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26 March 2021

A ship gets stuck

In Germany people used to refer to an unimportant event as a sack of rice falling over in China. A ship perfectly wedged across the Suez canal has given rise to similar thoughts - until you realise that this strange-looking accident constitutes a major macroeconomic shock for Europe. Germany reminded us yesterday that 9% of its export go through the Suez canal, and a much bigger proportion of its chemical trade. As we saw at the beginning of the pandemic, industrial supply chains are sensitive, even to small disturbances in transportation infrastructure. And this is a big disturbance.

It is not the first blockage of the Suez Canal. During the six-day war between Israel and Egypt, 15 ships got stranded, as FAZ informs us. But this here is of a different scale. Hundreds of ships are stuck. Some are now re-routed to the pre-Suez route around South Africa. That's an extra 10 days of travel. What makes the situation worse is that air transport cannot take up the slack, while demand for Asia-made products is high. FAZ has done the math on container shipping costs - which have gone up from a previous $1500 to $9000. Oil prices has already risen by 6% since the ship stranded. The share prices of shipping companies has fallen.

Even by the standards of modern container ships, the Ever Given is huge. 400m long, it is one of the world's largest. Dutch rescue teams will eventually get it unstuck, but it will take a while until the Suez Canal can be used again, and the backlog of ships clears. The accident will have damaged the canal's infrastructure, which also needs to be repaired before normal operations can resume.

This will be a V-shaped shock no doubt, but coming at a time like this, it is the last thing the trade-dependent European economy needs. Sacks of rice no longer fall over in modern China. But containers that travel from Malaysia do - kind of. 

25 March 2021

An unlikely alliance between Spain and the Netherlands

France might be leading the debate, but other EU member states are weighing in on what strategic autonomy means to them, resulting in some surprising alliances and results.

Spain and the Netherlands published a joint non-paper yesterday, listing 13 proposals aimed at strengthening the EU’s strategic autonomy after the pandemic. The paper challenges prevailing stereotypes about north-versus-south rivalries and reveals some surprising areas of common ground between the two, challenging the dominant Franco-German narrative in the process.

Spain and the Netherlands argue that strategic autonomy should not be protectionist, and should not be linked solely to European security and defence, writing that recent geoeconomic and geopolitical developments have revealed the risks of asymmetric dependencies in a host of strategic sectors.

Specific policy proposals include developing strong competition rules at the EU level to counteract the dominance of digital giants, and stronger regulations on foreign investment in the EU, particularly in sensitive sectors.

The pair recommend that the EU monitors state aid from third countries that could distort the level playing field, and interestingly, suggest that the EU regulate the crypto asset market.

The paper also calls on the EU to expand the number of policy areas that are voted by qualified majority to avoid unanimity stalemates.

Other surprising areas of common ground include an argument that the agreement on the Next Generation EU recovery fund provides an opportunity to promote the euro’s role in international financial markets, as well as calls for a migration policy that is based on the principle of fair sharing of responsibility and solidarity.

The recovery fund’s inclusion is notable because of the acrimonious negotiations required to reach an agreement on the fund last summer. Yet there is growing recognition in the media that at least some of the ideological differences between Spain and the Netherlands came down to political posturing. La Vanguardia attributed Rutte’s hardline frugal approach, which alienated southern member states during last summer’s recovery fund negotiations, to the fact that negotiations were happening in the lead-up to the Dutch elections. Now that Rutte has emerged victorious, he has more political capital and room to manoeuvre, particularly given the surprisingly strong performance of the pro-EU D66 party in last week’s elections.

The joint paper is a positive signal that north-south cooperation is possible, although the policy shifts required to implement its most ambitious policy proposals remain in doubt.

24 March 2021

Outright vaccine export ban still unlikely

The blanket export ban is off the table - despite of what you may read in some reports this morning. The purpose of the discussion is deflection - an art mastered by the rulers of the EU. It constitutes another way of not solving the problem.

