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20 December 2024

Whom the Gods want to destroy...

As the last working week of 2024 draws to close, one would be forgiven that the western world has turned officially crazy. We are at the brink of a government shutdown in Washington. Elon Musk is now officially supporting the AfD in the German elections. Olaf Scholz walked into the European Council to press for what he believes to be the key to the future of the European economy: EU-coordinated subsidies for the car and steel industries. Viktor Orbán has rejected the renewal of the EU’s Russia’s sanctions, which auto-expire at the end of January. And Kaja Kallas, the EU’s High Representative for foreign and security policy, warns against a peace deal in Ukraine. We write about France in a separate story, but what happens there complements this picture. Whom the gods would destroy, they first make mad.

We are not in the business of predictions. But there are three themes, we want to focus on in this story. More themes are in our next stories below. 

The first theme is on German politics. It is a mug’s game to speculate on what coalition will emerge after the German elections. But we can say that Friedrich Merz will most likely be the next chancellor.

We would expect him to perform better than Olaf Scholz and be more effective on the global stage. But whatever coalition permutation will emerge in Germany, it will not address the causes of Germany’s decline – clinging on to 20th century technologies, mindsets, and work practices. German coalition politics is like a game of musical chairs: Four party groups compete for three chairs. This is a political system hardwired to deliver continuity.

Much of the hardwiring is constitutional. The German constitution started off in 1949 as a lean, minimalist framework, but like the rest of German laws and regulations, it, too, has become cluttered over the years. It has been amended 67 times until the end of 2022, and then again this week to lower the majority threshold for the appointment of judges. One of these 67 changes is the infamous debt brake. The constitution as it is today lies at the centre of the legal/political doom loop in which Germany is trapped. A reform here, and another one there, is not going to fix Germany. This is not 2003.

Our second theme is related to the first - the malaise of the car and steel industries. We think it will get worse. We heard stories this morning that VW was close to a deal with its workers. What sounds like good news at first, is nothing of the kind. The company reportedly agreed to abandon plans to close three factories, and to extend job guarantees for another five years. The unions agree to moderate their wage demands. This is a deal from the playbook of the Schröder era. It won't fix the company's massive cost overrun problems. We should recall, VW is partly a state-owned company, one that is protected against a hostile takeover by a golden share. Germany will refuse to accept decline of this industry, and stem against the inevitable with subsidies and, if necessary, state ownership. For those with a long enough memory, this is the British Leyland model of the 1970s – and we all know where that ended up.

In Europe, we associate the problem of the car industry with Germany. Stellantis – the company that owns Peugeot and Fiat amongst others - appeared at one point to have been in better shape due but that turned out to have an optical illusion. We also noted that GM's sales’ in China are down by 42.5% in the first 11 months of the year. The decline of the car industry is a western thing. The reason for this decline is our failure to keep up with technology, and to regulate ourselves to death. China makes technological superior cars and is ahead of us in batteries and software. The car and steel industries that Scholz wants to subsidise are symptomatic of the decline of Europe’s social model that has been a defining characteristic of the EU itself. It is no surprise therefore that the EU is becoming dysfunctional.

Our third theme is fuzzier. Scholz yesterday held his second telephone call with Donald Trump and walked away with the strong impression that the next president will enforce a peace deal. There is still a lot that can go wrong, but on this point, we are moderately more optimistic than on the points raised above. It makes a difference that both sides of the war appear ready to talk and make sacrifices. Kallas and other delusional armchair warriors still believe in victory. The reality is that neither side in this car has the military capacity to achieve its stated war goals. Russia’s recent military successes are for real, but we do not count its progress in terms of dozens of miles, but tens of metres. What is clear is that when the war ends, it will get very expensive for us Europeans.

Herein lies the only prediction we are ready to make. No matter what our national and European fiscal rules may say, this decade is going to get expensive.

