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7 October 2021

The gentleman is for turning

Probably the most famous Tory Party conference quote in history was Margaret Thatcher's Shakespearean pun in 1980 that the lady is not for turning. She wanted to quell rumours of a U-turn. Boris Johnson yesterday tried to invoke Thatcher’s legacy, but then ended up doing the very opposite, by announcing a major policy U-turn. He ditched the manifesto promise to build 300,000 new homes every year. Instead, he promised home owners in Southern England that he would protect the value of their main asset, or as he put it, protect the countryside from being desecrated by ugly new homes. On this point, the Tories are still very much the old Tories. England’s supply-constrained housing market has been a sure-fire method for chattering and unproductive English middle classes to make money. Buy a house when you are young, spend 25 years paying your mortgage, and end up as a millionaire. For now, that model will persist.

The politics behind this is clear. In order to win re-election, he will need to keep his new working class supporters in northern England, but he will also need to consolidate the Tories' traditional voters in the south. The southern Tories' big issue is planning rules, for urban development and housing. The only factor that keeps their house prices high is scarcity. Once you open up even a tiny proportion of England massive green reserves, you would end up with a long period of depressed housing prices. The UK will also require more immigration to make its new economic model work, so that demand for quality housing will remain high for the foreseeable future, though perhaps less focused on London than it has been in the past.

The Telegraph reports that Johnson’s announcement constitutes an actual shift in politics, as his government has now ditched what was supposed to be the biggest overhaul of the planning system since the second world war. Instead of focusing on greenfield sites, they will shift toward brownfield developments, or redevelopment, in the Midlands and the north of England. The political idea is to shift development northwards, where it is politically more acceptable.

One of the triggers behind that U-turn was the loss of the constituency of Chesham and Amersham, near London, which resulted in a victory for the LibDems in a former Tory stronghold.

6 October 2021

Ça suffit! France goes after fish

France wants Brussels to toughen up its position towards the UK over fish. The Brexit accord grants French fishermen the right to fish in British waters if they receive a licence that proves that they had been fishing in British waters before Brexit.

France and the UK had been in a tussle after it became apparent that the number of licenses granted was below what Paris expected. The Channel Island of Jersey announced last week that it had granted 64 licences to French vessels and 31 temporary ones, and rejected 75 applications. Paris had requested 169. The day before, London granted 12 additional authorisations in its waters, within the limit of 6 to 12 nautical miles of its coasts, which is less than a quarter of the 87 requested by France.

Jean Castex warned that if the EU reaction is not enough, France would refer the matter to the arbitration panel that was instituted in the withdrawal agreement. Castex's reaction came hours after Clement Beaune, France's Europe minister, talked about retaliatory measures. Beaune mentioned France’s energy supply to the Channel Islands, implying that they could cut Jersey’s power if needed.

What is this indignant outburst about? Defending French fishermen? Or does it have a bigger context? After France felt left out over Aukus and Lord Frost’s threat to trigger Art. 16 over the Northern Ireland protocol, the relationship between France and the UK is going through some testing times. Fish always has the potential to stir up conflict. Trust between the two sides is waning. The EU is slowly waking up to what a post-Brexit world looks like: a world in which the UK is no longer a partner, but a strategic competitor.

5 October 2021

Spain's Puigdemont problem

Another chapter in the long-running story of Carles Puigdemont has, for now, been closed. Following on from the fugitive ex-Catalan president’s arrest in Sardinia on 23 September, an Italian court of appeals decided yesterday to suspend proceedings and free him in the meantime.

Puigdemont’s immunity from prosecution, which he gained after being elected to the European Parliament in 2019, was taken away by his fellow MEPs in March. But the court ruled that it still considered the immunity valid, while appeals to the Court of Justice of the European Union by Puigdemont’s lawyers are pending.

This was a frustrating development for the Spanish government. They have been trying to extradite Puigdemont since he fled in 2017, after he led an attempt to stage an illegal independence referendum. Spain wants him to face a variety of charges related to the referendum, including sedition and misuse of public funds. This is now the third time they have failed to secure his return to stand trial.

