The current budget debate in the French National Assembly resembles a filibuster. The plenary has 3700 amendments to go through until its debate closes this Friday. Even if they add another working day on Saturday, it still means that they would have to vote through 70 amendments per hour. An impossible task!

About 45% of amendments come from the centrists and the conservatives. Eric Coquerel, chairman of the finance committee and a member of the left-wing La France Insoumise, asked the speaker of the house to speed up the debate by grouping amendments under the same subject and voting only once on them. This may not be enough to speed up time. If they manage to get through, Michel Barnier could still trigger Art. 49.3 of the constitution if the nature of the budget is different from the original, as it had been the case in the financial committee.

The budget process is a time-critical matter in France. From the first day of submitting the draft budget to parliament, both chambers have 70 days to adopt it. If the assembly fails to vote on the budget next Tuesday, the budget bill will go to the Senate in its original version. The government may decide to upgrade this version with adopted amendments from the assembly before it does. The Senate, dominated by the conservatives, then has 15 days to adopt its amendments. If it fails to vote on the budget, the original version, or one that is modified by the government with adopted amendments, goes back to the assembly under an arbitration procedure. If the budget is a neither adopted by a joint committee nor both houses before the end of the year, the government can implement the budget by simple decree according to the constitution. This has never happened in the Fifth Republic. The government could also choose to present a new budget, but the timeframe is tight before the new fiscal year begins.

At any stage of this budget process, Barnier could use Art. 49.3 to impose the budget without parliamentary approval to make sure the state is ready for the next financial year. At this moment, Michel Barnier shows no interest in triggering Art. 49.3 and stopping parliamentary debate from unfolding. Those amendments could be useful to him politically. His government may cherry-pick their way through those amendments to upgrade the budget and present it as an offer that opposition parties might find difficult to refuse. After all, Barnier has a minority government and needs opposition votes to pass the budget.

This is a situation of fluid dynamics between parties and personalities, dominated by ambitions of potential presidential candidates. It deprives Barnier of solid support from his coalition partners in the assembly. Hopefuls think that they can do better than this and throw their nets out. Be it Francois Hollande or Gabriel Attal, Gérald Darmanin, or Laurent Wauquiez, all of them have the 2027 presidential elections in mind. Will Barnier trump over this chaos or go down in a messy process where no one seems to care about the costs for everyone? French policymakers may still be under the illusion that solid majorities can be won in elections if only the right candidate leads the way. But reality may be more humbling for those hopeful candidates. Coalitions and minority governments could become the norm, not the exception. This means a totally different game for parties and politicians.

Ahead of the visit of US envoy Amos Hochstein to Lebanon, Israel presented its conditions for a diplomatic solution to allow displaced people from both sides of the border to return to their homes. Israel wants the right of active enforcement, that is the right to strike whenever they deemed necessary to prevent Hezbollah from rebuilding its capacities. The second condition is that Israel’s air force has freedom of operation in Lebanese airspace.

Both conditions would be a violation of Lebanon’s sovereignty and contravene UN resolution 1701. The Lebanese government instead pushes for a solution based on 1701. Hochstein though sets a different tone in his first press conference  saying that resolution 1701 has never been fully implemented since it was adopted in 2006 after the war and that more will be required to guarantee that it will be implemented this time. As for diplomatic efforts on Gaza, Anthony Blinken is in Israel today to push the government for seizing this opportunity after Sinwar’s death to negotiate a deal with Hamas for the hostage release. Expectations are though low that anything meaningful can be achieved ahead of the US elections.

In this political vacuum, Israel is dictating the conditions for peace by force in its neighbourhood. After eliminating the leadership in Hezbollah and Hamas, they are now targeting the financial institution that Israel linked to financing Hezbollah. A leaked US document suggests that Israel’s military is preparing for a retaliation strike against Iran. Israeli settlers, meanwhile, put up makeshifts at the borders to Gaza with their plans to resettle into Gaza. If Israel prepares to stay in Gaza, where should the Palestinian civilians go? This way Israel will not be accepted as a partner for peace in the region.