20 December 2024

French dreams and realities

Emmanuel Macron came to power in 2017 with a new political offer to make France's traditional parties redundant and to marginalise the far-right. Seven years later, he now relies on those traditional parties to build a coalition government, with the far-right as the largest party in his National Assembly. Instead of the president, it is now those parties that dictate the political future of the country. And it is Marine Le Pen who still has the say over whether his government can survive or not. Macron seem to have come full circle.

The fate of Macron depends on what happens with Francois Bayrou. If Bayrou fails, France will be on the brink of a constitutional crisis. The country is in a situation similar to the end of the Fourth Republic, when political instability was the result of parties dominating the scene with their improvisations and partisan bargaining. It is the reason why the Fifth Republic gave so much more power to the president. And yet even despite, or maybe because of, the president’s extensive powers, France finds itself in the same situation again.

There are still many unknowns of what to expect in 2025. What we know, however, is not very encouraging. Bayrou wanted to enlarge the majority, but he ended up with the same crowd as Michel Barnier. He promised to break the political deadlock with a new method but the only concrete proposals he put forward promise more deadlock instead.

Will there be a government before Christmas? Yesterday, Bayrou presented his idea of negotiating a new pension reform over nine months in the new year. He insists, however, that as long as a new pension reform has not been found, the old one would remain valid. This way he pleased Les Républicains on the right, but alienated the Socialists. So he ends up where Barnier left off, with the conservatives ready to join a government and the left opting out. If Bayrou cannot include personalities in his government who appeal to the left, the idea that he can enlarge the majority is clearly dead.

Bayrou also rejected the idea of foregoing the use of Art. 49.3 to push the budget through without a vote in parliament. He may now have neither the Greens nor the Socialists ready to support him with a no-censureship agreement in parliament. MPs are already wishing back Barnier, even those who ousted him in the censure vote. Will the mood shift in the new year? Nothing is more uncertain.

Without a no-censure deal on the left, Bayrou’s future is once again in the hands of Marine Le Pen. Bayrou promised to deliver on one of their key demands, to introduce proportionality before the next legislative elections. Bayrou’s assurance is why the Rassemblement National cooled on the idea of a censure motion. But he still has to deliver this, to escape Le Pen’s clutches. Proportionality though is strongly opposed by the only party that is still interested in joining him in government, Les Républicains.

Proportionality is also not a solution to the current impasse. If the last election would have been held with a system and proportionality similar to how senators are elected, as the RN suggests, the assembly would still have three blocs and no clear majority. A simulation by the Jean Jaurés foundation applied the Senate system to the assembly. This would result in 80% of the MPs being elected via proportionality voting. As to be expected the RN would be the main beneficiary, winning 39 seats more than they currently have. The Macronist group would be the biggest loser with 28 fewer seats. Even the left alliance would lose some 17 seats. Les Républicains, the opponents to proportionality, would also be amongst the winners, with six additional seats.

Looking ahead at 2025, there are clear markers in the calendar. Bayrou’s political agenda is to be presented mid-January and the budget in February. So this means no censure motion until then. From then onwards there are a couple of scenarios.

If Bayrou presents the budget say mid-February, the parliament has 70 days to examine and vote on the texts. If this process goes through all to the end, without Bayrou triggering 49.3 before, we are approaching end of April.

It looks inevitable that Bayrou will have to trigger 49.3 eventually, like Barnier and every prime minister since Macron lost his majority in the 2022 elections. The contradicting nature of the parties’ demands has not changed, neither the power relations. There is thus little chance that parliament adopts a budget that Bayrou is ready to implement. The only question is when 49.3 will be triggered. What follows is also clear. Once Bayrou triggers 49.3, we can be sure that the LFI will present its censure motion. Will there be a majority ready to topple Bayrou?

If Bayrou manages to get a no censure deal together in time he may live for another day. This is the best case scenario, where uncertainty about the budget and the government would last until May. In this scenario the next challenge for Bayrou would then be whether he can deliver any meaningful reform and provide the country with a stable economic outlook.