And the Spanish public is getting similarly irritated with the government’s inability to get at him. According to a poll that El Mundo commissioned, 55% of Spaniards believe that Pedro Sánchez’s government is not doing enough to force Puigdemont to return to Spain. More worryingly for Sánchez, more than a third of voters for his own political party, the Socialists, share this opinion.

What is interesting, and annoying for most Spaniards, is how much sympathy there is for Puigdemont outside of Spain. In Italy, Matteo Salvini weighed in on Puigdemont’s side after his arrest, describing Spain’s attempts to extradite Puigdemont as a form of revenge. He went on to say that Italy’s police should prioritise arresting common criminals, rather than parliamentarians.

And in Belgium, where Puigdemont now permanently lives, he has maintained close links with the Flemish nationalist N-VA. This went as far as N-VA considering asking him to run on their European Parliamentary list. They voted against rescinding his parliamentary immunity in March. Although Puigdemont’s time in the public eye will temporarily die down, we can expect it to return with each court appearance and statement of support.

4 October 2021

Divisions in Hungary's opposition

It has been a busy time for Hungarian politics. For the last few weeks, a disparate coalition, which includes almost all of Hungary’s opposition parties, have been holding nationwide primary elections. They are selecting a single prime ministerial candidate, as well as candidates for a joint list, and winner-takes-all constituencies.

The parties vary a lot ideologically, from the centre-left Hungarian Socialist Party and Democratic Coalition to right-wing Jobbik. Their different outlooks have stopped them from cooperating in the past, to Viktor Orbán’s advantage. In July, they banded together, in a push to stop Orbán at next year’s general election. Their combined support is neck-and-neck with Orbán’s Fidesz party, so they have a realistic chance of succeeding.  

That is if they can keep it together. The signs leading up to the first round of voting, which finished last week, looked good. There was spirited disagreement on policy, but everyone was united by a common respect for the process, and disdain for Orbán. Now, cracks are beginning to show.

The issue is not so much over ideology or policy. It is over personalities, and one personality in particular: Ferenc Gyurcsány. He was prime minister from 2004-2009 for the Socialists, and now leads the Democratic Coalition. His wife, Klára Dobrev, came first in the primary’s first round, with 35% of the vote.

The problem with this for Gergely Karácsony, who came in second, and Péter Márki-Zay, who finished third, is that, as far as they are concerned, Gyurcsány is politically toxic. A speech he made in 2006, in which he said that his party lied to the public to win re-election, caused outcry. He is not especially popular. Orbán clearly realises this, and has portrayed the opposition as Gyurcsány's stooges.

As Gergely Nyilas explains, Karácsony, who is mayor of Budapest, and Márki-Zay could, according to the primary rules, both run in the second round. They disagree over which of them should step down. But they want to avoid splitting the vote against Dobrev, who they see as unelectable because of her association with Gyurcsány. Indicative polling shows that Karácsony has a better chance against Dobrev than Márki-Zay, but nothing has been confirmed.

The key date to watch out for is 17 October, when the second round’s results will be released. Karácsony has said that he would still want to work with Dobrev and DK if he wins the nomination. A more difficult result to swallow would be Dobrev winning.

The pact between Hungary’s opposition parties is rooted in a common desire to see Orbán gone. They are working together not because they want to, but because they need to. If everyone thinks that a victory is still possible, we expect that their dislike for Orbán will trump any reservations they have about each other. If some think the strategy won’t work, there could be problems.

1 October 2021

Delays in Poland on EU law ruling

Poland’s constitutional court met yesterday to deliver a ruling on whether EU law has primacy over Polish law. And, for the fourth time, the court kicked the can down the road. They will not make a decision until 7 October at the earliest, prolonging a process that has dragged on for months.

Poland has several ongoing disputes with various EU institutions where rule of law is concerned. These disputes have resulted in a CJEU ruling against Poland over disciplinary procedures for judges. The case that the constitutional court has deferred judgement on was brought by Mateusz Morawiecki, Poland’s prime minister, in March as an attempt to counter the CJEU.