There have been many diplomatic attempts by the US administration but nothing has stopped Israel’s government from pursuing its course with the elusive aim of completely destroying Hamas and Hezbollah. The Israeli military may put an end to this war, as the costs of fighting on multiple fronts are rising by the day. But we are not there yet.

Joe Biden paid lip-service to Palestinian rights, but without visible changes, those remain empty words. There are still no consequences for Israel for violating international law. At most, the US posed an ultimatum for Israel to allow aid into Northern Gaza within 30 days or else risk suspension of weapons deliveries. Some aid trickled in, enough to dispel the threat but not enough for the people there, according to the UN. Precious opportunities to end the war have been lost. Will the US elections change this? Kamala Harris finds good words but how can she act more forcefully if Biden could not deliver? Donald Trump is more likely to strike a deal. And this is what Benjamin Netanyahu hopes for.

From the EU there is no leadership whatsoever. For historic reasons, this is difficult for Germany, Israel’s closest ally in Europe. But one year after 7 October attacks, Germany has to decided what the so-called Staatsräson means, other than a blind-eye backing of Israel. A slight change in tone will not be enough, nor will hidden delays in arms deliveries. The current German coalition government will soon be history, but its foreign policy failures to strike a balance between backing international law and support for Israel will last for generations to come. France is best positioned to take over a leadership role. But Emmanuel Macron is weakened internally and is also unlikely to inspire leadership on this issue inside the EU. Spain and Ireland are most outspoken, they have both recognised Palestine and push for the EU to suspend the trade deal with Israel, but they lack influence in the EU.

Nobody is talking about the two-state solution any more. Yet we see it as the only way to guarantee sustainable peace in the region. The two-state solution is also the only foreign policy goal all EU countries can agree on in this conflict. This is what most diplomatic efforts should go into. It is the long-term solution to this war, taking the air out of terrorism and preventing future wars from emerging in this region.

The race in the US presidential elections is, and has been, too close to call – and that was so even before Joe Biden decided to stand aside. At no point in this campaign has one candidate established a lead over the other that would fall outside the polling error margin.

And yet, in Germany for example, 72% of the respondents are predicting a Harris victory according to a ZDF poll. It is not as though as they have superior intelligence about county-wide voting intentions in Pennsylvania or Michigan. We are not saying that 72% of Germans are necessarily wrong. If a race is too close to call, anyone can win. The point is that you cannot arrive at this conclusion based on the information that is available.

When a poll says 52-48, it means a draw. For a bog-standard opinion polls of some 1000-2000 respondents, the error margin is usually between 2-3% of either side of all numbers. The reason why exit polls are usually very accurate is that they are polling some tens of thousands of actual voters.

The reason they have Harris so strongly in the lead is because of the news reporting. We see this in the UK too. Media bias is a source of misinformation, and a cause of poor judgements. This is how it affects politics. If 72% of Germans believe in a Harris victory, they will not support policies to make Europe more independent of the US in defence and commerce.  

The death of Yahya Sinwar, the leader of Hamas, presents Israel with a choice between two very different future pathways, between more war or a peace plan. Now that the leaderships of Hamas and Hezbollah have been destroyed, Israel’s government could conclude that it has achieved its major goals, and can end this conflict. This would require as a first step agreeing to a cease-fire in Lebanon and letting aid into Gaza. 

If Israel decides to continue its operations in Gaza and Lebanon, escalation of the conflict in the Middle East becomes a possibility. A visit of the Iranian foreign minister to several Arab states over recent days is a reminder that normalisation with Israel cannot be taken for granted. Arab leaders benefit from the destruction of the two militia groups, but they have to balance this carefully with the public outrage over Israel’s attacks on civilians.

There is also a risk that Israel overplays its card on deterrence. A peace plan is about avoiding the next generation of Palestinians launching an attack similar to 7 October. It would need to get to the roots of the problem and take the oxygen out of any future violent resistance. Sinwar and Hassan Nasrallah are replaceable as long as the idea of a resistance prevails. Lasting deterrence will require a complete change of narrative in Israel. Without a two-state solution that would give Palestinians back their rights, peace remains fragile. European leaders and the US have their role to play.

