We use cookies to help improve and maintain our site. More information.

9 September 2021

Will Italy succeed?

Mario Draghi certainly brought more optimism among investors about Italy’s future. We know that confidence can generate a dynamics of its own. One of the lessons of economic reform in the 21st century has been that reforms can unleash large self-sustaining effects.

But market psychology needs to be complimented by real changes on the ground over a longer period. At the end of the day, the job is to raise Italy’s dismal productivity growth. It is through productivity growth that we will measure the impact of the recovery fund, and its two inter-linked components, investments and reforms. No political PR exercise will trump that metric.

The head of Italy’s Confindustria, Carlo Bonomi, has just declared Italy and Germany the growth engines of this decade. That may be at the optimistic end of the scale of expectations for both countries. It is likewise possible that Italy forges ahead on its own - the continuation of football by other means - using the opportunity to catch up with the others.

In both countries, the outcome will depend on politics. A red-red-green coalition in Berlin could trigger market downgrading, and produce a hostile environment for businesses. There are also plausible political scenarios for Italy, post-Draghi, that may not be conducive to growth, like a populist coalition of the right.

Our sense is that commentators seem to underestimate the sheer volume of the task, which was underlined by the OECD’s country survey this week. The to-do-list remains massive. And as we keep pointing out, the real difficulty with structural reforms is to implement them on the ground, which takes time. If you want a structural reform programme, don’t tick off boxes. Been here, done that. It doesn’t work like that.

Fixing an overblown public administration and a dysfunctional system of jurisdiction in civil cases constitute massive reforms that will invariably run into opposition. Throwing money at the problem could help in some cases, but may be detrimental in others. Hiring some 10,000 more judges would solve the judicial problem if the issue was a lack of staff as the judiciary claims. If the issue is an abuse of judicial independence, hiring more judges would be counter-productive. The whole point of structural reform is to change how systems work. More money is not structural reform.

Success or failure of Draghi’s reforms will not become fully visible until after he leaves office. He could be succeeded by another technocratic government that relies on a centrist coalition and that prioritise implementation. Another plausible scenario is a coalition between the Fratelli d'Italia and the Lega. The populists have so far done less harm than some of us feared. They are no longer talking about euro exit, for example. This makes them no less dangerous. On the contrary, they may have just smartened up.

8 September 2021

No, this will not sink Boris

Economically, the UK’s £15bn increase in national insurance contributions to pay for the NHS and social care is unlikely to be a big deal. Both systems are efficient but under-funded. And while the UK has long ceased to be the low tax paradise it was during that later Thatcher years, taxes and especially social charges are much lower than they are on the continent. The choice of national insurance, as opposed to tax increases, can be criticised because it is regressive. It is shared by businesses and employees. It comes in addition to an already announced increase in corporation tax from 19 to 25% in 2023.

So what about the politics? It constitutes a violation of the Tory manifesto pledge not to raise taxes. We suspect that Boris Johnson’s counter-argument will be ultimately persuasive: the pandemic wasn’t in the manifesto either. The Brits strongly support their NHS, and giving more money to the NHS is hardly a vote-losing proposition.

Robert Peston reminds us of another important aspect of this policy. Under the UK’s complex devolution rules, Scotland is in charge of income taxes, but national insurance is a UK-wide levy. The decision to raise NI contributions will therefore guarantee a punch-up with the SNP, as he puts it. This in itself will consolidate Tory support in the south.

We also agree with him on another, more marginal point: that Dominic Cummings' prediction of Johnson’s downfall constituted wishful thinking. There is a whole op-ed industry that makes a living with predictions of Johnson’s coming demise. We suspect that this industry may be alive and kicking for another ten years. There is nobody in the Tory party who could take over from Johnson. Many MPs owe their jobs to his strange voter appeal. As of now, we also don’t see that Labour Party, and its leader Sir Keir Starmer, do some real damage. Johnson is a lucky leader. Political luck eventually runs out - as the CDU just experiences in Germany right now. But the precise moment is always hard to predict.