One interpretation of the deferral is that it’s a pressure tactic. Since they came to power in 2015, Law and Justice has filled the court with party loyalists. Poland’s opposition claim that the decision is intended to strongarm the European Commission into approving Poland’s €57bn recovery package.

The primacy of EU law is a basic European legal principle. Without it, the complex regime that supports every aspect of how the union works would not be able to function. Paolo Gentiloni, European economic commissioner, has said that the questions surrounding the primacy of EU law in Poland have delayed the approval process. So, the constitutional court might be trying to win a staring contest with the commission over the funds.

Another possibility is that the deferral happened because the Polish government are stuck. Morawiecki’s decision to challenge the primacy of EU law probably made sense back in March. The Commission is notoriously reluctant to act on rule of law violations. Since the recovery act passed, this changed a little. Because the Commission is responsible for green lighting plans and payments, it can make malfeasance financially painful.

So, Law and Justice are in a bind. The court deciding against the government would mean a loss of face. But a ruling in favour of Morawiecki would poison the well with the Commission. The only other option is to stick the case in a holding pattern.

Whether it’s an attempt to coerce the Commission into approving the funds, or a panicked response to their own overextension, Law and Justice’s position is not great. The Commission controls the purse strings. Poland’s total recovery fund allocation is worth more than 10% of its pre-pandemic GDP, so it’s money the government needs to secure.

According to the most recent Eurobarometer report, 55% of surveyed Poles said they tended to trust the EU, while 28% said the same of the government. So, turning the blame on the EU, which is what the government has done so far, does not seem to be a viable strategy.

Dominika Wielowieyska has pointed out that, if Law and Justice cannot sort out the funding situation, their goose is cooked. Whatever happens on 7 October, the Commission will still have the high ground.

30 September 2021

UK leads EU on start-ups

There has been a lot of coverage in the European media about the UK's fuel shortages, still ongoing, but starting to ease. But deep inside the back pages of FAZ we found another story that pricked our interest: that London has maintained its number two ranking among the world's leading venture capital hotspots despite Brexit and Covid. Next week, we will take a detailed look at the UK's AI strategy, which we consider to be critical for the success of a post-Brexit economic strategy at a time when the patterns of trade shifts from physical goods to data.

The newspaper report cites a study by Genome, a consultancy, called the global start­up ecosys­tem report 2021, an annual investigation of the start-up scene. The US constitutes 50% of what the report classifies as the top 30 venture capital eco systems, followed by Asia with 27%, and Europe with 17%. The total system of the global start-up economy is put at $3.8tn. In terms of cities, Silicon Valley is the unsurprising leader, followed by New York and London in joint second place. Then come Beijing and Boston.

Among the top 20, there are only two European cities, Paris and Stockholm. One of the remarkable features of this table is that cities often come from nowhere in a relatively short time. Washington DC, not generally known as a place of commerce, has jumped ahead of all European cities. Tel Aviv is in the top 10.

The highest ranked German cities are Berlin and Munich. While the overall rankings don't seem to be impressive at first sight, 22 and 31 respectively, they have done especially well this year. The end of the anaesthetic Merkel years in Germany, and the likelihood of the Greens and FDP featuring in the next coalition, are promising signs for budding entrepreneurs. Germany is not a great place for new ventures, largely because of bureaucratic constraints and labour market rules designed for large industrial companies. The SPD even wants to tighten some of these rules.

The factor that favours London as a strong start-up environment is the financial sector, with 1400 venture capital firms based in London. London accounts for more start-up financial flows than the whole of Germany. The total market value of the London start up scene is put at $142bn compared to $37bn, about four times the size.

What these numbers are telling is that the potential in Germany is huge, but it would take a lot of political change to unleash this. This issue has played no role whatsoever in the election campaign, and is unlikely to be prioritised in the upcoming coalition talks. But it is one of the few areas in which there is a strong overlap between the Greens and the FDP, and one where they could come up with a joint position.

29 September 2021

Does EU beat US on crypto regulation?

In our previous story on decentralised finance, or DeFi, we wrote that the US approach to regulating the industry, a fast and somewhat arbitrary crackdown, is doomed to failure. Today we will elaborate on why that is, and examine how the EU’s approach to DeFi regulation compares.

