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28 September 2020

Possible Finnish referendum over the recovery fund

The youth wing of the Finns' Party organised a successful petition for a referendum on the EU recovery fund. In just five days the group obtained enough signatures for the petition to move ahead. Since 2012, any citizens’ initiative that collects at least 50,000 certified signatures from Finnish citizens must be considered by the legislature, writes YLE. The petition argues that, while a recovery fund is justified in times of economic collapse, the reach of the recovery fund agreed by the European Council is broader and goes much further than is warranted by the crisis.  

How many will join until the petition closes in March 2021 will depend on public opinion about how the money is spent. Media reports about EU governments wanting to use the money for pork-barrel spending will provide more ammunition for this type of argument.

Finland is responsible for €13bn in loan guarantees and grants out of the €750bn plan from the European Commission. Parliaments in EU member countries will have to approve these spending commitments. The Finns' party, the second largest in this Finnish legislature, has already signalled that it will try to block approval of the plan.

25 September 2020

Regional revolt against new lockdown measures

EU countries countered the first wave of Covid-19 with a general lockdown for everyone. Now that a second wave is coming, lockdown measures are confined to local communities or areas. This means that now, even in the national context, measures will hit some but not others. Sensible decision-making and good communication will be key to keep everyone engaged in this process. Some will disobey, others will insist on strict observance. New fault lines will emerge in the public discourse about what is reasonable and what not. Are governments prepared for this?

The metropolitan region between Aix-en Provence and Marseille is an example of what can possibly go wrong. The French health minister called the local executives just an hour before announcing maximum alert for the metropolitan region. The order implies closing down schools, shops, pubs and restaurants. It has significant economic and social consequences. Local executives revolted. They challenged the central government over lack of coordination, and used different indicators to suggest that the region is improving rather than deteriorating. The mayor of Aix-en-Provence even insulted the health minister. He told him to shut up and stop ruining the local economy, saying there are only 5 people in reanimation and 10 hospitalised in the city. 

Citizens now face the dilemma of deciding for themselves what responsible behaviour is. Should they obey the central government's order and close down pubs and restaurants, or disobey for the sake of their local community? The mayor's no to the order from Paris and social media communication could well foster disobedience. The region may be unusual, as they have a history of disagreement with the government since the lockdown kicked in in March. But it also shows that more needs to be done to ensure that the regional alert system is more than just a farce. 

24 September 2020

If Trump refuses to go, spare a thought for us Europeans

We treat the US elections as outside our reservation. But the outcome, of course, has potentially important consequences for the rest of the world, and for Europe in particular. We admit this is a narrow perspective. Much bigger issues are at stake. But while our perspective is narrow, we think it is nevertheless useful because it allows us to focus on foreseeable policy issues. 

The scenario we would like to discuss today is an inconclusive outcome.

Barton Gellman offers a truly scary scenario in the Atlantic: Donald Trump loses against Joe Biden, but then employs constitutional tricks to stop Biden from becoming president. It is a gripping read. In this briefing, we do not have the space to discuss the various legal mechanisms in the necessary detail. But the bottom line was well summarised by the constitutional law scholar Lawrence Douglas:

"Our Constitution does not secure the peaceful transition of power, but rather presupposes it." 

The consequences of such a scenario for American democracy would be hard to imagine. But they would also affect the rest of the world, including Europe. We have already witnessed the euro's exchange rate rise this year. A scenario in which Trump refuses to leave after an election defeat would almost surely trigger broad-based asset shifts out of the US and into the next-best safe haven. No prizes for guessing who that might be.

Currency appreciation constitutes an additional source of instability for Europe right now. Without the monetary union, Italy and Spain would have devalued their currencies during the eurozone crisis, and again during the pandemic. The only compensation they stand to receive are transfers through the recovery and resilience facility. But those are really quite small compared to the effect of a devaluation. Another increase in the euro's external exchange rate would constitute an additional, uncompensated economic shock for these countries. Just when you thought it could not get much worse... 