6 September 2021

Back to Heidelberg

The reality of Brexit still has to sink in every walk of life. As the new university year starts, one reality is becoming all too apparent: the number of German and European students in the UK has dropped dramatically since Brexit - because of the higher student fees and the need for student visas. Few European students can afford the international student fees of the top UK universities. The number of first-year German students in UK universities has dropped from 1600 to 800. The fall in EU students is even higher: down from 27,750 to 11,700.

We are not sure that the sudden fee equalisation of EU and international students is such a good idea - from the UK's perspective. It is an open secret that it is easier to get a contested place in a university when you are from China and can afford to pay £40,000 a year. As so often in life, there is a price when people stop asking questions. We know from first-hand experience in Oxford that the community of EU students and academics play a big part of university life. Their number will invariably drop off in the future. We expect the numbers to see a further drop once the international student fees are actually imposed.

There is another factor at play. The times when degrees from prestigious universities automatically translate into prestigious jobs are coming to an end in any case. The traditional bastions of the elite university employment market - banks, business consultancies, civil service and politics - have all been in the process of opening up, even in the UK. An additional factor for European students, is that degrees from UK or US universities would not in general give you a head-start in the job market, with some exceptions like Italy. We expect that UK universities may find that the higher fees give rise to adverse selection, a phenomenon known in economics.

The world of learning is also no longer the same after the pandemic. We expect that one of the lasting impact of the lockdowns will be a re-evaluation of universities and what they offer. A year of distance learning has made it transparent what is and isn’t being taught. Well endowed universities should have a competitive advantage in this area too, but it does not take a lot of money to convey high quality information online. The university marketplace, too, has become flatter during lockdown.

3 September 2021

Muddled thinking on defence

The reason why Annegret Kramp-Karrenbauer failed as CDU leader was a tendency to shoot from the hip. As defence minister she can do this with real ammo.

Yesterday she fired a shot in the council with a call for a rapid reaction force at EU level as a lesson from Afghanistan.

The obvious question to ask is what difference would this have made? Europe’s defence strategy, important as it is, is completely unrelated to what happened in Afghanistan.

Concretely, she is proposing the use of Art. 44 in the Treaty on European Union, a clause that has never been invoked before. It says that

...the Council may entrust the implementation of a task to a group of Member States which are willing and have the necessary capability for such a task. Those Member States, in association with the High Representative of the Union for Foreign Affairs and Security Policy, shall agree among themselves on the management of the task.

Under the Art. 44, the agreement has to be taken with unanimity, but if approval is given, any subset of countries can forge ahead without fearing further vetoes in the Council. Josep Borrell, the High Representative, suggested a rapid reaction force compromising of 5000 troops.

Ulrike Franke did a great job debunking this nonsense in a article for the European Council on Foreign Relations:

Europe’s problem in Afghanistan was not one of capabilities. Europeans may not have had the capabilities – but they did not have the will to stay in Afghanistan any longer than the US did. The reason Europeans did not continue the Afghanistan mission without the US, and the reason why they did not secure the airport without the Americans, is that they did not want to, because it did not make sense for them.

The trouble with European integration nowadays is that it is built on half-baked ideas such as this. One would have thought that people would first want to fix their half-baked monetary union before rushing into a half-baked defence union. But, apparently, no.

2 September 2021

Progress through crisis? Not really.

If there is one single issue where we at Eurointelligence have disagreed with the policy consensus in Brussels more than anything else, it is the notion of an informal, non-constitutional path towards European integration. The response during the euro area’s sovereign debt crisis and during the pandemic was based largely on ad hoc cooperation and ad hoc institution building. We have the ESM, a dysfunctional banking union, and now a recovery fund that is hailed as a precursor to a eurobond. Yet we have an unchanged treaty that lacks the constitutional basis for a political and economic union. The German constitutional court is quite right to assert that sovereignty rests with national electorates right now.