It is worth looking at the autumn forecast for Russia by the Vienna Institute for International Economic Studies, one of the best sources of economic information for central and eastern Europe. They upgraded their growth forecast for this year by 0.6pp to 3.8%. Russia is outgrowing all western economies, including the US. Growth is forecast to slow down to 2.5% next year because of the impact of a 19% interest rate. It is clear that Russia’s economic expansion is a classic case of a wartime Keynesian effect.

It is also interesting to contrast Russia’s economic development with that of Ukraine’s main supporters in Europe, which have entered into synchronised austerity, first in Germany, and now in France and the UK.

Russia’s fiscal stability is perhaps the biggest surprise. Defence spending is on trajectory towards 6% of GDP. And yet, the 2024 budget deficit is projected at 1.5%, falling to 1% in 2025.

Vasily Astrov, the Russia expert at WIIW, concludes that Putin will have money for the foreseeable future to continue financing the war against Ukraine. A rise in income and corporate tax has meant that Russia’s state finance will become less dependent on energy.

But he also notes that the US sanctions against third-country banks that helped Russia circumvent the sanctions are starting to have an impact. This year, Russian goods imports have fallen by 8%, due to the fact that banks are delaying or refusing to process payments. Russia is working frantically to establish alternative payment systems, and barter transactions are also flourishing. But there may be a time inconsistency at some time. We agree with Astrov’s projection that the funding situation is stable for the foreseeable future. Beyond this, we cannot project anyway.

Financial sanctions are ultimately not as successful as their advocates once believed because money is not a natural global monopoly. International banks are certainly susceptible to US dollar sanctions. But not all banks in the world operate in dollar markets. The use of secondary sanctions has become a first-order instrument in the US’s diplomatic toolkit in this century. But it falls into the category of instruments which lose their value the more you use them. Even amongst US economists, we see a lot of complacency about this. It was friction combined with network effects that favoured the emergency of a single dominating currency – the pound sterling, the dollar later. The danger to the dollar is not the euro, or renminbi. It is that micro-channels are becoming viable as technology reduces the frictions.

Something we didn’t know until yesterday is that the German state of Saxony has a constitutional rule according to which new elections would automatically be triggered if no government is formed after six months. That rule has never been triggered, but it might be now. Sahra Wagenknecht is running down the clock. The only way for CDU’s state premier Michael Kretschmer to form a government would be in a coalition with the SPD and Wagenknecht. The CDU has a political firewall against the Left Party. Without that firewall, he could in theory have formed a coalition with the Left Party, the SPD and the Greens. For the CDU that is not a political option, so all they are left with is Wagenknecht. The irony is that her positions are far more extreme than those of the old Left Party.  

Bild writes that if there is no deal by February, many recently elected MPs will want to avoid new elections at all costs – so there might be some multi-partisan agreement on a new premier. In Germany, the votes for chancellors and premiers are always secret. That could bring the AfD closer to power. The Saxony wing of the CDU is more open towards a deal with the AfD than the nationwide CDU and Friedrich Merz. AfD and Wagenknecht have no majority in the state either.

If the final decision was left to parliamentarians, we would not be surprised if members of the state assembly would agree to vote for a candidate who might be open to a confidence and supply agreement with the AfD. That would be a massive problem for Merz.

We keep saying that we should not extrapolate the current polls. A lot can still go wrong in a year. The politics of Saxony is one of the more foreseeable accidents.

One of the most serious, and intractable, socio-economic problems Europe faces is its demographic situation. Some countries are doing better than others. But across the continent, birth and fertility rates are below what they need to be to prevent slow population decline. This creates an obvious source of fiscal pressure, as a decreasing number of young people have to pay for more old dependents. But it also has social effects – an ageing society can bring ageing attitudes.

Politicians often like to draw a contrast between growing populations through so-called natural increase, i.e. boosting birth rates, and doing it through immigration. But the two are actually interlinked. This is because, as Federico Fubini has pointed out recently in an excellent piece, once your birth rates have been low enough for long enough, the number of children any young person has matters less. After a couple of generations of fertility decline, there will simply be fewer people around to have them.