Even with the reforms of the last few years, the eurozone remains a fair-weather construction that lacks the tools to manage asymmetric shocks. We never thought that we would consider a US election as a potential cause of an asymmetric shock in the eurozone. But if Gellman is right with his scenario, it would be.

23 September 2020

SPD has not benefitted from Scholz' candidacy

The best polls are not those that accidentally happen to predict the correct result, but those that give us a deeper understanding of underlying trends. We never cared much for the political polling record of the old-established Allensbach institute, which regularly publishes its results in FAZ. The institute is often slow to pick up shifts in real time because it places a greater weight than others on past results. 

But this polling institute excels at providing deep analysis of underlying trends. This morning, it gave a comprehensive explanation of a superficially puzzling trend in German politics: Olaf Scholz is one of the most popular politicians in Germany, along with Angela Merkel and Markus Söder. And yet, the SPD is not benefiting from his nomination as chancellor candidate. The three latest polls have the SPD at between 14-16%, once again overtaken by the Greens who are polling in the range of 17.5-22%. 

So, why is the SPD not benefiting from a Scholz effect? The short answer is that the candidate is not nearly as important as people think, a fact that seems to contradict the underlying assumption of virtually all political journalism. 

Allensbach has found that the political priorities of Germans do not square with the SPD's perceived strengths. The Germans are not currently prioritising classic SPD themes like social welfare, income redistribution, and refugee integration. The citizens' priorities are: the fight against the pandemic, strengthening the health care sector, a smooth operation of schools and childcare facilities, economic stimulus, concerns about unemployment and corporate insolvencies, terrorism, education, and climate change. The timing is all wrong for the SPD.

The analysis comes with an important health warning: the priorities might change again before the next elections. We assume that, by September 2021, a Covid-19 vaccine will be available and the pandemic will have peaked. The economic consequences, however, will persist. Corporate insolvencies will jump once support programmes end. While the situation will undoubtedly be different in 12 months' time, economic uncertainty will persist. This is a climate in which the electorate has greater trust in the CDU.

That analysis tells us more than the numerous polling snapshots. What is particularly striking about the Allensbach survey is the disillusion of SPD voters. While the SPD's support is still in the mid-teens, only 9% of Germans have confidence in the party's ability to lead the country through the current crisis. An overwhelming majority of citizens oppose all the theoretical coalition options under which Olaf Scholz could become chancellor: with the Greens and the Left Party, or with the Greens and the FDP. These scenarios assume furthermore that the SPD would be larger than the Greens, whereas all of the current polls have the Greens ahead of the SPD. 

The big conclusion from this analysis is that parties succeed if the issues they stand for and in which they are perceived as competent match the priorities of the electorate. It's not a dog fight between candidates. Election campaigns can still twist results. We recall that Gerhard Schröder twice managed to recover by almost 10% during a campaign. But he did so because he succeeded in aligning party and country. It was not only a question of his charisma. Germans are concluding that this is not the time for a coalition of the left, or indeed any coalition led by the SPD. With last year's leadership election, the party moved to the left. We think this is still a strategically intelligent direction because one of the likely consequences of the pandemic will be a rise in inequality and a return to SPD themes. But it might take a few election cycles, and a candidate who embodies the political shift, for that to happen.

22 September 2020

Towards a second lockdown

We hope that it won't happen, or at least that Sweden will be joined by a few others in resisting the gut reflex of western political systems to lock down the economy in order to defeat a virus. The UK has imposed restrictions on public gatherings and the opening hours of pubs and restaurants. We are sure that more restrictions will follow. The Times reports that Boris Johnson was about to order the complete closure of pubs, but was persuaded to hold off by Rishi Sunak, the Chancellor.

Infection rates are rising throughout Europe. We expect Germany once again to be among the countries most effective in their crisis response, with a focus for now on walk-in test centres for high-risk groups and special protection for care homes. The Italian response is also similar to Germany's, with the addition of compulsory mask-wearing in public. The Dutch response is more similar to the UK's: restrictions on bars.

