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18 June 2021

Return of Germanophobia?

Franco-German relations are famous for their roller coasters. Different in style, competitive, and with a long history of wars, they are bound to have conflicts with each other. At the political level, frictions often preceded new initiatives. The monetary union and the stability and growth pact were the outcome of an entente after crises between the two countries. Folklore has a rich choice of stereotypes for each other. 

The media plays its role too, and increasingly so, warns Matthias Fekl in L'Opinion. The recent victory of the French football team was heralded in the famous French sports magazine L'Equipe with the headline Comme en 18, like in 18, on its front page. Playing with a reference to the French victory over the Germans in the first world war was intentional, even if the article itself made the reference only to the 2018 world cup. The weekly magazine Marianne listed 40 non-sportive reasons of why France is to crush their dear neighbour Germans, warning its readers that Germanophobia is guaranteed. Some of the caricatures are funny, while others also resonate with some deeper held resentments against the German stability obsession, Angela Merkel and German culture over which the French consider themselves superior.  It is the reduction to simple terms and its frequent repetition that grinds down the goodwill of the people.

In politics there has always been a suspicion that the Germans continued the war, only in economic means, with its stellar ascent in the second half of the last century, German reunification, and the domination of its stability culture inside the euro area. Most recently La France Insoumise, the outspoken left party under Jean-Luc Mélenchon denounces the arrogance of the German economic model, calling it a monster that represents a danger to the French civilisation. These stereotypes and demeaning prejudices may be normal in the British tabloid press, but were far less common in France and Germany. The usual German response is one of resignation or indignation about the French making a big splash on the political scene, but then failing to deliver what they promised or to meet expectations. The Germans love facts and despair over the lack of them, despite a lot of hot air.

These two narratives are part of the power game between the two and have been going on for decades. Yet, the uptake in German bashing is noticeable. These more frontal attacks may be part of a broader observed change in the use of language since Donald Trump shifted the tone in politics with his demeaning tweets. But whatever the context, it may set the scene for more troubles ahead as it can give life to the return of past vulnerabilities. As we have seen with Brexit, narratives can diverge very quickly and become a source of an emerging national identity. This shift in language and identification is something to watch out for when both countries are campaigning towards crucial elections only six months apart. Marine Le Pen may no longer have to work on her anti-European narratives if the French press does the job for her.

17 June 2021

Will the Russians meddle in Germany?

The German office for the protection of the constitution - Germany’s domestic security services - is expecting immense Russian meddling in the upcoming elections. The interference will be directed specifically against the Greens, and Annalena Baerbock, the party’s candidate for chancellor, in particular. The Greens are the only Russia-critical political party in Germany, and the only party opposed to the Nord Stream 2 pipeline.

Reading the report in Bild, we are not sure whether the activities that have taken place so far are illegal. We find it amusing to see Bild hyperventilating about misinformation, given the paper’s own history of fake news. There are newspapers and magazines that try to play fair, but many pursue political agendas and encourage biased reporting, not unlike Russia Today. It seems to us that they are upset that they no longer hold the monopoly on fake news. It has a certain but-we-stole-it-first quality.

Western intelligence agencies have been trying to influence opinion in other countries in multiple ways. The digital age and the prevalence of global social networks has opened the marketplace, and made that task easier for leaders like Putin. To the extent that fake news is an issue, it may be an issue of scale, but it is certainly not new.

The Bild story raises one particular concern about an act that would be illegal if it were to take place - and yet without consequences. The fear is that Russian spies would have illegally obtained compromising material on Baerbock that they would go on to leak close to the elections. We assume that most of the bad news on Baerbock is out - not because of propaganda but because of fact-checking by journalists, who took a look at her CV. The most we would expect is another immaterial inaccuracy in her CV, or something personal, but a young politician who has only been on the national political scene for three years is unlikely to have had the occasion to commit a serious crime.