FAZ reports this morning that the Commission will now propose a transparency mechanism, according to which countries have to notify the Commission before they impose export bans. But EU countries already have to do this. What’s new is that the countries of the western Balkans, Switzerland and Norway would have to do so too, which is of course irrelevant for the current situation. The Commission is also insisting that an export ban can only be issued if it is subject to reciprocal action and if it is proportional.

We struggle to see a rational purpose behind this discussion. Maybe it is intended to put pressure on AstraZeneca, or to get the UK to share vaccines voluntarily. In any case, we are nearing the end of the period of acute vaccine shortages. Unless a member state, say the Netherlands, applies for an export ban by mid-April, it is not going to happen. Thursday’s European Council will discuss the situation, but will not impose an outright ban. There would not be agreement among EU leaders in any case.

We agree with Werner Mussler’s assessment in FAZ this morning, according to which the EU’s vaccine fiasco reflects the underlying reality of Europe's dysfunctional state. The EU could not have done what Israel and the UK did. Israel handed all health data to the manufacturers. That’s not possible in the data-protection-obsessed EU. The UK put a venture capitalist in charge of the operation.

Inexperience plays a role. But the biggest problem in the procurement delays is the constant need in the EU to co-ordinate between all members. Policy co-ordination works in situation that are purely symmetric - of which there are not many. Vaccination is surely not in that category.

23 March 2021

Get the popcorn out: Karlsruhe may rule on recovery fund

German eurosceptics have been fighting various ECB and EU related policies forever, but here is a case that is potentially interesting. Bernd Lucke, a German economics professor and founder of the AfD, is bringing a potentially disruptive complaint to the court to stop the ratification of the recovery fund. Specifically, it relates to the national law that enables the EU to tap capital markets to raise the money for the recovery fund. The Bundestag is in the final stage of debate of the law. President Frank-Walter Steinmeier is expected to sign it shortly after it is finally agreed. Lucke and his supporters are asking the court to accept their case before Steinmeier signs. It is practice that the German president withholds his signature while a court case is pending.

It is not clear whether Karlsruhe will accept the case, or if does, whether it will accept it in time to stop the law from becoming effective. What we do think, however, is that the recovery fund raises issues under German constitutional law with potentially serious implications for the EU. We don’t see the worst-case scenario - of Karlsruhe actually blocking the recovery fund. What we do see is Karlsruhe imposing restrictions on the German government going forward - as it did in previous EU-related cases. In this case, a possible restriction would be to strike down perpetuation - the notion of the fund as a kernel for a future fiscal union. In the past, Karlsruhe has tended to give the government a high degree of freedom to act in emergencies. But it often restricts the government’s ability to perpetuate emergency measures. Our reading from previous EU and euro-related court rulings is that Karlsruhe believes an EU fiscal union to be unconstitutional. Its view on the matter will depend on whether Karlsruhe will see the way the fund is financed - through joined debt - as constituting a fiscal union in a legal sense. We have argued before that it does not constitute a fiscal union in an economic sense because it is far too small.

Lucke is no longer a member of the AfD. He has founded another political party - calling itself liberal and conservative reformers. The party is irrelevant in German politics. We see it as a vehicle for court cases. At this stage, the legal proceedings have the status of a constitutional complaint. The court has not yet accepted the case. Over the years, the plaintiffs have smartened up. In this case, they are not asking for a ruling against the emergency aid itself, but the method of funding. Lucke argues that the EU is trying to abuse the emergency situation to create a fiscal union through the back door.

Unlike Lucke, we support an EU fiscal union, but we agree with him on the legal issues. We think the notion of perpetual recovery fund is ultimately doomed, for legal and political reasons, and will never produce a fiscal union of sufficient size. What we fear is the hologram version of a fiscal union - the one that allows European politicians to congratulate each other and pretend they have done the job.

In its report on the case, FAZ makes the point that the German constitutional court has acquired a fair degree of legal knowledge on EU monetary and fiscal affairs, including during the long case involving asset purchases. It is possible therefore that they could act quickly - one way or the other.

22 March 2021

Are Nord Stream 2 sanctions too late?

