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12 January 2024

Meet the Neo-Nazis

It was a cracking piece of journalism. Correctiv.org has produced a scoop on a secret meeting between AfD members and far-right activists, where they discussed a concrete plan for what they call remigration - the forced expulsion of millions of people with a migration background, including people who have obtained German citizenship. One of the co-organisers of the meeting is the businessman Hans-Christian Limmer, the owner of Backwerk, a bakery chain, and investor in the burger chain Hans im Glück, which has since managed to get rid of him.

The meeting took place at a rural villa near Potsdam last November. To call the plans that were discussed illegal would be an understatement. It would constitute a total usurpation of the constitutional order of the country for German citizens to be deported, based on racial criteria. It is unsurprising, therefore, that there are now calls for the AfD to be outlawed. Olaf Scholz said yesterday that this meeting should be a matter for the The Federal Office for the Protection of the Constitution, the domestic intelligence agency. We don't think that there will be a total ban of the AfD. In Germany. It is not possible to ban a party on the grounds that some of its members attend a conspiratorial meeting. The party opposes immigration, but has been careful enough to fulfil at least the formal requirements of adhering to constitutional law.

An AfD ban would also backfire politically. You cannot ban the 22% of Germans who are considering voting for that party. They are not going to return to the SPD or the CDU. 

There were four AfD members present at the meeting. The most senior person present was the party's group leader in the state parliament of Saxony-Anhalt, who claimed through his lawyer that he was there in a private capacity. Another participant was the personal assistant of Alice Weidel, the party's co-leader. Several AfD politicians, including the ultra-right winger Björn Höcke, have talked about remigration plans in the past, but never at this level of criminal detail. 

The main organiser of the meeting was Gernot Mörig, a retired Düsseldorf dentist and his family. The main speaker was  Martin Sellner, a well-known Austrian neo-Nazi, the leader of the Identitarian Movement of Austria, who is also a celebrated figure amongst ultra-right wingers in Germany. 

11 January 2024

Beware Orbán bearing gifts

Victor Orbán is ready to strike a deal on Ukraine while preserving his veto power. EU leaders failed in December to agree unanimously on the €50bn aid for Ukraine due to the veto from Hungary. Hungary made a compromise proposal last Friday, agreeing to the aid as long as EU member states vote on annual financial envelopes unanimously each year. They suggested an annual €12.5bn in grants and loans for Ukraine, which is over four years the same as the €50bn package suggested by the European Commission. The sums may not be different, but perhaps the composition and certainly the annual approval procedure is. The annual unanimity requirement means that Hungary can use its veto power every year, for example to negotiate its way through the goal posts to release EU funds. A nightmare for those EU member states who want to give Ukraine a long-term prospect, and the EU’s rule of law advocates.

EU budget questions are subject to an unanimity vote, but setting up a fund only requires a qualified majority. Belgium, which currently holds the EU Presidency, thus could get the green light to set up the Ukraine facility, a new single dedicated instrument to support Ukraine’s recovery.

The European Commission is also preparing alternative options should there be no unanimous vote. A decision is due at the European Council summit on 1 February.

10 January 2024

The Draghi reflex

The most useful shortcut to think about the plight of the western world in the early 21st century is Dani Rodrik's famous trilemma. You can't have globalisation, national sovereignty, and democracy all at once. The EU itself attempted to overcome this fundamental trilemma with the inclusion of a democratically-elected European Parliament into its institutional setup. But every now and then, the triangle haunts the EU too. In late 2011, the future of the euro area depended critically on there not being a referendum in Greece. In 2015, it depended on Greece not honouring the referendum that was held that year. There was a clamour for a second referendum after the Brexit vote.

Right now, it appears that the future of the whole EU depends on Viktor Orbán not ascending to the position of temporary president of the European Council. Charles Michel, the incumbent president, is leaving early to become an MEP. Based on current rules, the vacancy would be filled by whoever holds the rotating EU presidency at the time. That rule makes sense. Unfortunately, it is Hungary's turn in the second of half this year, so Orbán would be the automatic interim president. 