The worst case scenario is if Bayrou gets censured. We assume for now that this will happen only after Bayrou triggered 49.3. Under the current calendar, this would be April or May at the latest. With Bayrou gone, the chances that anyone can survive as prime minister diminish rapidly. New legislative elections can be called for July at the earliest. So in this scenario, it would add another two months of caretaker government where no decisive measures can be taken. And there is no guarantee that the next assembly gets a clear majority. So parties may have to continue to practice the art of compromise.

We do not see Macron resigning any time soon. But with new legislative elections, parties could campaign with a promise to end the Fifth Republic. If those parties were to win those elections, pressures on Macron would increase significantly. Another source of pressure comes from the business community. Aghast by his spontaneous decision to dissolve the assembly, many business leaders lost their trust in Macron’s leadership. Investments are put on hold and relocation plans are drawn up. Internationally, Macron may be the European leader Donald Trump turns to once he is in the White House. That could give him some leverage in Europe and at home. We also expect Macron to fight for his legacy. He has two more years to straiten his accounts with the French people and he plans to use those. But if his ambitions and the fate of his country continue to be at loggerheads, eventually the question arises whether there is a general interest that supersedes his personal ones.

20 December 2024

Europe's mid-sized country problem

Back in September, Mario Draghi warned that the EU risked fading into irrelevance in the 21st century. If you visit Tallinn, Estonia’s capital, nothing could feel further from the truth. Beyond the mediaeval old town, you have an ultra-modern cityscape, with offices populated by start-ups. Some of the best-known high-tech names in Europe, like Skype or Wise, originally hail from Estonia, a country with fewer than 1.4m inhabitants. The country is currently in a recession, but it is one that seems more cyclical than structural, with a return to growth expected by the European Commission next year.

Like Estonia, most of Europe’s current winners are small countries. Ireland has carved out a successful niche as a gateway for multinational, and especially American, firms into Europe. Like Estonia, it is a beneficiary of the tech industry. Denmark has one of the EU’s fastest-growing economies, thanks to the runaway success of Novo Nordisk, the pharmaceutical firm that developed the Ozempic weight-loss drug. Sweden, another country with a relatively successful tech sector, is a bit bigger than Ireland and Denmark, and especially than Estonia, but still small in the grander scheme of things.

In comparison, Europe’s large economies have struggled. Germany’s growth is flatlining, and its industry-based model is in existential danger. France’s growth is set to come in below 1% this year, and it faces a debt crisis. After an initially strong rebound, Italy’s growth will probably come in low too, maybe even as low as 0.5%, according to the Banca d’Italia. The UK had a decent beginning of the year, but now it is stuck in the low-growth cycle too. British wages also risk continuing stagnation, a trend from the pre-Covid era.

The bright spots amongst the larger European countries are Spain and Poland. But these are more like special cases. Spain’s economic growth has mostly been due to employment and population growth, thanks to immigration. Its ability to integrate newcomers is laudable, but there’s little sign of any productivity improvements. Poland is a genuine success story, but it is further from the productivity frontier than its western European counterparts. Its output per hour worked, adjusted for purchasing power parity, is still well behind the likes of France and Germany.

What all five of these countries share in common is a degree of political turmoil too. France’s government fell apart when it tried, and failed, to pass a budget. The same happened to Germany, which will go to snap elections for the first time in its post-war history. The UK looks calm on the surface, but the rise of Nigel Farage’s Reform party has upset the balance of power. Spain and Poland both have highly polarised politics, which often end up involving the judiciary. Italy is experiencing a rare period of political stability, but this may change if low growth becomes persistent.

Initially, these countries seem to have quite different economies, issues, and political systems. But the one thing they do share is size, and that seems to be making life complicated for all of them. Unlike their smaller counterparts, finding political consensus is difficult. They also cannot exploit economic models that rely on having much larger and open neighbours easily, like Ireland and Estonia, or benefit from one super-company, like Denmark. Some proponents of Brexit in the UK talked about turning the country into Singapore-on-Thames. The most obvious flaw was that Singapore’s population is less than a tenth the size of the UK.