Handelsblatt writes that US administration officials are sceptical that the latest threat of sanctions against companies involved in the Nord Stream 2 pipeline project will have much of an impact. If so, Anthony Blinken's most recent threat of sanction would be for show only - intended to placate the Nord Stream 2 critics in Congress without having much real-world effect. 

Two Russian pipe-laying vessels are working on expedited schedule to complete the missing parts of the pipeline in the Baltic Sea. The question in Germany is no longer if the pipeline is completed but when. Handelsblatt says the current estimate is September.

The paper says the bigger issue is not so much whether US sanctions would stop the pipeline, but to which extent they would damage the transatlantic relationship. One of the potential threats we haven't considered so far is for the US to target Gerhard Schröder personally. As the chair of Nord Stream 2's supervisory board, the former German chancellor could become subject to US sanctions directly - through a freeze of assets and a travel restrictions to the US.

We have to take this report with a pinch of salt. The German media - generally fanboys of the grand coalition - have been supportive of the project, and did not see the international counter-reaction coming. We believe, in contrast to Handelsblatt, that the Biden administration and Congress have the ability to stop this project if they want to. The question is whether they are ready to do what it takes.

Handelsblatt writes that if the US imposes sanctions, a recently created public foundation in Mecklenburg-Vorpommern - with the help of Gazprom money - would become the front company for all the remaining works, because as a public entity it is not subject to US sanctions. It is possible, however, that the US Congress would interpret this as a hostile move and extend sanctions on the German government in that case. That would constitute a massive escalation.

During his visit to Europe, Anthony Blinken will almost certainly address the issue in his talks with Heiko Maas, his German counter-part. He won't get anywhere. Americans underestimate the sheer determination with which Germany pursues this pipeline project, even at the expense of lasting damage to the relationship to the US. The US will need to make a strategic decision whether to continue the current strategy of keeping up appearances, or whether to act. Until Joe Biden branded Vladimir Putin a killer, we expected the former. We are less sure now, but it would be a mighty U-turn if his administration really tried to stop Nord Stream 2.

19 March 2021

A bad day for Nord Stream 2

Something has changed in US policy since Anthony Blinken enraged US Congress with his statement that the US would, for the time being, not impose new sanctions on Nord Stream 2 operators. Yesterday came the U-turn from the U-turn. A day after Joe Biden branded Vladimir Putin a killer, Blinken came up with a statement that the State Department was now tracking everybody involved in this project, with a view to imposing sanctions. Blinken said, in respect of the Protecting Europe’s Energy Security Act:

"The Biden administration is committed to complying with that legislation. The department reiterates its warning that any entity involved in the Nord Stream 2 pipeline risks US sanctions and should immediately abandon work on the pipeline."

In Luxembourg, meanwhile, the advocate general of the Court of Justice of the EU gave an opinion in a legal case involving Nord Stream 1, the existing pipeline, with potentially far-reaching consequences for the new project.

Manuel Campos Sánchez-Bordona rejected Germany’s appeal against a previous ruling in the General Court to annul a sweetheart deal by the European Commission relating to the terrestrial part of the existing Baltic Sea pipeline, which goes from north-eastern Germany to the Czech Republic, bypassing Poland.

In 2009, Germany initially agreed to reduce the output of the so-called Opal pipeline for 22 years as a quid pro quo for exemptions from various EU rules. But in 2016, the Commission gave Germany the go-ahead to increase to full capacity again. Poland has sued against that decision. At stake is an annual volume of 12.5bn cubic metres.

If the opinion is confirmed, it would impact Nord Stream 2 as well, and possibly subject it to similar constraints. That would reduce the commercial viability of the project.

18 March 2021

What's not to like about Green certificates?

There is nothing green about the Digital Green Certificate, which will allow citizens with vaccines to travel throughout Europe this summer. This type of branding borrows a term generally used for environmental policies to square free movement across national borders with a jab from the pharma industry. It also raises multiple legal, scientific and ethical questions.