Defamation is always a risk - the publication of allegations that are not true. Germany is particularly vulnerable because of its ineffective defamation laws. Unlike in the UK, defamation is a criminal offence in Germany. This subjects defamation to the same burden of proof requirements as other criminal offences. It is, in practice, very hard to prove that someone lied on purpose. But you can’t blame Putin for ante-antediluvian libel laws.

16 June 2021

Swiss reject climate legislation

After Switzerland dropped its negotiations with the EU, the country has now rejected a climate-protection law in a referendum. Concretely, they rejected all three parts of the law in separate votes: on CO2, on pesticides, and on drinking water.

We agree with the Swiss journalist Mathieu von Rohr that this failure is not merely important in its own right, but symptomatic for the difficulties facing Green politics in general. It is one thing for people to pretend they support the Green party, especially when it is cool to do so. It is quite another to make actual sacrifices as the Swiss were asked to do.

The Swiss law was previously approved by a cross-party majority, reflecting the strengthening of the Swiss Green party at the 2019 elections. The referendum failed narrowly in a 52-48% vote. As with Brexit, it was a vote of countryside versus the cities.

One reason the vote failed was lack of agreement among climate activists. Many rejected it because the law did not go far enough. But what is particularly interesting about this referendum is that the strongest opposition came from young people. 60-70% of the 18-34 year old voted No in the three categories.

Each country is different, but the big yet unanswered question is whether people elsewhere would agree to make personal sacrifices for the greater good. The Swiss referendum tells us we should not take this for granted. The German elections will be the next big test.

15 June 2021

In Strasbourg this Saturday

The biggest enemies to European integration are not the eurosceptics or Russian hackers. They are the inter-governmental integrationists, people of a pragmatic disposition. They incessantly talk about Angela Merkel and Emmanuel Macron. They drool over G7 summits, and about who is with whom against whom. Their narrative of European integration is what used to be called the Great Man Theory of history. Laws don't matter in this Hobbesian world. The only institution they care about is the European Council. And the thing they most despise is the Conference on the future of Europe, a construction they don't understand with all its aspirations for treaty change. This Saturday, the conference will hold its first plenary meeting in Strasbourg.

We believe that European integration is too precious to be left to any one group, which is why reform of the EU has to proceed on several levels simultaneously. We have been arguing since time immemorial that the euro area requires treaty change that lays the ground for an economic union - one that includes but is not limited to fiscal policy. It cannot be done properly without. If we want the EU to succeed in areas we want it to act, we would bestow it with the legal competencies and procedures to get the job done. Think of vaccine procurement. Andrew Duff is taking a particular interest in this debate. He was an active member of the constitutional convention almost 20 years ago - whose work later gave rise to the Lisbon treaty. Duff has in the past been more optimistic about the future of the EU than we were. But even he is now saying that this is crunch time. He writes

"Those who would resist change must live with the consequences of a failing Union."

Failure and irrelevance, not breakup and conflict would be the hallmarks of a failing EU. We think the most important part of Duff's list of proposals relates to the extension of the enhanced co-operation procedure, which we see as the only way to produce a fiscal union. Right now, enhanced co-operation is a last-resort measure. Duff writes that qualification should be dropped. We actually think of it as a first-resort measure, at least for the euro area. A fiscal union can only ever proceed as a coalition of the willing. It would a be a subgroup of the eurogroup. Waiting to co-opt Germany into such a project seems hopeless unless you are unwisely betting the house on a Green election victory. Duff also make some sensible points about an extension of qualified majority voting, which are beyond the scope of our summary. He will address the fiscal union in a separate article. For us, this will be the test of success or failure. If it fails, it will become progressively harder for euro advocates to make the excuse that the time will eventually arrive. If it hasn't arrived after two consecutive financial crises and a pandemic, we would have to base our analysis on the safe assumption that it won't happen.

14 June 2021

Northern Ireland's identity challenged

The season of marches started in Northern Ireland, led by union flag-waving loyalists, just as tensions over the Northern Ireland protocol spike. Against this backdrop, and following a UK-France spat over sausages at the G7 meeting, it will be a decisive week in politics that will decide whether there will be a new first minister or new elections.