But these countries also aren’t big enough to insulate themselves from global economic or political intrusions, or shape them individually. Building strong and deep capital markets, like the US, to help produce big but innovative firms is easier if you are already a very big country. So is funding a military large enough to protect not just yourselves, but allies. China could dominate both the solar and electric car industries in part because its large internal market proved a great proving ground for new firms.

Next year, the fortunes of Europe’s larger countries might ebb and flow. But we do expect the malaise to be consistent. None of these countries appear intent on making the reforms to the EU necessary to overcome these problems either. Like the big countries that hold most of the power in the union, it also seems stuck in limbo.

19 December 2024

Muddled thinking on post-war Ukraine

The post-war funding for Ukraine constitutes a potential fiscal shock for European countries they have not budgeted for. Nor have they budgeted for US demands for another 1pp increase in defence spending as a proportion of GDP. Here are some numbers for Ukraine.

If you include debt servicing costs, Ukraine will have a public sector deficit of 28.6% of GDP. The funding gap for next year is $53.8bn, of which $38.4bn accrues to the US and the Europeans. The west has no budgets for this. It has taken a $50bn chunk out of the Russian foreign currency reserves, not the reserves themselves but the earnings. It is interesting, and maybe symptomatic of the state of Ukraine war reporting, that it fails to draw any connections between the peace process and the status of those reserves. There is no way that we get any deal with Russia and at the same time fund the reconstruction of Ukraine through Russian reserves. The Russian reserves consist of money European countries paid to Russia for oil and gas.

The real-world choice will be between confiscating these reserves, and funding an ongoing war, or ending the war and returning the reserves. It is important that we start bifurcating those two scenarios. 

The German budget has no allocations for any Ukrainian assistance beyond the military deliveries that have already been hard-coded into the budget. France, Italy and the UK have no fiscal space. Western promises to Ukraine are based on non-existing financial resources - except for the Russian reserve funds. But once we raid them, we ourselves would be in a war with Russia. 

Russia will also insist on an ending on the sanctions regime as part of any peace deal. It is possible that a deal is agreed in which the sanctions are phased out, pending compliance with agreement, or that reserves may be unfrozen in stages. But we struggle to see Vladimir Putin agreeing to a deal in which he funds the reconstruction of western Ukraine when the war is proceeding well militarily. He, too, cannot fund a permanent war, and has an interest in a settlement eventually. If we are serious about a deal, we will have to start thinking about how to fund Ukraine's future in earnest.

18 December 2024

How ready are we for a Taiwan war?

As our side of the Eurasian continent is mired in war, the other side is preparing for war. China held the largest military exercises yet in the Taiwan Strait, with 100 ships and 50 military aircraft, which had the effect of a two-day shutdown of civilian air traffic. Handelsblatt notes that the exercise should serve as a warning that the conflict over Taiwan could escalate at any time. We see it as yet another geopolitical conflict we Europeans are underestimating. And the way we underestimate it is by not preparing for it. When your geopolitical experts are predicting that a hot conflict might still be five years away, this usually translates in a response of no-action by politicians who horizons are much shorter. Even the threat of trade tariffs by Donald Trump, which are as real and concrete as it can get, has so far not had any noticeable impact on wider European politics.

If the US goes to war with China, it would not insist on Europe’s active participation. But it would insist that Europe joins in economic sanctions. Right now, Europe is not in a position to do that because its economy is too interwoven with that of China. You don’t see it in the trade data. The problem is not the exports, but the supply chain dependencies that takes years to unravel. China has progressed much further down that path, by order of President Xi Jinping himself, who prioritised supply chain independence in view of a potential upcoming conflict. A Trump presidency might be the ideal moment for a Taiwan blockade. Trump has given mixed signals on whether or not he would protect Taiwan.

