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11 January 2021

Team Söder/Laschet vs Merz

FAZ is telling us this morning that the CDU establishment is rallying behind Armin Laschet as the next CDU chairman. This does not surprise us. He is the continuity guy, and the last thing the CDU headquarter likes is disruption. What has changed over the weekend is that Markus Söder, the Bavarian prime minister and CSU leader, has come out in support of Laschet. 

The CDU's virtual party congress will take place this Saturday when 1001 delegates cast an electronic vote between the three candidates. The two who come first will then go into a second round, which, according to German law, has to be decided by postal vote.

Söder's positioning is transparent. If elected, Laschet is less likely than Friedrich Merz to seek the chancellery. And despite his evident lack of public support, Laschet is very likely to score a higher share of the vote among the delegates than Norbert Röttgen. Laschet is Söder's ideal CDU chairman. 

We see the strategy, but we think this is too clever by half. For one, Jens Spahn has told friends that he wants to become chancellor. Spahn is Laschet's running mate. A perfectly plausible scenario would be for Laschet as CDU chairman to become chancellor for a relatively short term, to be followed by Spahn.

The other risk is that the CDU delegates may follow Helmut Kohl's dictum that it is best to combine the role of CDU leader and chancellor. The only split imaginable is between a CDU chairman and CSU chancellor candidate. But this is dangerous for the CDU. Söder would be the third CSU leader - after Franz-Josef Strauß and Edmund Stoiber - to be nominated chancellor-candidate, and the first one likely to succeed. With the state of the polls - the CDU/CSU steady at 35% - and the geometry of the political landscape in Berlin, the CDU/CSU candidate will almost certainly end up as chancellor. If Söder gets the nomination, he might well stick around. At 54, he is 14 years older than Spahn, but young enough to have a long political career ahead of him. Laschet will turn 60 next month.

What weighs against Laschet are two factors. He may be a moderate, but he is a supporter of coal. We are not sure that the Greens and a CDU headed by Laschet would find common ground on the key environmental policy areas on which the Greens are campaigning. Second, Laschet's astonishing unpopularity must be a factor in a big election year - with one federal election and six state elections. Of the 1001 delegates, 39% hold elected office - as local, state, federal or European parliamentarians. The others are ordinary party members. Laschet is also more popular among women than men, but only 34% of the delegates are women. 

Establishment support is important, but this will be an anonymous election. We think the AfD still constitutes a formidable factor despite its recent troubles. The AfD has been beset by inner party rivalries over whether or not to oust neo-Nazis. But as we are going into an election, we think the party will probably rally around its leader, Jörg Meuthen, who has been leading the campaign to oust neo-Nazis. We think that the approaching reality of a CDU/Green coalition would play into the hands of the AfD. Merz's pledge to CDU conservatives is that he is considered best placed to keep the AfD at bay.

11 January 2021

Social benefits scandal rattles Rutte

Yesterday GroenLinks, the Dutch green party, announced plans to bring forward a motion of no confidence in Mark Rutte’s cabinet if it does not resign. The Dutch prime minister’s centre-right VVD party leads a coalition that includes the Christian Democratic Appeal, CDA, Democrats 66, and Christian Union.

NOS reports that Jesse Klaver, GroenLinks leader, called for cabinet’s resignation in the wake of a social benefits scandal that saw thousands of parents falsely accused of defrauding the system and forced to repay their benefits. Last month a parliamentary inquiry committee released a harsh report that found the rule of law was violated during the scandal.

Klaver believes the entire cabinet should resign not only because of the scale of the affair, but because it was the result of years of dismantling the social welfare state. Resigning would not only demonstrate an admission of guilt, it would also signal that austerity policies will no longer continue in the Netherlands.  

VVD holds 32 seats at present. A peil.nl poll from yesterday show that it would win 33 if elections were held this week, down from 36 last month. Geert Wilders’ far-right PVV party would win 25, against the 20 it currently holds. The CDA would win 18, up four from last month.

Source: Peil.nl

CDA has been largely unscathed in the social benefits scandal and may still decide to vote against the government. That would make it easier for its new leader, Wopke Hoekstra, to campaign for the March elections. CDA has been polling better since Hoekstra, the Dutch finance minister, took the reins last month. Hoekstra might think he stands a chance at forming a government.