Arlene Foster will step down as first minister today, with hardliner Paul Givan nominated as her successor by Edwin Poots, the new DUP leader. Sinn Fein needs to confirm this choice as part of their joint leadership role. Their prerequisite for accepting Givan is that the DUP enacts the Irish Language act that would give the Irish language equal status to the English. Troubles are ahead as Sinn Fein accuses the DUP leadership of bad faith by promising the Irish Language Act but having no intention to deliver it, the Belfast Telegraph reports. Sinn Fein also called for a full implementation of the New Decade, New Approach (NDNA) deal, which restored power sharing in Stormont last year. The cultural elements of this deal would have to be delivered in the form of amendments to the 1998 Northern Ireland Act. And Sinn Fein wants it all to be enacted before the end of the summer. Both the DUP and Sinn Fein have seven days to re-nominate the job as first minister and deputy minister. What could possibly go wrong?

Not that the UK and the EU make it any easier for them. A reported exchange over sausages between Boris Johnson and Emmanuel Macron shows just how easy it is to stir up emotions and sensibilities in this conflict. In a private meeting between the two men, Johnson allegedly asked: How would you like it if the French courts stopped you moving Toulouse sausages to Paris? To which Macron answered that it was not a good comparison because Paris and Toulouse are part of the same country. Obviously, Macron got the facts wrong. His slip caused an avalanche of statements of indignation from Poots, Johnson and Dominic Raab, his foreign minister.

This made it ever so clear, if it was still even necessary, that the EU has no understanding of the basics nor the finer details of what is at stake in Northern Ireland. Will Northern Ireland become the proxy-conflict for Brexit?

What is clear is that those stories will stir up emotions amongst unionists and loyalists, as they are about to re-identify with their past thanks to the challenges of Brexit and the protocol. The loyalists' procession last week, peaceful but without authorisation, may be the beginning of a long marching summer, writes the Guardian, as the new post-Brexit reality reopens old wounds. Under the Northern Ireland protocol there are border checks of people's handbags and products as they come over the sea from Scotland or England to Northern Ireland. No pet can travel to England or Scotland without a vaccination pass anymore, and many products are no longer available in supermarkets or can't be ordered via Amazon. For unionists and loyalists it is a daily experienced threat to their British sovereignty. 

The EU needs to realise that this is not about compatibility with single market rules, or even trade, and that peace in the union will take precedent for London. We would not be surprised if the UK triggered Article 16 of the withdrawal agreement. 

11 June 2021

You think the Germans are green?

There are polls, and there are polls that explain the polls. The latter are the interesting ones.

An Infratest dimap poll, published yesterday, debunked one of the more persistent myths about Germany - that it is naturally a green country. Germany has a strong Green party, but there is a specific history to that, one that one should not be confused with general attitudes in society.

Here are some of the highlights. Should the state outlaw behaviour that is particularly damaging to the climate? 53% say No. Are you in favour of higher petrol prices? 75% say No. Should the government encourage a shift from fuel-driven to electrical cars? 57% say No.

To their credit, Germans are now mostly in favour of a speed limit on motorways and higher prices for flights. Pollster beware, that’s easier to say in a lockdown. But don’t think for a moment that the Germans are particularly green.

The current political polls are best read with that information in mind. The Greens are back to where they were at the beginning of the year, at around 20-22% - which we think is where the current core support lies. What we saw in April was a bubble. Germans thought for a while that Annalena Baerbock was cool. Now they have gotten to know her, they don’t think this any more. Having been found vastly more popular than Armin Laschet and Olaf Scholz, she is now trailing both.

Baerbock had a strong performance in a TV interview yesterday. She will have to keep this up. What she will need to do in the next three months is focus on selling the Green world view, and not scare commuters with threats of high petrol prices. To land at 25%+, she will need to fight for the voters.