Fubini looks at this with reference to Italy, which has one of the longest-running and most severe demographic problems in Europe. Now, more than before, it is not necessarily caused by how many children each woman is having, which has stayed stable for the last 30 years or so. The problem is that there are fewer women who are young enough to have children around in Italy. That number peaked at about 12.6m in 1991, compared to 9.4m as of 2023.  

This is not a situation that some other European countries will experience as badly as Italy has. A few countries, like France, the UK, and Sweden, experienced a mini-baby boom around the 2000s. It temporarily brought total fertility rates in these countries close to so-called replacement levels, the necessary number for stable long-term population growth. In doing so, it has now bought them a bit more time. But this happened at least partly because people who weren’t born in these countries having children there.  

But Italy is still not the only country in this situation. Germany has spent even longer in the demographic sink than Italy has. Its total fertility rate hasn’t been above replacement levels since before 1970, according to World Bank data. Germany also did not experience a mini-baby boom in the early 2000s. German politics’ own immigration omerta is how it will manage to keep its working-age population stable in the long term without more foreigners coming in, and settling to have children.  

We have been arguing that as a policy prescription for Europe, the Draghi report is as good as it will gets. If the EU followed this advice, the situation will be markedly better in five years time.

For us, the main issues in the EU are massive capital misallocation towards old industries and a lack of public sector investment in some large EU countries. We agree with Olivier Blanchard and Angel Ubide that the report’s title, The Future of European Competitiveness, is a misnomer. Draghi’s report really focuses on productivity.

The EU has traditionally always framed its economic policies in terms of competitiveness. This start with the Delors White paper in 1993, entitled Growth, competitiveness, employment. The obsession with competitiveness peaked during the Barroso years. The problem with framing your economic objectives in terms of competitiveness is the lack of clarity on what that means. The macroeconomic indicators of competitiveness are the real exchange rate and the current account balance, which would suggest that the EU is, if anything, too competitive.

If, to cite a concrete example, Volkswagen is struggling to compete in China, this is due to its failure to invest in 21st technologies. Our capital markets do not reallocate money to companies that would have made better investment decisions. This is why we are banging on about the importance of a capital markets union - a real one that breaks the oligopolies.

The question on our mind right now is what will happen if the EU addresses a productivity/innovation problem through a competitiveness-focused agenda. We think that the centre-right majority will try to do this. This means that they will double down on what they have been doing in the past, and shift even more funds to old industries, through a combination of higher debt, and lower public sector investment. Just witness the absurd subsidies Germany is paying out to the semiconductor industry, with the goal of securing the supply chains of the car industry.

In Germany, this is exactly what the CDU wants. They are talking about the welfare reforms of the first decade that ended up reducing wage costs for companies. Can it succeed again?

Superficially, at least, the Schröder competitiveness agenda of 2003-2005 appeared to have worked. But we believe this is due to other factors that coincided with those reforms: cheap Russian gas, globalisation and supply chain integration, and the real devaluation of the euro following the euro crisis.

Despite these reforms, Germany has not become more resilient to adverse shocks, nor less dependent on a few industries. If the EU's policy is focused on helping Volkswagen and Stellantis to compete in world markets, we doubt very much that the result would be a similarly benign economic development as during the first two decades. In other words, we would solve a non-existent problem while ignoring the ones that really matter if we address a productivity problem with a competitiveness agenda.

Blanchard and Ubide challenge the assumption that you have to be a technology leader to grow, citing the case of countries that achieve similar rates of growth as the US, even though they are not technology leaders. Here we disagree. Such countries exist, but they are mostly small countries. This observation does not scale up to the level of the EU as a whole. The main economic impact of 21st century digital technologies is not the tech sector itself, but the way we use tech. This is Europe’s main problem, not the lack of Googles and Apples. We just saw a demonstration of self-driving robo-taxis in Wuhan, China. The EU will be one of the last places on earth to allow this.

In Benjamin Netanyahu’s direct video message to the Lebanese people he presents them with a choice of finishing with Hezbollah themselves or a war with Israel that could turn Lebanon into another Gaza. Israel is at the same time preparing the next coup. While continuing its military operations in Gaza and Lebanon, Israel is already preparing to hit Iran hard. The US and Europeans are busy preventing Israel from spreading and getting implicated in a war that is not of their choosing. But there is too little effort to push for a plan that would dissolve all these regional tensions.