But CDA only holds 19 seats at present, and Hoekstra’s coalition would need at least 75. 

The largest opposition parties are the socialists and the Greens, each with 14 seats, and PvdA, the labour party, with nine seats. Labour and the socialists have joined GroenLinks in calling for the government to resign. But even with full opposition support, the CDA would still need another 27 seats to form a government. D66 and the CU hold just 24 between them. Tacit support from PVV would be enough to put a minority government in power, but Hoekstra has ruled out governing with the PVV.

There are six additional parties that currently hold 17 seats. Support from smaller parties would be enough to deliver a new coalition that excludes both the VVD and PVV. But one of those smaller parties is FvD, a populist far-right party. Another, JA21, was formed by former FvD members last month. It is already polling at three seats, while FvD would win four, up from two in 2017.

CDA does have an opportunity to form a new government. But with such a short period remaining until elections, the best it could hope for is a temporary coalition. The VVD is still polling higher than any other party. Withdrawing support now could complicate future coalition negotiations if VVD still comes out on top in March. 

11 January 2021

Greece running out of cash

In all this mayhem and fighting the spread of the virus, it is easy to forget that some EU countries entered the crisis already financially weakened. When lives are at risk, who wants to talk about money? With the EU recovery fund financial assistance is available. This is true in the medium term, but it does not solve short-term liquidity problems.

Greece has been under financial distress for the last decade. It exited the third EU bailout in 2018 with a liquidity cushion of €32bn to defend itself against shocks. The lockdown requires nearly all the allocated funds that were earmarked for the first quarter, €6.5bn out of €7.5bn budgeted. The Greek government had to tap into those cash buffers to pay salaries and pensions, as state revenues have declined without any other access to liquidity, writes Kathimerini. Their source in the ministry expressed concern about the latest extension of the lockdown, which will diminish the state's liquidity further in a year when Greece must pay its creditors €11.5bn.

11 January 2021

The fight against secondary sanctions

As we noted last week, China’s recent data protection legislation was modelled after the EU’s general data protection regulation. Now it appears China is aligning new rules to counter secondary sanctions with those of the EU.

Zichen Wang, a Chinese journalist and publisher of the newsletter Pekinology, brought an interesting story to our attention. It concerns the recent publication of new Chinese rules for countering secondary sanctions. 

China’s ministry of commerce, MOFCOM, published the new rules on Saturday. As Pekinology pointed out, only Bloomberg reported that the rules are remarkably similar to the EU’s blocking statute. This statute was established in 1996 after the US imposed secondary sanctions on countries doing business with Cuba, Iran and Libya. It nullifies any foreign court ruling based on foreign laws listed in its annex. It also allows affected companies to seek damages in court for losses caused by the extra-territorial application of specified foreign laws. The statute was updated in August 2018 when the US announced it would re-impose sanctions on Iran, following US withdrawal from the Iran nuclear deal.

Like the EU, China now requires businesses and individuals to report secondary sanctions. Both sets of rules threaten fines for operators who do not report them. And as Pekinology notes, China’s rules would apply to any foreign joint venture or wholly-owned company registered in China. Importantly, both rules target only secondary sanctions, not primary sanctions that would, for example, apply American law only to American companies. 

Finally, both laws provide remedies via domestic courts for companies that suffer losses from secondary sanctions. But this is where the two legal texts diverge. Unlike the EU, remedies in China can include support from relevant government departments based on specific circumstances. Necessary counter-measures based on actual circumstances and needs are also mentioned. Subsidies came to mind when we read this section.

We've previously argued that the US secondary-sanctions regime affecting European companies is very likely to remain in place under the Biden administration, for the simple reason that you cannot un-invent this very powerful instrument of modern diplomacy. We doubt whether Chinese alignment with EU legislation will be able to change that, particularly given a report from the Washington Post on Friday. It quoted a senior US national security council advisor saying the US will take a stronger position on China than previous Democratic administrations. It looks like the cold war is here to stay. 

11 January 2021

How to grow from here?

What are the main risks for economies in 2021? Over the coming months it will become clearer which companies will still be viable and can adapt in post-pandemic markets once government support dries up and new regulations take effect. At least in some sectors, customer preferences will shift.  