What is interesting is that the bursting of the Green bubble did not benefit the SPD but only the CDU/CSU. What the shifts are telling us is that there are 6-8% of swing voters who are open to the Greens in principle, but who are not core Green voters. The Greens won’t catch these voters with threats, but with promises of investment in climate technologies. That plus the strong emphasis on technologies is the most attractive element electorally of the Green agenda.

10 June 2021

The case for optimism on inflation

We have been writing in recent times about anecdotal early indicators of a rise in inflation down the line. Our focus has been about whether the ECB is prepared to handle an inflationary shock.

Guntram Wolff has taken a look at developments in Germany specifically, and concludes that current trends in the labour market do not give rise to concerns. On the contrary, as he rightly points out, German inflation would need to be higher than average eurozone inflation in order to correct the fall in Germany’s real exchange rate that accompanied the first decade of the euro area. In a monetary union, the real exchange rate is essentially a metric of diverging wage costs. This was the decade when Germany tried to out-compete the rest of Europe by keeping industrial wages low.

Wolff took a look at wage growth, traditionally the most important early indicator of future inflation. Wage growth at 3%, combined with productivity growth of 1%, is in line with the ECB’s current inflation target. He then goes on to look at collective wage agreements, which are still playing a big role in Germany. The recently concluded wage agreements do not give rise to concern.

What we can conclude from this analysis is that Germany and the euro area are unlikely to generate inflationary pressure in the short-to-medium term, based on the usually domestic demand channels. We would agree with that analysis.

But that’s not the whole story. We recall the 1970s when the inflationary impetus was triggered by a series of oil price shocks. The foreseeable external events would be a rise in US inflation and a rise in global commodities prices. In theory, an appreciating euro exchange rate could compensate for any external price shock. The main inflationary risk we see is thus based on a metric of the exchange rate’s failure to adjust completely. This is a derived risk, one that is very hard to foresee let alone predict. That said, we agree with Wolff’s analysis that the domestic developments in the euro area do not show signs of rising inflationary pressure. The euro area can easily live with German inflation at 3% over a longer period.

8 June 2021

Germany's strange crypto-debate

Handelsblatt has an interesting comparison between Germany’s political parties in respect of their plans for crypto currencies. We have been arguing that the election is primarily about whether Germany sticks to its analogue past - best exemplified by the policies of the current grand coalition - or whether it embraces 21st century technologies. While the Greens and the FDP disagree on many things, they are two modernist parties.

The problem with the Handelsblatt comparison is that it lumps central bank digital money and cryptocurrencies together, which is a common error. They both constitute forms of digital means of transactions, but they have nothing in common because they are different in nature and used for different purposes.

The CDU/CSU is almost apathetic to this issue. The party says it supports a digital euro and sees potential in the blockchain technology. We would like to add that it is far from clear whether the ECB will settle on blockchain or a centralised ledger as the infrastructure for a digital euro. The ECB has been experimenting and has yet to decide. In any case, this will not be the decision of the next German government. On private crypto-currencies, the party says ok in principle, but warns about non-European crypto currencies. If we import standards, we import values, a party spokeswoman said. While we would agree with that statement, the position conveniently ignores that all the main cryptocurrencies are non-European. What this tells us is that the strategy will be to counter the technological leaders of others through regulation. Good luck with that.

The Greens are very hostile to crypto-currencies. They want to reaffirm the money monopoly of the state, with clear rules for digital currencies. They seek transparency digital payments from a certain value upwards. Ok with digital euro, but say it should not replace cash. Acknowledge that China is ahead of us, and that Europe needs to secure the international role of the euro through its own infrastructure. The Greens are opposed to bitcoin because of its energy consumption.

The FDP is the only party enthusiastic about all things crypto. It welcomes alternative private monies. It says the digital euro is overrated and misunderstood. It says digitalisation of payments is a matter for the private sector. The party also sees a role in crypto-currencies for international payments systems.

The SPD is opposed to all things crypto, but in favour of a digital euro.