In our continuing series on Europe’s constitutional future, we picked up on an article by Stefan Auer and Nicole Scicluna. While we cannot ever do justice to a long essay in a short briefing, we can nevertheless pick up one pertinent point we think is worthy of discussion. In their essay the authors put their fingers on what we consider the most important question of European integration of our time: whether the various exceptional measures taken over the last decade during consecutive crises could ever be brought into a future constitutional framework.

Like ourselves, the authors are highly sceptical of what they call celebratory accounts of crisis as opportunity. We have written about the wishful thinking that lies behind the praise of the recovery fund as a future eurobond. Auer and Scicluna argue that a long-term consequence of this mindset will be the erosion of channels of democratic accountability in ways that cannot easily be undone. In other words, pro-Europeans, like ourselves, will at one point face a choice between advocacy of European integration or democratic accountability.

Advocats of a federal Europe face the greatest opposition not from eurosceptics - the devil we know - but from pro-European functionalists, who reduce the EU to an intergovernmental forum. They have no ambition for constitutional reform. They regard democratic legitimacy a non-issue, and see the institutional and legal part of European integration as largely completed.

We ourselves have become increasingly sceptical of the functionalist perspective if only because it is not functioning well: the EU’s diversification from its core competence like trade and single market have by and large not been successful. The monetary union brought austerity and a scale of underinvestment many times of the size of the recovery fund. Europe’s voice in the world is much diminished nowadays.

While our focus has been on the economic side, and more recently on the Next Generation EU programme, the authors come to the same conclusion, but on a larger scale. We share the authors'

reservations about the viability of constitutionalising emergency powers at the supranational level, all the while acknowledging that such powers would be required for the EU polity to function effectively in bad times as well as good.

An important question to ask at this stage is what will happen if the constitutional reforms fail? It is quite possible that pro-Europeans like ourselves will be asking serious questions about whether European integration would still be morally justified if the EU were to wield sovereign powers without a proper legal and constitutional framework. We have moved beyond the old pro- or anti-Europe argument. This is an argument about democratic accountability and the challenges of the 21st century.

1 September 2021

Rule of law? Not for now.

There is an awful lot of huffing and puffing about the Commission’s reluctance to trigger a rule-of-law procedures against Hungary. It was back in September when Angela Merkel, in her role as holder of the council presidency, cut a deal with Hungary and Poland. They would lift the veto on the budget and the recovery fund, and Germany promised that the rule of law procedure would not be used until the CJEU casts a ruling on the mechanism. This is expected to come towards the end of this year. We also cannot see Merkel in particular supporting a rule-of-law procedure in the council. Without German support, it would be hard to assemble a qualifying majority for enacting the procedure.

So why did the European Parliament agree to what we at the time and others criticised as an evil compromise? The answer is that everybody was afraid of holding up the recovery fund. The vote, which took place in December, was 548 MEPs in favour, 81 against, 66 abstentions. Did they honestly believe that the European Commission, who is headed by a close ally of the German chancellor, would instigate a rule of law procedures within a few months of this agreement?

MEPs profess shock by the lack of action. Ursula von der Leyen wrote a cynicial letter to Davide Sassoli, president of the parliament, that MEPs had not provided enough evidence for the Commission to act. The resolution did not refer to any concrete cases, it said. MEPs are fuming that the Commission is invoking procedural errors. The letter had a certain got-you-on-a-technicality quality to it.

We are witnessing a rather low-grade political drama playing out between a Commission that has at present no intention to invoke the mechanism and a European Parliament that desperately tries to claim the moral high ground.

Once the CJEU has ruled, Germany will have a new government, or maybe a bit later, a government that will not feel obliged to honour whatever Merkel may have promised Viktor Orbán in private. We are still doubtful, however, that the rule-of-law procedure will ever become a significant instrument. If they use it, it will be mostly symbolic.

31 August 2021

Quantifying biodiversity

Last week the Banque de France published a working paper examining biodiversity-related financial risks. The authors found that 42% of the value of bonds and equities held by French financial institutions comes from issuers that are highly or very highly dependent on one or more ecosystem services. These aredefined as the connection between an ecological function and an actual or potential socioeconomic benefit for humans. In other words, nature's contributions to people. They can include the provision of food, fuel, drinking water and pharmaceutical ingredients, pollination, air quality and erosion control, or tourism.