For the economic recovery, everyone is counting on vaccines. But for this to work, the roll-out would have to be fast and smooth, a sufficient number of people need to agree to be vaccinated, and the vaccination has to be effective against new strains. This is not a given. For trading companies this will embed significant risks. Divergence in vaccine roll-out across countries will affect supply chains.

Control Risks, a London based Consultancy, list on top of its risk map for 2021 a fragmented exit from lockdown. There will be countries who easily absorb the vaccine and return back to normality, while others face an obstacle course over availability of the vaccines, as well as effective distribution and public uptake. 

The relationship between companies and the state will change too. Not only are those who accepted public money now subject to constraints and public scrutiny. Governments are also likely to regulate more when it comes to commerce. The pandemic made it clear that the health sector is one of the strategic sectors for a nation to be protected against inbound investment. There will be more investment screening and possible sanctions. 

Public scrutiny over how well a company managed the pandemic will also become an issue in work relationships. Customers and shareholders may seek an alignment with their values as duty of care obligations widen for companies, not only with the pandemic but with climate change too. Productivity and profit may turn out to be performance measures of the past. The future success for companies will also rely more on holistic measures including relations with governments and the public in a fast changing world.

11 January 2021

Operation Bleach EU

It is interesting to read in the Sunday Telegraph that Boris Johnson ordered a team of 20 civil servants to remove references to EU law from UK legislation in order to make it more difficult for a future Labour administration to undo Brexit. This is not overtly about regulatory divergence but language. For example, current UK law uses the term state aid, which constitutes an EU-specific term, while the World Trade Organisation refers to subsidy systems. The fear in Downing Street is that UK judges might refer to the CJEU to seek clarification on terms that are EU-specific.

The bigger issue for us is whether this act of legislative cleansing constitutes a first step towards regulatory divergence. Language embeds legal definitions. Subsidy systems are not necessarily the same thing as state aid. Divergence on language is where divergence on substance starts. This is the reason why we recommended that pro-Remain supporters accept Theresa May's compromise deal, which would have tied the UK to the EU's single market and regulatory framework for a long period, during which it would have been at least feasible for the UK to return. Divergence does not make this impossible, but constitutes a hurdle that will be hard to surmount. It would prolong accession negotiations, possibly beyond the duration of a single government. A second referendum now would require three things to happen at the same time. Labour would need to be in power. The leadership would need to win the referendum. And it would need to win the subsequent elections. Recall that Brexit was preceded by an absolute Tory majority in 2015, followed by a referendum and two further election victories. Nothing is impossible in politics, but this is not a scenario you would be wise to bet on. 

Sir Keir Starmer, the Labour leader, said over the weekend that he would not campaign on Brexit, and that there was now no case for the UK to revert to EU membership. Since Labour needs to win back pro-Brexit constituencies in the north of England to regain power, this makes perfect sense to us. There are conspiracy theories that he might flip when in power. We don't think so. Whatever Sir Keir and other pro-Remain Labour MPs might feel personally, we see no chance of a pro-EU majority in the UK in the absence of a significant intruding event. 

8 January 2021

Approaching high noon in Italy

Italy's government crisis enters a decisive moment today when Matteo Renzi could decide whether to accept a compromise on the recovery fund, or pull out of the governing coalition. The Five Star-PD coalition relies on him for its majority. His breakaway party, Italia Viva, is stuck in the polls at 3% - a level that would not guarantee parliamentary representation if elections were held today. But don't read too much into polls, and don't underestimate the dynamics. Renzi has identified the recovery fund and Italy's slow vaccine roll-out as ideal subjects to raise his political profile.

So what are his options?

Giuseppe Conte has offered some minor compromises - though not the ones Renzi sought. Huffpost Italia has a useful summary of a document that accompanies the draft legislation. It had little to say on governance. The government plan is still to empower a small task force with all the decisions. Renzi seeks broader governance with parliamentary control. The only compromise offered by Conte is that the parties will deal with this later, which is hardly reassuring for Renzi. Renzi argues that there is a danger that the programme will be abused for party political purposes. On the substance of this point, we have to agree with Renzi. We also have to remember that keeping centrist governments in power has been one of the unspoken reasons for this fund, and especially the way it was constructed. The last thing the EU wanted was a Salvini/Meloni administration running Italy at a time like this. 