We hear calls that Mario Draghi should be helicoptered in to fill the void. What makes the situation a bit more tricky this time is that the cosy majorities in the European Parliament are likely to change. The centrist Renew Europe could be overtaken by the far-right Identity and Democracy. Emmanuel Macron is the main representative of the former and Marine Le Pen of the latter. Last time, EU leaders overcame their disagreement with a jobs package that ticked all the boxes. Ursula von der Leyen went to the Commission and Michel to the European Council. Josep Borrell, a Socialist, became the high representative for foreign policy, and Christine Lagarde went to the ECB. It won't be so easy this time, which is why we should not expect leaders to come up with a jobs package within a few days from the 9 June elections. 

The European Council sets its own rules for how it nominates an interim president. They can choose to change the rules by simple majority. They can keep Orbán out if they want to. But we are not sure this is wise. It is never a good show to change the goalposts in the middle of a game, especially not in an election year. The European Council could, in theory, wait until the 27-28 June summit to change the procedure, but that would be cutting it a bit too close.

We should not over-estimate the duties of the interim president. The Council secretariat, led by Thérèse Blanchet, is the true power behind the scenes. The job of an interim president would simply be not to interfere too much. The job of the Council president is to broker difficult political compromises. Even though Mario Draghi attended many European Council meetings in the past, both in his role as ECB president and later as Italy's prime minister, he is at this point not part of the club, whereas Orbán is. The EU's much bigger problem with Orbán is his willingness to deploy the veto, in foreign and budgetary policies. That willingness increased after the EU's stance towards Hungary became more confrontational.

We think that centre-right parties, especially the CDU/CSU, have been complacent about their firewalls against the far-right. In the Netherlands, the firewall contributed to the landslide victory of Geert Wilders' PVV. In Germany, it has led to the rise of the AfD to become Germany's second largest party, and the largest in eastern Germany. When political coalitions don't deliver, as is clearly the case in countries like the Netherlands and Germany right now, voters turn to the available alternatives. You can't erect firewalls against voters. The allure of the AfD is so great because this party is nowhere in power. We expect the CDU/CSU to maintain the firewall for the next election, but we don't think it can afford to maintain it. Once voters realise, as they surely will, that a Friedrich Merz-led coalition will not bring real change, then what?

Our advice to EU leaders is not to give Orbán yet another opportunity to cast himself as a victim.

9 January 2024

Is Brexit milk safe for Europeans?

Food labels can be confusing. A new level of confusion was the result of the Windsor agreement between the UK and the EU to ensure that goods stay within Northern Ireland and do not enter the Republic of Ireland and thus the EU's single market. Since October last year, all meat and some dairy products have to carry labels. Those labels read: Not for the EU.

The British even go one step further. From October 2024, all meat and dairy products are required to carry those labels, and more products will be included as of 2025. The idea is to simplify production lines and labelling across the UK market, but it creates a schism with the EU. For the consumer this is entirely confusing. The ‘Not for the EU’ sounds like there must be a difference in product quality, or a different selection of food between the UK and the EU. Some consumers who complained in X, formerly known as Twitter, thought it suggests that the meat is out of date and not safe for EU citizens to eat, but good enough for UK citizens. Or that it means the opposite: that UK products are of a higher level than those sold to the EU. It all depends on your bias, whether or not you think Brexit was a good idea, and whether you trust the British when it comes to food standards.

The fact is that food standards in the UK have not much changed apart from some rules about pesticides, writes Politico. There is no special Brexit milk that is unsafe for Europeans. Nor are the British second-rate consumers. Retailers are not keen on this new labelling regulation either, as they cannot sell on their unsold products into the European market. Another fine mess.

8 January 2024

President Orbán

Charles Michel’s surprised everybody when he announced he will step down as the president of the European Council to run as MEP candidate for his liberal MR party in the European elections in June. We presume that he regards this as a promotion. His term officially lasts until end of November. If elected, he would have to step down before being sworn in by 14 July. This means EU member states would have to find a successor until the 24 June summit if they do not want Victor Orbán to fill the void. This is because Hungary will hold the rotating Council presidency in the second half of the year. The choice of president of the European Council is a horse-trading exercise between the main political groups once the results of the European elections are known. This takes normally months to complete.

Even members of his own party have expressed their dismay over Michel’s move that puts his own carrier over the interests of the European Council. The Dutch MEP, Sophie in’t Veld, accused him of abandoning the ship in the middle of the storm. Andrew Duff calls it a dereliction of duty as it is the president’s central constitutional function to form the new Commission in accordance with the Parliament.