It is understandable that Europeans are preoccupied with conflicts nearer to home, but this is one they need to prepare for. For starters, we should discourage European companies from raising their exposure to China even more, as Volkswagen and BASF are currently doing. We have been reading a lot of smug German newspaper headlines about companies ignoring politics, and expanding into China. An easy way to stop this would be for the German government to withdraw the Hermes export credit insurance. German industry lives in a full-insurance bubble that protects them against geopolitical risk. The first step should be to establish a market for geopolitical risk. Preparations for a US-China standoff should be a priority, not because it is about to happen, but because it takes a long time to create the conditions for Europe to be independent of China, if that's the political choice it wants to make.

17 December 2024

Moving on from freedom of movement

There are two consistent themes of the UK’s relationship with the EU: how transactional it is, and a tendency to fight the previous battle, and not the current one. The British government’s attitude towards an EU-UK youth mobility agreement, a likely precondition for any wider agreement with the EU, combines both.

Now, however, there might be some movement. Last week, Nick Thomas-Symonds, the European affairs minister, indicated that a youth mobility agreement might be doable, with the caveat that it depends on what you mean by youth mobility. 

Thus far, the attitude to a youth mobility agreement has been that it would be too much like a return to freedom of movement, and therefore politically risky. But we are not so sure that logic holds up much anymore. There are obvious, and easily explainable, differences between this kind of scheme, which would allow young people to live and work in the UK or EU for a few years, and freedom of movement. The UK also already has similar agreements in place with other countries, like Australia, Canada, and Japan. These are all countries that are currently easier for Britons under the age of 30 to live and work in than the EU.

How UK immigration policy has developed after Brexit might have changed freedom of movement’s salience as an issue too. Ending freedom of movement did not lead to a reduction in net migration in the UK. Instead, more immigration followed, with the new non-EU immigrants generally staying for longer too. Recent polling commissioned the ECFR suggests that voters would be more comfortable with freedom of movement than UK-EU regulatory alignment, or accepting ECJ jurisdiction.

The bigger risk we see is that the government comes out with an agreement that doesn’t do anything to materially change the UK’s economic circumstances, but trumpets it loudly. That would lead to more cynicism with the government, which is already high despite it not having been around for long. We are not really sure what the UK could do to deliver the kind of change voters might expect without rejoining the single market. At this point, that would entail an unacceptable level of regulatory alignment. Rejoining is something Labour has definitively ruled out.

16 December 2024

Kallas' one sided foreign policy

Kaja Kallas knows how to talk about Ukraine and the threat Russia poses to the EU. Backed by her own family’s history, she finds clear words. As the EU’s high representative she elevates the profile and weight of the Baltic states and Poland in European foreign policy decision making. She even went off-script saying that she wants Ukraine to win the war, a position for which there is no consensus in the EU.

When it comes to the Middle East and on Gaza especially, Kallas joins the there-is-no-consensus chorus in Brussels. She avoids talking about Gaza and has not found a proper language. In an interview with Channel 4 anchorman Krishnan Guru-Murthy, she described what is happening in Gaza as very worrying. She said that if Europe wants the two-state solution to happen, it needs political will and also political pressure on Israel. These are diplomatic placeholders that mean nothing.

Josep Borrell was much more upfront on Gaza and the two-state solution. Can Kallas' lukewarm touch move the EU member states more than Borrell? We doubt that. For European member states, it is already uncomfortable to talk about Israel’s actions in Gaza. Most are on standby mode and unwilling to act. It can have diplomatic consequences, as Ireland just found out. Israel announced that it will close its embassy in Dublin. Ireland had been one of the few outspoken countries in the EU on Israel’s international law violations. It recognised the state of Palestine and lately joined the South African legal suit against Israel in the International Court of Justice. It ticked all the boxes for Israel to cut diplomatic ties.