Other than governance, one of the changes Renzi is pressing for is a faster roll-out of vaccines, starting with teachers, to allow the opening of schools. As we keep writing, vaccination is going to be one of the big political battlefields this year, with lots to criticise: procurement policy, speed of the roll-out, and of course, the decisions on who should come first. Renzi is no longer the big beast of Italian politics that he once was, but he still has an acute political instinct. There are a lot of votes in the re-opening of schools, not only from teachers.

What Conte has offered Renzi so far is more money for health care, and a small rebalancing in the overall package towards investments. But unless Renzi was bluffing from the outset, we would be surprised if he were to accept this list without further concessions.

Renzi's position is both strong and weak. The government depends on him for a majority, but Renzi cannot risk elections at this point. His alternative option is to play kingmaker for another government, either of the centre-left with the existing partners, the centre-right, or a technical government. Five Star won the last elections and commands an absolute majority of MPs in the chamber of deputies, the lower house. It is not possible to form a government against Five Star, unless some Five Star members were to desert. 

Renzi is not the only one who wants to avoid elections. So does Beppe Grillo. This makes it an interesting tactical standoff. Five Star has lost about half of its support since the elections. Together with the reforms to reduce the overall number of MPs, a very large number of Five Star MPs stand to lose their jobs in the next elections. As La Repubbblica reports this morning,  Conte seems to be unafraid of elections. If it was up to him, he would confront Renzi head on, high-noon style, and see who is left standing. This is a confrontation both the PD and Five Star would like to avoid. And so does Sergio Mattarella, the president, who has appealed to both sides to compromise. 

Such a compromise could take different forms, including a cabinet reshuffle, but Renzi says he is not seeking more ministers. La Repubblica reports that Conte had tried to contact Renzi over the last few days, but without success. There are also rumours that Renzi was in talks in Silvio Berlusconi. None of the information we have suggests that a solution is getting any closer.

Maybe there will be more clarity later today when party leaders are due to meet. If Renzi approves the recovery plan in principle, Conte would give the cabinet time to negotiate some of the disputed areas. If Renzi rejects it, Conte will assemble his cabinet and wait for Renzi to withdraw his two ministers. As La Repubblica puts it: a dance in the dark would begin at this point. 

8 January 2021

Vaccination rollout and the new strains

The French government finally communicated a clear timetable for the vaccination and clarified which vaccines they purchased and when, how they will deliver them and who they will deliver them to. This should reduce some of the hysteria in the public debate. Clear communication is key to rein in misinformation.

The emergence of new and more transmissible Covid-19 variants from the UK and South Africa has put even greater focus on vaccinations as the only route out of repeated lockdowns. So far there have been only 19 cases of the UK variant confirmed in France. Infections in the UK are eight times those in France, but this could be due to the UK being ahead in the infection cycle. We will know more in a few weeks. There is clearly a close relationship between vaccination policy and the appearance of the new strains. The more the virus spreads, the more governments come under pressure and the more likely people will take the jab.

Plans and clear communication are one thing, but they still have to deliver on the plan locally. And this not only depends on the de facto availability of vaccines, but also on the logistics and the willingness of the people to get vaccinated. 

With the two approved vaccines France expects to give a jab to 1m by the end of this month and to 3m-4m by end of March. There will be six vaccination centres available in each local region by the end of the month. Given the 45,000 vaccinated so far, it means that as of today France would have to give 42,000 jabs per day to fulfil its target. This is quite a jump that has yet to be realised.

They will start with health care workers and the over 75's. To get the numbers right, people still have to book an appointment and physically get there. 

At this point we may know how many vaccines governments ordered, but will they be cleared and available in time? The French government provided a timetable that tells us month by month when they expect what vaccine to become available. Compared with earlier tables from Les Echos it is an improvement showing that some negotiations succeeded in securing vaccines earlier. For the whole year, France ordered 200m jabs.

By the end of June the two vaccines authorised so far, Pfizer-BioNTech et Moderna, will cover 12m. This is clearly are not enough. Curiously, the timetable suggests the availability of AstraZeneca in February, but it is not even approved and the British already face bottlenecks in production due to high demand for the much easier to handle vaccine. The German Curava is expected in March.

One way the French government made up for bottleneck problems in delivery is to lengthen the period between the two doses of the jab from three to six weeks. All four vaccines above need two doses. Only a fifth vaccine, Jansen/J&J, requires one shot only, but this will be available only as of April. With six weeks rather than three between the two jabs per person, more people can get vaccinated with their first shot until the pressure eases with more vaccines becoming available.