We expect the situation to ease the moment a vaccine is ready for mass introduction, which is likely to happen at some point in 2021. The winter tourism season is definitely cancelled. We expect the summer tourism season in 2021 to resume partially, but at a subdued volume. Even if restrictions were lifted in the summer, we do not think that tourism revenues in Europe will reach 2019 levels for many years, if only because travel has become more bothersome. Tourism and hospitality have joined the media and cars as declining industries.

The economic effects come mainly in the form of cross-sectoral shifts, which would be massively accelerated in the event of a second lockdown. Economic history teaches us that disruption is often good for economic development in the long run. But there are notable exceptions. It took the German economy 100 years to recover from the 30-year war in the 17th century. Beware of lazy historical analogies. What is unique about the lockdown is its massive interplay with two trends that have been happening in parallel: a technological shift from analogue to digital, and a political pushback against globalisation and multilateralism.

21 September 2020

Forget soft power

At their last meeting, EU foreign ministers discussed a paper that was uncharacteristically honest in its appraisal of the current situation: a shift in the global environment towards hostility to the European way of life. We have a copy of this paper, which touches on some of the things we have been discussing here at Eurointelligence.

The first big hurdle is to confront the culture of denial about the world as it is today, and Europe's role in it. The paper identifies five hostile trends, with some overlaps: 

  • multi-polarity without multilateralism: confrontation prevails over regulation;
  • return of competition between states;
  • return of empires: lack of respect for the sovereignty of people as opposed to the sovereignty of states;
  • weaponisation of interdependence: trade wars, secondary sanctions; 
  • reconfiguration of global supply chains as strategic policy instruments. 

The overriding theme is the breakdown of liberal multilateralism. We are not surprised that this is happening. Our multilateral institutions are ineffective and elitist. We have made the observation before that the dumbest thing a politician can do these days is to go to Davos or some other global junket. If you want to revive multilateralism, you must to involve your electorate in much deeper ways, and put an end to the elitist nonsense.

But herein lies the dilemma. European electorates are becoming more assertive, but they do not favour hard-power solutions. In Germany, for example, no coalition could currently win an election by supporting Nato's 2% defence-spending target.

Our suggestion is to focus on high-tech capacities in a more general sense, and develop them for dual civilian and military use. The latter is particularly critical as a new arms race is developing in this area. 

The UK has been the European country most advanced in signal intelligence. For this reason alone, Brexit will constitute a net loss to European security. This is one of the reasons we have been so critical of the EU's hardline position in bilateral negotiations, and its excessive focus on 20th-century manufactured goods rather than 21st century technologies. If the EU wants to think more strategically about Europe's role in the world, a useful first step would be to stop thinking of the UK as an adversary.

18 September 2020

EU hydrogen targets are a bunch of hot air

The European Union has officially bumped up its 2030 emissions target from a 40% reduction relative to 1990 levels, to a 55% reduction. The European Commission is banking on hydrogen to meet this goal. Green hydrogen, or hydrogen produced using renewable-powered electrolysis, could be a game changer for Europe’s energy sector. But the Commission’s hydrogen production targets are extremely ambitious given the current state of the industry.

Climate change and the European green deal were near the top of Ursula von der Leyen’s priority list during her state of the EU address this week. She confirmed that 30% of the Commission's €750bn recovery fund borrowing will be raised via green bonds, and that the fund will prioritise hydrogen projects. The goal is to develop hydrogen valleys, or large localised clusters of hydrogen production, to modernise industry and to power vehicles and rural areas.

It all sounds very good, but Europe has a long way to go. The EU's hydrogen strategy, laid out in July, calls for 40 gigawatts of green hydrogen electrolyser capacity by 2030, and an additional 40GW of capacity from countries in the southern or eastern neighbourhood, possibly Ukraine or Morocco, which would export to the EU. The interim 2024 target is set at 6GW. Green hydrogen is preferable from an emissions perspective because it uses renewable energy to generate the electricity needed for hydrogen production. Blue hydrogen uses fossil fuels in the production process, and so relies on carbon capture and storage to reduce its greenhouse gas emissions.