The position of the Left Party is almost identical to that of the Greens. It wants to ban all private crypto currencies, and to protect cash. It wants cash to remain a legal tender in all payments. In other words, it cannot be refused. We think this would severely constrain the use of a digital euro, since the attraction for traders would be reduced cost of cash handling. The Left Party has a strong focus on data protection.

We noted that the AfD was not on the list, but have a suspicion that crypto-currencies are not high on their priority list.

If the FDP ends up in a coalition, we suspect it will hold either the finance ministry or the economics ministry, which means that they will be influential in this debate. The same will be true for the Greens too. Crypto could thus turn into a political controversy within the next coalition. What we would like to know from the Greens is whether their position would change if the energy implications of bitcoin mining are mitigated - which will happen eventually. We suspect not.

We see the crypto debate as the quintessential modern political confrontation because it is ultimately about the role of the state in the 21st century. We think the FDP and the Left Party are the only ones who seem to have thought through this - obviously coming to the opposite conclusions.

7 June 2021

Putin's threat

Norbert Röttgen had it spot-on. When Vladimir Putin said Ukraine would need to show goodwill to remain a transit country for Russian gas, Putin started blackmail the country even before Nord Stream 2 is completed. This is telling us that Putin has already moved beyond Nord Stream 2. As Röttgen put it, Putin is using gas supplies as a weapon, just as Poland, the Baltic States and Ukraine always said he would. Ukraine's interior minister said he expects terror attacks, clandestinely organised by the Russian secret service, as an excuse by Russia to turn off the gas flows. He said he already received reports to that effect. And German politics - with the exception of the Greens, and the lone voice of Röttgen in the CDU - will side with Putin when push comes to shove. 

FAZ reports that President Joe Biden wants to raise this issue with Putin at their upcoming summit, and he may well receive assurances. But we don't think they will count for much in the real world.

4 June 2021

Turkey bets on Poland

Last week Turkey and Poland took a crucial step and moved bilateral collaboration beyond their NATO partnership commitment with the Polish purchase of 24 Bayraktar TB2 armed drones, produced by a Turkish company owned by Erdogan’s son-in-law Selcuk Bayraktar. It is the first time ever that a Nato and EU member has bought Turkish drones, and it serves political purposes on both sides, but is likely to increase tensions with Russia, writes Al-Monitor

The deal has been facilitated by a political affinity between Recep Tayyip Erdogan and the right-wing Polish president Andrzej Duda. Both are populist leaders, accused of undermining democracy in their respective countries, and both enjoyed an extraordinary chemistry with Donald Trump during his term in office.

Selling drones to Poland serves two purposes for Erdogan: One is to demonstrate his standing with Nato and the other is to use Poland as a sort of Trojan horse inside the EU. Ankara would like to see a proponent speak on its behalf when it comes to speeding up the customs union with the EU and to rally more Nato backing against eventual tougher US sanctions over its purchase of Russian S-400 air defence system. Warsaw, for its part, wants Ankara to align with the Bucharest Nine, a group of eastern European countries created at the initiative of Poland and Romania against perceived threats from Russia following its annexation of Crimea in 2014.

Can both countries deliver when push comes to shove? Duda envisions Turkey as a bulwark against Russian dominance in the Black Sea region. But Erdogan's support may sink as fast as quicksand once Russia flexes its muscles. For Erdogan the value is more in a double game strategy where he can play the US and Russia against each other. Adding a military dimension to Turkey's military ties with Poland could strain his relations with Russia, and a drone sale to a Nato ally is not what will deter the US from further sanctions. The question is, where is the tolerance threshold for the Russians? When Duda visited Ankara last week, Sergey Lavrov, Russian foreign minister, urged Ankara to carefully analyse the situation and stop fuelling Kiev's militaristic sentiment. Encouraging aggressive Ukrainian actions on Crimea amounts to an encroachment on Russia's territorial integrity, Lavrov added. Erdogan wants a place at the adult table in this geopolitical game. Erdogan punches above his weight in geopolitics with the backing Turkish drone technology. This sounds like playing with fire to us.