not working. There are several domestic and EU kickstarter initiatives that operate at a small scale. And we don’t see political leaders turning this into a high-priority matter. At least Kohl and Mitterrand were interested in technology. They just bet on the wrong one.

The politics has not changed either. In Germany, the CDU is in favour of de-regulation, but the Greens, who run the economics ministry, want to prioritise data protection. This is why we are where we are. The headline of the ARD article is: Will Germany be left behind in the AI boom? The article tries its best to be hopeful. But we see this as a triumph of hope over experience.

31 January 2023

Scholzing wins

It is common to see the media - us included - poke fun at Olaf Scholz, and his scholzing. In Germany, scholzing works politically. The media were very tame during the period when Scholz came under pressure to deliver tanks, but criticised Annalena Baerbock’s comment: "we are fighting a war against Russia". It was an unwise comment, and created tensions between Baerbock and Scholz.

The polls show that over the last six months, the SPD has regained its pole position over the Greens, through both are trailing the CDU/CSU. In the Insa/Gov polls, the Greens led the SPD all through the summer until October, but the SPD is now 4.5pp ahead. The CDU/CSU is relatively stable at around 28%, a level it has been lingering at since May of last year. At these levels, whether the present coalition maintains a majority would depend only on the fate of the Left Party. The Left Party polls at the exact representation threshold of 5%. Last time they didn’t meet the hurdle, but got into because they met the qualifying criteria for an exemption: at least three directly elected MPs. Their performance is too close to call.

From a purely electoral point of view, Scholz's dithering is paying off. The Greens, CDU, FDP are all pushing for greater German engagement in Ukraine. The SPD is the only large establishment party that speaks to the half of the population whose position on support for Ukraine ranges from the sceptical to the outright hostile. The only party that is vehemently opposed to aid for Ukraine is the AfD, which is now polling at 15%, up from an election result of 10%.

What these numbers are telling us, the scholzing will go on. Where we disagree with the consensus view amongst political observers abroad is that Scholz will always cave in at the end. We are not so sure.

30 January 2023

Traffic light flickers red

Olaf Scholz's legendary dithering of arms deliveries to Ukraine is in part due to disagreements within his coalition. Spiegel reports that these divisions encompass the entire realm of national security policy. A meeting of senior ministers in the chancellery broke up without resolution after Scholz and Annalena Baerbock failed to settle their disagreement over a national security council. The idea is based on the US model, in which a body exists to co-ordinate security policy between various departments: foreign, interior, defence, economics, finance and the chancellery itself. Lack of co-ordination is exactly what happened in the run-up to the decision, with Baerbock pushing in favour of tank deliveries and Scholz against. Baerbock won that battle, but Scholz is now insisting on concentrating oversight of national security policy in his own office.

The chancellery is, of course, the natural place for this to be located, but Germany is run by coalitions where the largest coalition partner always get the foreign ministry portfolio. A power shift from the ministry to the chancellery is a power shift between parties. Germany’s foreign ministry has been jealously guarding the few remaining powers it has. They lost EU policy during Helmut Kohl’s time in office. Scholz has now taken charge of weapons deliveries for Ukraine. The foreign ministry is not willing to yield further powers.

A related dispute is about the Nato 2% defence spending target. Boris Pistorius, the new SPD defence minister, discovered that the Bundeswehr is massively underfunded, and is now asking his cabinet coalition to put their money where their mouth is. He wants an immediate increase in defence spending to achieve the 2% target. We report recently that Germany is on course to miss this. The Greens are sceptical of this target, and demand that any increase spending has to be accompanied with equal increases in diplomacy and civilian projects. Scholz does not agree with this. And Christian Lindner disagrees with both: he prioritises a balanced budget.

What can possibly go wrong, we wonder. The traffic light coalition, born in the pre-war days, turned to be a fair-weather construction from a distant period. It is only just over one year old. Amongst the various feasible political constellations in German politics, the traffic light is the one with the greatest disharmony on foreign and security policy. Under Angela Merkel, they fudged it, but nobody called them out.