Europe is certainly making inroads in hydrogen. The Netherlands, Portugal, Germany, and France have all published hydrogen strategies over the past year. Global investment in electrolysers planned to be operational by 2030 more than doubled in the six months to March 2020, and more than half of this will be built in Europe.

But even this is not enough to meet the EU's mid-term target. Europe’s current electrolyser production capacity is well below 1GW per year, and the largest electrolyser currently under construction has a capacity of 10 megawatts. The Oxford Institute for Energy Studies reports that, for electrolysers, the typical success rate for large infrastructure projects to progress from feasibility to a positive investment decision is between 20% and 30%. Achieving the 2024 target would require between 20GW and 30GW of projects to be in the pipeline now, or by early 2021 at the latest. As of July 2020, Europe had 4.5GW of projects expected to come online by 2030, not even by 2024.

That's not the only challenge. The EU hydrogen strategy prioritises green hydrogen development. But it also accepts that, in the short and medium term, other forms of low-carbon hydrogen will be needed. However, it calls for just €3bn-€18bn of blue hydrogen investment, compared to €180-€479bn for renewable hydrogen. The green hydrogen figure does not include investment required to bring additional renewable power production capacity online, which adds between €220bn and €340bn to the bill. The recovery fund alone is not going to cover this, and Europe's hydrogen leaders can't meet the shortfall on their own. France, for example, plans to invest €7.2bn in hydrogen by 2030. It's not enough. 

At the end of the day, even if the Commission reaches its 40GW target by 2030, this would meet just 3-3.75% of Europe’s total projected energy demand. Hydrogen still holds potential to transform Europe's energy landscape in the long term. But right now, the hydrogen hype should be taken with a grain of salt. 

17 September 2020

Johnson's conservative friends are pushing him towards no-deal

The UK's internal market bill turned out to be a storm in a teacup. The storm subsided yesterday when Boris Johnson cut a deal with Tory rebels that will give the UK parliament the last word on any future breaches of the withdrawal agreement. For the EU and the EU/UK trade deal, this whole episode is completely irrelevant. 

There is one political development, however, that could increase the probability of serious challenges. Conservative commentators, friends of Boris, are rounding on him. This morning we see the extraordinary spectacle of both the Spectator and the Daily Telegraph running stories about Johnson's failing premiership. Allister Heath writes in the Daily Telegraph that Johnson needs to do two things: fix the broken system of Covid-19 testing; and leave the transition period properly, by which we presume he means no deal. We certainly agree with Heath on the former issue. But we are not sure that the UK, or even Telegraph readers, are quite ready to draw the right conclusion from the testing debacle: an open acknowledgement that the UK's revered National Health Service is no longer fit for purpose. 

Fraser Nelson's cover story in the Spectator this morning lists a large number of policy failures and U-turns, including the latest twists and turns on the internal market bill. The criticism is devastating, but the message is conditionally optimistic. Even now, Johnson is ahead in the polls. There is no alternative leader in his own party. But he needs to start to govern.

The reason we give these comments so much prominence is the implicit message they contain for the future relationship with the EU. They are both saying that Johnson cannot afford a deal with the EU that would be interpreted as a climb-down. If that happened, the sense of indecision might become irreversible. These are spine-stiffening rally calls by Johnson's most loyal supporters. We think he will heed what are still, in tone, friendly warnings.