Will Kallas be like Ursula von der Leyen, who decided to ignore requests from Ireland and Spain to re-examine the EU trade deal with Israel amid the human rights violations? Borrell at least put it on the agenda for EU foreign policy meetings. Kallas might be tempted to stay with the prevailing minimal consensus, which is basically to talk about the two-state solution but not to act. It is true, she is busy with Ukraine. But in foreign policy, you cannot choose your battles. And the European South risks splitting with the rest of the EU over what to do about the two-state solution and Israel's violations of international law.

Borrell once described diplomacy as the art of managing double standards. And Europe has many of those. But that does not mean Kallas's fuzzy language about events that are very worrying. And she needs to find a common position where the split inside the EU is likely to increase. Kallas is not afraid to address Russia. And she should even be less afraid to address Israel. It is not a question about whether or not to side with Israel. This is about preventing the situation from getting worse, which is in Europe’s interest. As the famous Russian novelist Fyodor Dostoevsky once said:

Nothing is harder than speaking the truth and nothing easier than flattery.”

13 December 2024

Turkey and Israel in Syria

After five decades under the oppressive Assad regime, the mood is still one of jubilation in Syria. It is now up to the opposition forces to design a better future for their citizens. No one really knows yet how the transition will turn out and what the state will look like. Syria, with its peaceful revolution will have to proof that it can stay peaceful for its people.

While the rebels are busy preparing for the transition, two foreign forces increased the presence in the country. Turkey and Israel are slowly but surely advancing further into Syrian territory. Officially this is due to security concerns, to prevent a threat coming from Syrian rebels towards them. But what will the US, the UN, and Nato have to offer to make sure it does not ultimately lead to a land grab?

While the world is looking at what is happening in Damascus, Turkish-backed SNA fighters, supported by Turkish Air Force jets and drones, have been attacking Kurdish strongholds. Recep Tayyip Erdogan is framing the operation as part of Turkey’s counter-terrorism. The Turkish proxies were pushing the Kurdish SDF forces out of the Manbij region, and are moving towards Kobane and Qamishli, with Turkish air strikes also recorded in Raqaa. Without the international community guaranteeing an autonomous region for the Kurds, there will be no peace in Syria. Will it be like in the past, when Turkey entered Syria to establish their zone of influence where Nato could do little to stop one of its own members?

Israel too, has expanded beyond the occupied Golan Heights and a new buffer zone into Syria. Israel’s military describes it a defensive move that is temporary. Benjamin Netanyahu, shortly after the fall of Assad, declared the 1974 agreement maintaining the buffer zone in the Golan Heights as null and void. Europe is watching with some unease what is happening there. France called for a retreat of the troops, Germany and Spain for restraint.

Israel also took the strategic Mount Hermon, straddling the borders between Syria and Lebanon. It is only 40km away from Damascus and as the highest mountain in Syria it offers oversight views. Is this one of the places where Israel creates facts with no intentions to leave from there? Benjamin Netanyahu said on Tuesday that something tectonic has happened here, an earthquake that hasn't happened in the 100 years since the Sykes-Picot Agreement. This agreement from 1916 between the colonial powers of the UK and France divided up the Ottoman Empire and created the states as they are today. Netanyahu’s reference implies that he thinks the Sykes-Picot Agreement, and with it the Levant's borders, is de facto dead. Netanyahu’s maximalist military strategy since 7 October has emboldened him to think that creating facts will not be met with much resistance by the West. Everyone is waiting for Donald Trump to come to power and put a new agreement into place. Where will Europe be in all this? What foreign policy position other than on Ukraine do we have to offer?

In German, the Middle East is called the Nahe Osten, or Near East. It is a reminder that those countries are nearer than we think. It is time to take a principled decision rather than to let ourselves been drawn by events, and follow up with a double standards foreign policy that focuses narrowly on those aspects that concerns us most, like the refugees. It is not only in the interests of Turkey and Israel as immediate neighbours, but in our interest too that a new Syria emerges with thriving trade and working opportunities for those who want to return home. If all stakeholders get obsessed with security concerns and counter-offensives, Syria may not even get there.