Legally, it is the first EU framework to allow the sharing of information about peoples' health, as Alberto Alemanno, a legal scholar, pointed out. There will be no EU database, but a decentralised verification of digitally signed, interoperable certificates with QR codes. These digital certificates should record whether the holder is vaccinated, recovered from Covid-19 or tested negative. Information is kept to a minimum: apart from name, date of birth and country of issuance, this certificate will tell us which vaccine has been used and how many doses. For those with tests, either for infection or recovery, the info is restricted to a specification of when, where and who authorised tests.

While the proposal stayed clear of outright discrimination of the vaccinated against non-vaccinated, troubles are likely to emerge in those grey zones. EU member states are to recognise certificates issued by other member states, but conditions are allowed to differ. All member states are expected to accept all vaccines procured by the European Commission, but they are also allowed to add other vaccines. Member states may also differ whether a certificate is issued with only one jab of the vaccine or two jabs. Furthermore, member states may differ when it comes to the validity of the certificates. Some may be valid for longer, inviting all sorts of distortions into the system. The good thing is that the certificate will eventually come to an end once the WHO declares the end of the pandemic. The pressure is now to speed up the process.

Ratification of this new certificate seems to be happening quickly. The EPP already signalled a green light without much examination of the Commission's proposal. The plan is to get the certificate up and running as of June 1. While the Commission provides the framework for the coding, it will be up to the member states to create the infrastructure for reading all those QR codes at the borders. Those different infrastructures will then have to talk to each other. What could possibly go wrong? Also, for some member states this is not fast enough. Austria wants to introduce its own version ahead of the common one. Another headache? 

The WHO also warned that we do not know enough about how effective vaccines are to protect against spreading the virus. It could lead to a false sense of security for travellers in times when others are still waiting for their vaccine. Also, some countries are already discussing whether to use the certificate for theatres, restaurants etc., which would incentivise more people to vaccinate if they want to go out. Antigen or PCR tests cannot be self-administered, which means a certain infrastructure needs to remain in place for those choosing not to vaccinate as long as the pandemic lasts.  These are difficult ethical questions that will come up further down the line. 

17 March 2021

How not to think about crypto

Central bankers hate crypto currencies for good reasons. Undertakers would not applaud the immortality pill either.

But don’t make the mistake of underestimating the enemy. We noted a comment by Frank Elderson from the ECB who said the following yesterday:

"Crypto-assets are volatile. They lack any intrinsic value and there is no reliable institution backing them."

The same, of course, can be said of the euro. No fiat currency has intrinsic value. And volatility is a relative concept. Is bitcoin volatile against the euro? Or is the euro volatile against bitcoin? It depends on how you look at this.

If Elon Musk accepts bitcoin for his cars, if other tech companies follow suit, and if they starting paying at least some of their wages in bitcoin, they will produce closed bitcoin-based mini economies that operate outside the dollar and euro-based worlds. Within such an economy the exchange rate between bitcoin and the dollar does not matter. Of course, bitcoin will never be all-inclusive. Nothing ever is. If you get paid in bitcoin, you will presumably still buy your food in euros. At that point the exchange rate matters. If the value of bitcoin falls, the euro-based prices rise. But that is the same with any currency.

What about trust? Again, be careful. Cryptocurrencies have arisen because people were seeking transaction currencies not controlled by states and central banks. It is distrust that gave rise to them. Bitcoin has operated without interruption since 2009. It would be folly to dismiss it as untrustworthy because it is digital. Just as it is folly to dismiss to dismiss digital art, which is also now using crypto tokens.

There are good reasons to be concerned about cryptocurrencies. The energy costs of mining is one. Strong fluctuations in the bitcoin dollar price, and a potential collapse of secondary infrastructure like stablecoins, could end up generating overall financial instability. We are no experts in the field, but we keep reading reports about potential knock-on effects in case of a bitcoin crash. But these are externalities. Bitcoin and other crypto currencies are not directly affected. For some bitcoin fanboys, financial instability is a feature not a bug.

We think that central bankers and economists by and large underestimate the world of crypto. The origin of this misunderstanding is the failure to appreciate the lack of trust that has given rise to them in the first place. In an age of quantitative easing, it should come as no surprise that a substrata of the population - certainly the younger generation - have greater confidence in algorithms than in central banks and their down digital currencies. It is not the digital aspect they care about. Central bank digital money is not for them. It is about who is in control.