The paper also found that the accumulated terrestrial biodiversity footprint of the French financial system is comparable to the loss of at least 130,000 sq km of pristine nature, and that this number is rising by an estimated 4800 sq km annually. Citing a 2014 study, the paper notes that the annual value of ecosystem services, including drinking water, food, and pollination, is estimated at $125tn, or 1.5 times global GDP. 

The working paper is interesting because it is a green study that is not focused entirely on climate change, decarbonisation and extreme weather events. Climate change features as the third most important driver of biodiversity loss, after land and sea use change and direct exploitation, and the authors draw a clear distinction between the two concepts, demonstrating that current models of green thinking are incomplete. Critically, they note that:

"positive feedback loops can take place between biodiversity loss and climate change. For instance, deforestation caused by climate change might not only cause irreversible damage to local ecosystems but also dangerously exacerbate climate change by releasing even more CO2, which could in turn cause even moredeforestation (e.g. through increased droughts and fires)."

The authors go on to argue that solving one issue does not automatically lead to solving the other, as is often believed.

We think it’s an important argument, and one that has not yet filtered into mainstream thinking on climate change and the green transition. As we’ve previously written, efforts to reach net zero emissions can have catastrophic consequences for biodiversity. Electric vehicles are meant to replace internal combustion, wind turbines to replace coal-fired power plants, but the raw materials required to grow these industries means new mining projects and increased exploitation of natural resources. Important to consider as we barrel towards Fit for 55.

27 August 2021

Kabul bombings and moral dilemmas

The suicide bombings at Kabul airport are just the beginning of a worst-case scenario now unfolding - that will confront the west with some tough moral choices. At least 13 US service members and 60 Afghans were killed yesterday. The Afghanistan-based offshoot of the Islamic State, ISIS-K, claimed credit. It is unlikely to be the last bombing attempt at Kabul airport in the last days of evacuation efforts. There are still about 1000 US citizens left in Afghanistan. 

Terrorists and extremists are competing over who is forcing the US out. This bombing is a first taste of what lies ahead in the years to come. How to rely on local intelligence to avoid terrorists achieving their goals without any people on the ground? Terrorists and extremists will do what they can to re-ignite the conflict between the US and the Taliban, warns William Wechsler at the Atlantic Council. This way they can claim victory too.

Joe Biden insists that the US will not change plans and will continue to evacuate until August 31. More attacks are to be expected. Who will look after the security at the airport gates after this attack on one of them? What if the airport gets destroyed? There is no plan B for the evacuation from Kabul airport. 

Another moral dilemma for nations evacuating their people from Kabul is that they left many behind. Germany alone had 100,000 requests but only got out about 5000 before they stopped all flights yesterday, Handelsblatt reports. Those left behind risk losing their lives or becoming a target for ransom kidnapping. 

Now everyone talks about Afghanistan, will they still talk about it next year? Or will Afghanistan then only be known in Europe for refugees and terrorists? To do what is morally right has never been an easy path. European countries will have to make some tough choices.

26 August 2021

Poland won't budge

Things are going from bad to worse for asylum seekers caught in the crossfire of a conflict between the EU and Belarus. UNHCR, the UN refugee agency, has waded into the debate after a group of around 30 asylum seekers were pushed back from the Polish border, but refused re-entry into Belarus. They have been camped on the border with no food, water, or medication for days.

UNHCR urged Poland to offer medical and legal support to the group of trapped migrants, arguing that while states have the legitimate right to manage their borders in accordance with international law, they must also respect human rights, including the right to seek asylum.

Euractiv reports that Poland, Lithuania and Latvia have all reported a sharp increase in asylum seekers entering from countries such as Iraq, Somalia and Afghanistan, and authorities have accused Alexander Lukashenko of using these would-be refugees as weapons in a new hybrid war. As we wrote earlier this week, Lithuania plans to complete a 550-km border wall by 2022, and is calling on the EU to help finance the project. Poland, too, is now building its own 2.5-metre high border wall, and recently doubled the number of troops it had stationed along the border with Belarus, to 1800 in total.