Michel himself is defiant, telling journalists that there are several options that the European Council has if they want to avoid Orbán to lead the Council for four months. One of them is to appoint a caretaker president by changing the rules with a simple majority. But who would be able to take over this role? The short time frame leaves little room for those who need to quit their job first before taking up the job as Council president, Andrew Grey from Reuters points out. Mario Draghi’s name came up on X, but will he want to do this? Another complication is that it will be harder for the Council this year to chose a new president if the polls confirm a surge of far right Identity and Democracy (ID) group. This could dethrone the liberals from their third place, and reduce their influence, writes Euractiv.

How this episode will play out for Michel himself is also not clear. He may have ambitions for higher jobs, such as the head of the European Commission or leader of the European Liberals. He might also wish to return to Belgian politics. But the way Michel pursued his exit as president of the Council leaves a bitter taste behind that is likely to weigh on his future positions. Still unforgotten are his past gaffes like Sofagate, when he took the chair next to Recep Tayyip Erdogan and left Ursula von der Leyen to retreat to the sofa.

In a worst-case scenario, the world ends up with President Trump in the US, and President Orbán in the EU - alongside President Xi and President Putin. You could not make this up.

5 January 2024

Delors and the Israel-Palestine conflict

Jacques Delors, the architect of the modern EU, left us many lessons. One of them is that long term-problems need long-term solutions. Once credible and necessary long-term solutions are worked out, short-term politics will follow. He did not stop searching for new solutions, and eventually found some that were agreeable to all. This way he realised his vision, a political project for Europe through economic means.

Foreign policy was not a prerogative for the EU back then, and is hardly one today. Yet when it comes to the Israel-Palestine conflict, Delors’ method could be an inspiration of what the EU and its member states could do: working hard to find a long-term solution for Israel and Palestine instead of getting caught up in the politics of their war.

In November 1947, the United Nations adopted the principle of the two-state solution. The US and USSR agreed to it, as did Israel’s leadership and what would become the EU's member states. This is a commitment which has still to be delivered. What 7 October changed is that the world can no longer afford to look the other way while the conflict has been brewing in Gaza and the West Bank. If we want to prepare the conditions for peace in the region, there is no alternative to a two-state solution.

The work needs to start now, not after a ceasefire is agreed. Long-term strategies have the capacity to untie the knots of the short-term. They take attention away from extremists and their call for more violence. They focus on the future, not the past.

Let’s not fall into the impossibility trap. There are many reasons why a two-state solution may not be possible. The past tells the story of failed peace talks, such as the Oslo Accords. Current leaders have no interest in agreeing to it. Benjamin Netanyahu made it clear several times that a two-state solution will never work. Nor is Hamas interested in a solution that would offer Palestinians a secure land of their own. That would obviate Hamas's influence. This should not stop world leaders in pursuing this idea. On the contrary, a two-state solution is the only real alternative to the visions of extremists on both sides.

The world has stakes in this war too. Not only do we suffer with both sides of the conflict, but also through the actions of both. World markets are disturbed. The Red Sea trading route is suspended. Societies are antagonised. Western governments have lost domestic political capital over the question of loyalty to one side or the other. There are many good reasons for the US, Europe, and the Arab states to focus their work on the long term, instead of getting boxed into a corner over war politics. The ultimate goal is to ensure peace and security for the whole region. 

The principle of a two-state solution has been agreed. Now, the question is how to make it happen.

What does a two-state solution look like for the US, France or Germany? What does it look like for the Arab states? What we do know is that only a long-term solution can bring long-term security for civilians on both sides of this war. If we want the violence to stop, the world needs to deliver on the 1947 commitment.

22 December 2023

We have to talk about Italy

Turns out it was not only blackmail. Despite the EU, including Italy, agreeing to a stability pact reform package, Italy has voted down ratifying the new European Stability Mechanism Treaty. In the Chamber of Deputies, Italy’s governing coalition split. Fratelli d’Italia voted with Lega against ratification, while Forza Italia abstained. This will have material consequences for the EU’s ability to resolve both fiscal crises and banking crises in the future, until the treaty is ratified. It also leaves Giorgia Meloni’s approach to the EU at a dead end.

The new ESM treaty was designed to do two things. One was to use the ESM itself as a backstop for the single resolution fund. The idea here was to provide extra support to the SRF, so as to make managing a possible banking crisis easier. First, the ESM could kick in and provide resources, with banks paying it back over a 3-5 year span.