16 March 2021

Forget stability pact reform - for now

The European Commission is right, of course, to propose a reform of the stability pact because the eurozone needs a different fiscal framework as it exits the crisis - and as Christine Lagarde reminded us, also as a tool to make monetary policy more effective. Yesterday it became clear that such a reform is unlikely to happen any time soon.

As FAZ reports, Olaf Scholz told other finance ministers that he saw no point in a discussion about reforming the stability pact because it would only end up fuelling a domestic controversy. There is no need for reform, he said, because the pact had proven flexible enough.

We find this to be a very short-sighted statement because the existing flexibility is due entirely to the fact that we are still in a deep depression, during which the pact is suspended. Once the suspension ends, the rules kick in again. The same goes for Germany’s constitutional debt brake. It is suspended until it isn’t. The reform of those debt rules is not needed for now, but to manage the aftermath better than we did after the eurozone crisis.

The debate goes back to the 1990s. Just before the eurozone started, people were more afraid of free-riding and moral hazard than the kind of crises we are now facing. A much better and sustainable system is one that takes a broader view of debt sustainability, together with a more qualitative assessment of public finances in general. We can confidently predict that this won’t happen, barring some huge political change in Germany, where you would need a two-thirds majority in parliament in favour of constitutional change. Without a reform of Germany’s fiscal rules, there won’t be a reform of the stability pact.

The FAZ report gave a good rendition of the difficulties EU member states will face when they exit the crisis. The European Commission is proposing extending the exemption from the stability pact for 2022. In its first draft, the finance ministers welcomed the statement, but that draft was later changed to a different wording. This clearly suggests that not all finance ministers agree on this point.

15 March 2021

Letta's promise of a return to the past

The big contribution Italy can make to Europe is not by being being pro-European in some general sense, but by fixing the country’s multiple economic problems. The PD has always been the most pro-European of Italy's large parties. After the resignation of Nicola Zingaretti, it elected Enrico Letta, the former prime minister, to be its general secretary. Letta won in a vote of 860 party delegates in favour, and 2 against. It is fair to say that Letta is not a grassroots campaigner, and this was very much a top-down appointment, old-style. And yes, he is as pro-European as they come in Italy.

There is another interesting Italian political story playing out right now that might end up more significant than the next leader of the declining PD. The mayor of Milan, Beppe Sala, an independent who is supported by the PD, has joined the Italian Green party. Italy has been a desert for Green politics in Europe, but the fall-out of Five Star and the PD’s inability to modernise strongly plays into the hands of fledgling Green movement. 

At the PD, meanwhile, Letta signalled an ambition to re-create the olive tree alliance, a united left that governed on and off from 1995 until 2008, mostly with Romano Prodi as leader and prime minister. These were the glory days of the Italian left. As Corriere della Sera reports, Letta came with three big ideas to this job: A campaign in favour of birthright citizenship, or ius soli. He opposes what is known in Italy as transformismo, which relates to centrist coalitions to isolate the left and the right. And he wants electoral reform. We agree with him on the first two - except that we would not have picked them as our main campaign theme at a time when the country has bigger problems. We understood what Matteo Renzi wanted when he became prime minister, albeit only for a brief moment. During his year at Palazzo Chigi, it was never clear to us what Letta wanted for Italy. He was certainly no reformer. His current list of priorities reminds us of that period.

His big idea is to unite the left, as Prodi did. And then to negotiate with Five Star as the united party. That may well turn out to be the right way forward tactically. The trouble is that Five Star, too, is crowding into the same centre-left niche of politics. It is far from clear that Letta will outshine the relatively popular Giuseppe Conte, Five Star’s leader.

We find it unfortunate that pro-Europeanism these days is often associated with status quo and a leadership that defines itself on the past. The big prize in Italian politics will go to a modern pro-European party that will get Italy out of its 20-year economic slump. We don't expect that this will be the PD or Five Star.