It’s not just the UN sounding the alarm: The Helsinki Committee for Human Rights and the Polish Human Rights Ombudsman have both sprung to action, requesting the European Court of Human Rights to take temporary measures to ensure migrants’ safety, and criticising Poland’s border guard for violating the Geneva Convention by not accepting verbal declarations from some of the migrants that they wanted to apply for international protection in Poland. Another NGO, Salvation Foundation, warned yesterday that one member of the group is on the verge of death, and that 25 in total are unwell.

But Mateusz Morawiecki, the Polish prime minister, has already said that while he sympathised with the migrants, they are a tool in the hands of Lukashenko and Poland will not succumb to this type of blackmail.

It’s worth noting that the new migrant wave that is so concerning to Polish authorities amounted to 2100 people who tried to enter the country in August. Of those, 800 have been sent to government detention centres.

24 August 2021

Some vaccination math for the EU

There are cases when data lead people to make wrong inferences. One such data set, in this case from the UK government, suggested that of those 50 years and older who died from the delta variant, 61% were fully vaccinated, while 39% were either unvaccinated or only had one one shot. It would sound like a case a against vaccination, but not really. Among those who are 50 years and older, 94.5% were fully vaccinated, while 5.5% were not. So the unvaccinated constitute 5.5% of that age group, but account for 39% of the deaths. That’s a factor of 7.

These data would suggest that vaccination is highly effective in protecting older people from death and severe illness. What these data are not telling us is the number of people who die as a direct result of the vaccine itself. Unsurprisingly, there are no reliable data on this in the UK. But the Paul-Ehrlich Insitute in Berlin, which blew the whistle on the Astra-Zeneca side effects, calculated that 1028 people in Germany have died in connection with a vaccine. There have been reports of strong side effects and complications from vaccines in 107,000 cases, a ratio of 0.2%. Not all of the 1028 people who died after receiving a vaccine will have died because of it.

Even if you take the most pessimistic interpretation of the German vaccination death data - a causal relationship of 100% - they would suggest a fatality ratio from the vaccines of at most 0.002%, which is significantly lower than the fatality ration from Covid-19 for the over-50 year olds. However, the reported figure of 0.2% of serious side effects should not be underestimated.

One reason the UK scientific advisers are cautious about advising vaccination for children are studies showing potentially serious side effects. The US Centers for Disease Control and Prevention found that of 8.9m children between 12-17 years had received the Pfizer vaccine, 9,246 had adverse reactions, a ratio of 0.1%. 14 children died from arrhythmia, a heart condition. For children, unlike for older adults, the case for a vaccination is more complex.

Another important statistic to bear in mind is that vaccines do not protect against the spread of the virus as much as people thought. An Oxford study showed that the effectiveness of the Pfizer vaccines had halved after four months. Studies from Israel showed similar results.

From those data, we would be ready to draw the following lessons for policy:

The first and most important is that vaccines are highly effective against death among older people. In the age group of the over-50 years, 95.5% of Brits are vaccinated, but less than 80% of Germans. It is the vaccination rate of that age group that matters the most. Continental European countries have caught up with the UK in overall vaccination rates, but this is in some cases due to the vaccination of children. The current fast spread of the delta variant is therefore quite serious because it comes at a time when a lot of vulnerable people are still unprotected.

The second is that the case for mandatory vaccination is not strong because the vaccine does not offer great protection against the spread of the virus. They are, however, effective in protecting against illness and death. It should therefore be an individual decision whether to take the vaccine.

A third consequence of that observation is we should not give up on testing. Some EU countries are starting to discriminate against tests in order to drive up vaccination rates. Germany will end the subsidies for tests. In Italy, we noted that the experience of testing is rather complex and unpleasant. That may not be such a smart policy move.

And finally, a fourth observation is that the case for the vaccination of children is far from clear based on the data.