The other was to streamline the process for assisting euro area members in the event of a fiscal crisis. Instead of a memorandum of understanding, to access precautionary credit lines, members would need to sign a letter of intent. This would commit member states to the old, pre-reform stability pact targets, including the 1/20 rule. But, unlike the memorandum of understanding, the letter of intent would not be legally binding. As well as this, governance for programmes would move from the old troika set-up to the joint responsibility of the European Commission and the ESM itself.

Not agreeing to the treaty is a way for Lega in particular to signal its opposition to the ESM more generally. Lega’s latest spin on this argument is that it would mean Italians having to put in money to bail out German banks, an inversion of the old German argument against bailing out Southern Europe. We are back to the whole fundamental issue of the banking union: you need a backstop, but nobody wants to bail out anyone else's banks. Italy's domestic banking system is much more robust than it used to be. But one does wonder what Lega thinks will happen if the German banks in question do go bust. FdI were in a position where they couldn’t be seen as going against Lega.

From a certain perspective, however, the Italian position makes total sense. Rather than the ESM, which would be a net cost to them, their best option would be unlimited support from the Transmission Protection Instrument if spreads get too big. Because of the volumes of Italian collateral in the euro system, the ECB doesn’t have much of a choice.

Italy is in a different position from the countries that did have to rely on the ESM during the sovereign debt crisis. It is too big to fail. We think this is something Meloni also realises. There is no sense in her triggering a crisis. But it is also pointless for her to waste political capital domestically to buttress the ESM when she has no intention of relying on it if something does go wrong.

This should disabuse us of the notion that Meloni has had a damascene conversion to being a good European. She has learned from Matto Salvini’s misadventures that recklessness with the EU can have a real political cost. There are also areas, like migration, where she needs the EU to advance her own domestic priorities. This is different from buying into European integration, however. She is simply doing what she thinks is best for Italy, or herself.

Where this entire game of musical chairs leaves the EU and euro area is with a stability pact that Italy, and probably France too, can only really follow until 2027, and the ESM the same as before. This is against a backdrop of economic weakness across Germany, Italy, and France, as well as no real prospect of Italy’s debt-to-GDP ratio coming down in the next few years. The prospect of fiscal divergence between Germany and Italy and France means that something will have to give.

22 December 2023

Coalition? What coalition?

In the late 2000s, piracy became a big problem in the Gulf of Aden because of civil war and political instability in Somalia. In response, a coalition of countries formed to make one of the world’s most important shipping lanes safe again. The US, China, UK, India, and even Iran and North Korea, banded together to deal with the problem. Eventually, they managed to mostly stop the hijackings.

Once again, we have disruption of shipping in the region. This time it is because of Houthi drone and missile attacks on shipping in the Red Sea. Once again, a multinational coalition has formed to keep seaways safe. The idea seems to be a repeat of the Gulf of Aden effect: deterring the Houthis in the same way they did the Somali pirates.

So far, none of the big shipping companies seems convinced enough by the new US-led initiative to return to the Red Sea. Shipping tracking services still show a large-scale diversion of traffic away from the sea, and from the Suez Canal. The day after the announcement, Maersk, the second-largest shipping firm in the world by tonnage, said it would be sending previously Suez-bound ships around the Cape of Good Hope instead.

One of the problems the multinational coalition faces is the practical difficulties the Houthis’ tactics pose. Dealing with piracy is relatively simple. You intercept the pirates before they intercept the ships in question. Like a cat in a barnyard, the very fact that there is a sizeable naval presence keeps opportunistic, economically motivated pirates away.

The Houthis are different. Russia’s naval struggles in Ukraine have already shown how much damage comparatively cheap anti-ship missiles and suicide drones can do, even when you don’t have a navy of your own. If the Houthis can simply overwhelm the naval vessels guarding the sea, then it is a moot point. Yemen’s challenging, mountainous topography makes destroying launch sites and depots on land practically difficult too.

Another issue is political. The Houthis are, at least partly, ideologically motivated by Israel’s war in Gaza. This angle has scared off some other countries in the region, like Egypt and Saudi Arabia, from participating. The Houthis, for their part, have doubled down, and said they will attack any ships affiliated with the coalition members. 

If this effort doesn’t work, it presents the mostly western countries in the coalition with a couple of unpalatable options. Either they can try to pay the Houthis off, somehow, or get rid of them. The latter is easier said than done. Saudi Arabia and the UAE both tried dislodging the Houthis during Yemen’s long civil war, and failed.