The French government still has to prove that it can deliver 42,000 jabs per day. And this while the jab counting system is still not even operational. What could possibly go wrong? 

8 January 2021

Stuck at zero

The inflation data are almost comically stable - and they are unlikely to recover substantially until the restrictions are lifted. The annual core rate of inflation remained stuck at 0.2%, and the headline, for what it is worth, continued at -0.3%. This is essentially zero inflation. The German VAT cut played a role, but this is not the reason why inflation is low. It will remain low for some time.

We keep reminding readers that the core rate of inflation - the one we look at mostly - has not been at 2% since 2008 - marking a 12-year undershoot with no end in sight. There were several factors at play that were conducive to a low inflation environment  - austerity, structural changes in the labour market, and the rise of global supply chains among the most important. Many of those structural changes will not persist indefinitely - and some may not persist beyond the crisis. The foreseeable shifts - the monetisation of private and public debt and ageing populations - point towards higher inflation in the future - but this shift will not become apparent until after the lockdown ends and some degree of normality returns. 

That moment is still some way away. From what we can glance from the data in the UK, the new mutant virus has yet to hit the European continent. The effect of the vaccinations will kick in gradually but probably not in time to quell the rise of the more infectious mutant. We expect quasi-lockdown conditions to persist until about Easter. The weakness of growth and price is likely to persist at least until the current wave ends. 

 Headline Core 
Jan-201.36%1.09%
Feb-201.22%1.21%
Mar-200.75%1.03%
Apr-200.31%0.85%
May-200.09%0.90%
Jun-200.27%0.83%
Jul-200.39%1.18%
Aug-20-0.17%0.37%
Sep-20-0.31%0.21%
Oct-20-0.28%0.23%
Nov-20-0.29%0.25%
Dec-20-0.27%0.22%

8 January 2021

Trade war ceasefire

At the last minute, the US has suspended plans to impose retaliatory tariffs on $1.3bn of French goods.

A 25% levy on French handbags, soaps and cosmetics was set to come into effect on Wednesday, but news broke yesterday that Donald Trump paused the tariffs, which came in response to France’s plans to impose a digital services tax on American tech giants. Bloomberg reports that the US trade representative suspended the tariffs in light of an ongoing investigation of similar taxes adopted or under consideration in 10 additional jurisdictions. As we reported this week, Spain is also planning to roll out a digital tax on big tech. The US has not threatened retaliatory tariffs on Spanish goods.

Yesterday’s decision to suspend new tariffs could de-escalate transatlantic trade disputes weeks before president-elect Joe Biden takes office. It is interesting to note that when making the announcement, the US called for a coordinated response in all ongoing digital service tax investigations. Biden has repeatedly called for a coordinated approach with the EU in formulating trade and investment policies with China. Yesterday's announcement bodes well for global efforts to tax big tech. It could also be viewed as the US extending an olive branch to the EU following years of fractious trade disputes. But it remains to be seen whether the EU will take the bait.

Bruno Le Maire issued a brusque statement that France had taken note of the decision, and re-iterated France’s position that the sanctions would have been illegal under WTO law. He called on both sides to settle their ongoing trade disputes, arguing that everyone will lose otherwise. The EU was also reserved in its response to the announcement. Valdis Dombrovskis, EU trade commissioner, tweeted that the EU stands ready to explore all options should the US move forward with the tariffs.

This might be because both sides are facing a bigger trade dispute that pre-dates Trump. Indeed, it dates back to 2004, when the US launched a case against aircraft manufacturer Airbus, claiming it had benefitted from $22bn of illegal subsidies. The EU responded by claiming Boeing had received $23bn of US subsidies.

The US imposed punitive tariffs on $7.5bn of EU goods following a WTO ruling in 2019, and in October last year, the WTO ruled that the EU could follow suit with retaliatory tariffs on $4bn of US goods.

Observers had expected the EU would wait until after Biden took office to move ahead, but Dombrovskis announced it would impose tariffs days after the US election in November. Both sides claim to have repealed the offending subsidies, but both companies are facing an existential crisis brought on by the pandemic. Good intentions may not be enough to settle this dispute.