12 December 2024

Kickl, the anti-hero?

The Austrian assembly voted yesterday to lift the immunity of Herbert Kickl, the popular far-right leader. Prosecutors can now investigate a complaint, filed by an ÖVP lawmaker in July, that accuses Kickl of false testimony in a parliamentary committee inquiry into the misuse of public funds under the previous ÖVP-FPÖ government, which was in power between 2017 and 2019.

They also lifted immunity for three FPÖ MPs on the grounds of possible violations of the Nazi-prohibition law.

Unsurprisingly, the FPÖ did not vote in favour of lifting the immunity. Instead the far-right party describes the move as a political manoeuvre aimed at discrediting Kickl and the FPÖ itself.

The FPÖ won the national elections and the local one in Styria, the largest of the federal states in Austria. After the national elections, president Alexander van der Bellen decided not to give the mandate to the FPÖ, but to the second largest party, the ÖVP which is now in talks with the Socialists and the Greens to form a new government. Politically, the question is whether these judicial investigations could really harm the FPÖ or instead serve its popularity.

Judiciary court cases are increasingly been used politically and turned into narratives of unfair persecution that resonate with a public inundated with victim and conspiracy stories. Whether the accused keeps a low profile during the investigations as Donald Trump did, or more offensively like Marine Le Pen, in both cases it seem to have worked for them politically. Trump won the elections and Le Pen is rising in the polls. As long as it can be framed as a victim story, there are votes to win. Benjamin Netanyahu is a master in this, turning international law to his own political advantage. And so is Vladimir Putin. Calling on the courts to disable a candidate ahead of a crucial elections has been a familiar template in his repertoire.

All men may be equal in front of the law but not when it comes to what they can expect as a political dividend. That reality is very different from the times when investigations could suddenly end careers without even a verdict. It did so for Francois Fillon, when an assistant fraud affair came up during the presidential elections campaign when he was leading the polls. We should not jump to the conclusion that this will also be the case for Le Pen or Kickl.

11 December 2024

The better deal

When we heard Sir Keir Starmer talk about getting a better deal from Brussels when he was opposition leader, it felt like Groundhog Day. The better deal has always been characteristic of UK attitudes inside the EU. Margaret Thatcher wanted her money back. Her successor, Sir John Major, opted out of the monetary union and tons of other policies. We do not know of any member state with such a transactions-based definition of its relationship with the EU. It is, in our view, the deep cause of Brexit.

The transactional mindset continues to this day. The British government is still obsessed with the idea of a deal. The EU-UK trade and cooperation agreement, agreed in 2021, is clearly not the final word. There will be tweaks, as both sides are suffering from the fall in mutual trade. It is the EU that is suffering the most, as it runs a massive trade surplus with the UK – of €113bn in 2022. So the EU should have an interest in trade facilitation, and should probably seek to get a better deal from the UK.

The UK and the EU will clearly co-operate in some areas, like student exchanges, and possibly also on defence because the change in the geopolitical situation requires it. We are not holding our breath on some of the more ambitious proposal for a generalised debt-financed European defence union. For starters, defence should not be funded through debt. If countries were to agree to that, the only conceivable purpose would be to disguise cross-country transfer payments, like the recovery fund. We struggle to see a readiness by the EU’s three largest net contributors, Germany, France and the Netherlands to agree to such a deal. Or the UK for that matter. It would not be a good deal, would it? So we are probably looking at joint projects, like the Eurofighter, only more so.

How about financial services? Rachel Reeves attended a eurogroup meeting this week to discuss potential areas for co-operation, giving the City of London greater access to the EU. The EU is, and will remain, reliant on the UK for derivates clearing for example. But the reasons that keep the EU from creating a capital markets union are the same that block further access by the UK. Member states are not letting go of national banking fiefdoms.