In this crucial moment where the choice is between war and more war, western leaders have trapped themselves in Israel’s narrative. A way forward for them would to focus on the region as a whole. The ingredients are already there. A two-state solution would guarantee Israel the security it seeks. It is what European leaders and the US have paid lip service too. It is only that the Israeli government does not want it. The two narratives of Hamas or Hezbollah threatening the security of Israel and Israel refusing the two state-solution are the ends of a wrong debate. It needs to be put into another framework.

Before 7 October, the region advanced in normalisation between Israel and Arab countries. Today, those efforts are at risk of being lost as Israel choses the path of war against militias accepting as collateral damage massive destruction and suffering on the civilian population. For the Arab nations, this is a price that is too high to pay. Saudi Arabia and other Muslim countries have to take their distance towards Israel. Anything else would be suicidal in a population that strongly empathises with the sufferings of the Palestinians and the Lebanese. 

War is a truly ugly affair. We in western Europe no longer know this kind of reality, people living in the US even less so. War is relentless. Not knowing where bombs will hit next, along with the permanent presence of military planes at night, changes people. It destroys the foundations for a well functioning society and its economy. All this we do not see when we decide on our foreign policy priorities. And yet western leaders have a crucial influence on the events.

A return to the Abraham accords or the Arab peace initiative from 2002 is possible  but only in conjunction with a two-state solution. It is for the west to frame its foreign policy accordingly.

Language is rarely used to describe what is. More often it is a conduit for aspirational beliefs, social norms and values. The factual reality language can be boring, while the language of ideas inspires and has thus some momentum behind. A healthy society has a mix of both, constantly preserving and inventing itself. But we are in a period of stark social change, and the language is reflecting this. This is not only visible on social platforms but also in companies as well as in politics.

Political correctness and their enemies are dominating the political scene in western democracies. Historic texts and old childhood books are reworked to eliminate what is now considered offensive language. Minority groups and their supporters seek a break with the past to create a more equal future for all with a language that address injustices with incredible frankness. Whether they succeed to fundamentally transform a society through language is though much less clear. After all language reveals as much as it conceals. And societies go through circles.

Company cultures have changed too. No one talks about work any more today, but employment, a word that describes a relationship, not an activity or a value in life. No one talks about human resource management any more, but rather talent or human wealth. This reflects a change in perspective from the company to the individual career path. Companies offer coaching and social spaces, they integrate emotional intelligence and soft skills in their must-have job descriptions. They adopt diversity, equity and inclusion policies to reflect the latest woke culture.

Has it actually worked to make people more productive and happy at their workplace? The philosopher Julia de Funès comes to the conclusion that the over-moralisation of the public sphere has let to a proliferation of vices too. Just because a company has all those nice policies in place does not mean they are less authoritarian in their actions. Also, by expanding the remit of what a workplace is and turning it into a community, it turns a society into tribal affairs where lots of energy is lost in addressing tensions.

It is not only on the production input side that a change in language is visible. Many products are marketed not according to their functionality or ingredients but in terms of aspirations. New small producers are coming up in the market against the wholesale Goliaths with catchy titles such as Grumpy Mule for example. There are aspirational names in cosmetics and food. And it is too bad if drinking Happy tea does not make you happy.

In politics too we are bombarded with aspirational language that relates to people’s hopes. To do justice to everyone and everything, we end up with job titles like in the new European Commission where looking at the organigram, no one of the older generation understands any more how these titles relate to their competences. Like at the company level, there is a dangerous overreach in competences implied by this language. For a concrete example, see our story on the debate in the European Parliament yesterday or on Ursula von der Leyen's foreign policy today.

It is hard to resist these trends as a manager or politician. But we have seen that doing too much inclusiveness is achieving very little, and has even become counter-productive. Why is a politician or a manager to be responsible for well being? Is that not the prerogative of the individual with their free will and choices? Are we meandering into a sort of nanny state where problem solving is expected to come from above? This is not an attractive prospect.