22 December 2023

Where ignorance is bliss...

Here is why it won't work. The agreement on the new stability pact foresees a long-term fiscal adjustment for both France and Italy that neither country can or will even attempt to deliver. The table below is from Jeromin Zettelmeyer and colleagues at Bruegel, but with our own annotations specifically for the two countries. The structural primary balance (SPB) - the deficit or surplus that excludes interest payments - is the main reference point. The ordinary adjustment period for excessive deficits and debts occur over 4 years. If countries are willing to undertake reforms, this can be extended to seven years. The table below shows the impact of the fiscal adjustment for either scenario. 

Italy starts out with a projected SPB at -0.9% for 2024. If Italy were to opt for a seven-year adjustment plan, it would end up with a long-term SPB of 4.6% - this is a total adjustment in the annual SPB of 5.5% of GDP from the base 2024 level. A four-year adjustment would require bigger steps initially, and a slightly lower SPB in the long run. For France, the total SPB adjustment is 4.8% of GDP under a 7-year adjustment. Here are the data for all the countries with a debt-to-GDP ratio above 60%. 

Olivier Blanchard summed this up succinctly. He wrote on X:

"I am no gambler, but I am willing to bet this will not happen. Almost surely, after a few years (some countries got a temporary break), the rules will prove unworkable. They can and probably will be adjusted, but it would have been better to get them right from the start."

This is how we see it too. This is iteration number four of the stability pact, and once again we have a fiscal regime that cannot conceivably work. There is a lot of polite chatter that this regime is better than the previous one. If it is destined to fail, why should we even care?

Germany's own, much stricter, fiscal debt brake is also unworkable. There is no way Germany can ever meet its needs for investment and defence spending without a change in its domestic fiscal rules. We are not criticising the German constitutional court. The problem is not how we should interpret the law but the law itself.

The same is the problem with Stability Pact IV. The one big take-away message is that the euro area finance ministers still prioritise appearances over content, just as their predecessors have done. The Germans in particular seem to be very unafraid of another fiscal crisis. We leave the final comment to Thomas Gray: 

"where ignorance is bliss, 'Tis folly to be wise."

22 December 2023

The moral Rubicon on immigration

Impatience comes from the desire to control. Often it achieves the opposite of what was intended. Emmanuel Macron may have wanted to turn the page over the immigration law before Christmas by pushing it through the mixed committee and accepting provisions from the hard right unthinkable only months ago. Yet, he opened Pandora’s box for his majority and served a score to Marine Le Pen and her party.

Morally, the French government crossed the Rubicon. The adopted text is not a copy of the Rassemblement National programme. But it is a first opening to its ideology that separates migrants from the French. This ideology is called préférence nationale, promoting policies which legitimise discrimination against foreign nationals in favour of French citizens concerning access to employment, housing and social protections.

In this immigration bill the measures included sharpen the conditions for foreign nationals to access housing benefits and medical aid. It also increases sanctions against companies which employ undocumented workers. And requires foreign students to make refundable deposits.

Macron’s strategy to get the law over the finishing line was too clever by half. To offset the right’s most extreme measures, Macron government accepted Les Républicains’ demands, knowing full well that some of them will be invalidated by the Constitutional Council, the country’s highest constitutional court. His government agreed to open the door to the préférence nationale, which was key to get the law over the finishing line. The argument with which the government sold the law to its own lawmakers was that the vote passes if it does not depend on the Rassemblement National votes, otherwise it would have been withdrawn. And so it passed, with enough votes for the government to claim that it had the majority needed. But at what price?

From now on the French will have an advantage over foreigners, rejoiced Le Pen. The bill divided his own majority, with 27 MPs voting against and 32 MPs abstaining. One minister resigned, another handed in her resignation but got rejected. Francois Bayrou calls on Macron to reshuffle the government.

Macron could have chosen to withdraw the bill and start from scratch but he chose to push it through. Now he has a government crisis at his hands and people will have a hard time to understand what he is standing for. True, an immigration bill was needed, but perhaps not this one. To accept the préférence nationale into law for a country that has Liberté, Egalité, Fraternité as its national motto has been made possible after decades of Le Pen and her father promoting the idea that immigration is a burden, that the French pay a price for it or that it is a factor in criminality. This is the result of their efforts. Les  Républicains won’t be the ones to benefit from this crisis. As Jean-Marie Le Pen once said, voters prefer the original to the copy.