The UK-Japan trade agreement tells us what a compromise can look like. We disagree with the interpretation of this deal in the FT, which argues that the UK had undermined its own negotiating position with the EU by agreeing to a state aid regime in its recently concluded deal with Japan. As the FT writes, the two governments agreed to prohibit indefinite government debt guarantees for struggling companies, or open-ended bailouts without restructuring plans. We cannot think of an existing or potential future state aid case in the UK that would fall under this category. We believe that the UK can happily live with this type of arrangement in a trade deal with the EU. We think the problem here is more likely to be the EU. Recall the proximity argument. The EU seeks harder guarantees from the UK than it did from Japan, on the grounds that the UK is geographically closer.

This is where the rallying calls of Johnson's supporters become relevant. Nobody would regard it as a defeat if Johnson were to agree to the standard terms on state aid in international trade agreements. The same goes for other level-playing-field issues, such as environmental and labour standards. But we think this is the marker of a broader line between perceived success and failure. A deal will happen if the EU agrees to treat the UK as a normal trading partner. But such a consensus has yet to emerge in Brussels. It won't happen until October. If it doesn't emerge, or only insufficiently, our expectation is that Johnson will walk. 

16 September 2020

Unclear whether Turkey and Greece will start talks soon

The path to dialogue between Greece and Turkey remains unclear, even if both countries declare they are ready for dialogue. It will be crucial for diplomatic efforts to produce tangible results in the next eight days, ahead of the European Council on September 24/25.

The Oruc Reis, Turkey's exploration ship, has returned to port. But Ankara continues to send conflicting messages. The Turkish government issued a naval directive for real-fire naval exercises on September 17, near the Turkish coast opposite the Greek islands of Rhodes and Kastellorizo. Turkey also extended a hydrocarbon exploration expedition off the shores of Cyprus. In terms of rhetoric, Recep Tayyip Erdogan has kept quiet but his spokesman and foreign minister both insist that Turkey will protect its rights and interest in battle and at the negotiating table. Ankara clearly wants to keep up the pressure.

The Greek government is asking for tangible signs that Turkey seeks de-escalation ahead of the EU summit, while the Turkish government has signalled that more Green conditions will prompt their own counter-conditions. In the coming days, diplomatic efforts will be all about where to draw the bottom line for starting talks.

There is some last-minute diplomatic effort from Brussels to pull off a multilateral conference with Greece and Turkey before next week's summit. One of Athens' preconditions is that Cyprus also participates, which Ankara strongly opposes. Whether this conference will actually happen will emerge in the coming days. Other diplomatic initiatives include talks between Athens and Berlin, an appeal by Mike Pompeo to demilitarise the conflict, and a visit to Greeve by the Egyptian foreign minister. 

16 September 2020

Macron's transformation to bottom-up candidate

Emmanuel Macron is turning his green credentials upside down, starting with his swipe at opponents of 5G. The French Greens requested a moratorium on 5G and Macron went against them yesterday, comparing them to the Amish people who advocate a return to the oil lamp. Ecologists, as the greens are called in France, are also against the Tour de France. Macron made sure to attends one stage of what he called a major event in French sporting and cultural heritage. And then there is the ban on neonicotinoid pesticides used in agriculture, which is about to be lifted. There go three years of building up his green credentials.

Why? Macron is about to reinvent himself for the 2022 elections. In 2017 he was an elite candidate who promised the people he could destroy the political system without destroying the country. For 2022 he wants to become a bottom-up candidate, writes Cécile Cornudet. This is what his choice of Jean Castex as prime minister is all about: changing the tone and talking like people on the streets, though not the ones in Paris. There will be green policies still, but less systemic and more in sync with the people. They are to follow common sense, without giving up the French art of living well. These are little phrases, but they are signalling a fundamental shift in Macron's positioning for 2022.

For Macron, the next candidate from the left will come with a green agenda. By pointing out that this agenda is not in sync with the French way of life, Macron presents himself as the compromise candidate in times when economic recovery is a priority. The polls suggest that he is not giving up much political capital, as his green agenda, allocated €30bn in the stimulus package, fails to convince. But whether Macron's U-turn will help or harm him as a presidential candidate is yet to be seen. After all, the French are divided over environmental questions, and Macron's makeover could accelerate this polarisation.