A regulatory crackdown in DeFi will be difficult under existing frameworks because many of the platforms and products that exist do not need centralised oversight. In the event of a crackdown, developers and company management can simply withdraw, and the platform can continue to function as a decentralised autonomous exchange, or DAO. 

DAOs are confusing for regulators because they function as both a business and a community. A new company can build and launch a DeFi protocol, but transition control of the protocol over to a DAO when it wants, or when its founders want to disappear. 

This makes it almost impossible to dissolve the entity because a DAO is a large group of mostly anonymous users that is almost impossible to map and track. Dissolving a DAO would be like deleting a viral meme from the internet. You would have to find every individual user who has it. Yet DAOs, like a company, can operate a business under a decentralised model, with participation of their members ranging from passive to full time. 

Facebook and other social media companies are facing a similar situation, how to regulate and moderate users, but they are centralised businesses with a CEO and a platform that could in theory be shut down. With DAOs, no one can turn the lights off unless everyone does. 

That’s only the beginning of the headaches facing regulators, although in the case of the EU, the approach to confronting such a challenge appears to be avoiding any near-term action. 

In July the European Commission proposed a new law, the travel law, which would ban anonymous crypto wallets and require companies handling crypto assets to obtain the customer’s name, address, date of birth and account number, as well as the name of the person who will receive the crypto assets. The proposal requires approval from member states and the European Parliament, however, meaning it is unlikely to be implemented for at least two years. 

A potentially more significant development came earlier, in September 2020, when the Commission adopted the Markets in Crypto-Assets Regulation, or Mica proposal. Mica aims to harmonise and legitimise cryptocurrency regulation, including supervision of crypto-asset service providers, meaning DeFi companies and communities. The proposal would set clear rules for crypto assets in the European Economic Area under a common framework, with the goal of providing greater legal certainty, fostering innovation, and improving consumer and investor protection. 

Mica stipulates which tokens qualify as a financial instrument, and which are considered crypto assets. Stablecoins that are pegged to fiat currency would be considered crypto assets under Mica, as would asset-based reference tokens, which are pegged to a basket of currencies. Mica also modifies the existing e-money regime to include electronic money tokens, or e-money tokens, crypto assets whose primary purpose is be used as a means of exchange and that are denominated in units of a fiat currency. 

Crypto-asset service providers will be required to publish white papers and obtain approval from national governments prior to launching. National financial watchdogs will be responsible for enforcement. Issuers of significant e-money tokens and asset-referenced tokens will also be directly regulated by the European Banking Authority. They will be obliged to follow rules regarding capital, interoperability and liquidity management.

With Mica, the EU has become one of the first major jurisdictions to attempt to regulate the stablecoin asset class. It’s good news for those in the industry who have called for regulation and legitimisation, but there’s a problem: it is not expected to be fully operational until 2024. By then, the industry may have changed so much that original frameworks no longer apply. Consider the DeFi industry itself. As Carlo De Meijer, an economist and European crypto expert, noted: leading platforms such as Maker, Compound, Uniswap and Aave grew from less than $1bn in value in 2019, to more than $90bn as of early June 2021. Furthermore, Mica doesn’t have an answer to the DAO question: how to regulate a business that has no management. 

On the other hand, faraway deadlines give regulators more of an opportunity to study the market, learn the concepts and vocabulary, engage with the industry, and determine the best course of action. As we wrote previously, an intelligent and collaborative approach to regulating DeFi could give the EU a competitive advantage. It might also allow for the creation of something truly novel: European tech giants.

28 September 2021

What to make of Angela Rayner

Recent events in the UK should be a golden opportunity for the country's opposition. Europe’s energy crisis has led to small British suppliers going bust, meaning higher bills for many. And a shortage of lorry drivers caused a fuel crisis, forcing the government into an embarrassing u-turn on short-term visas for foreign hauliers.

The situation has been bad. And the government’s response has, frankly, not been great. But Labour missed an open goal, by letting factional infighting overshadow it.

The UK’s biggest opposition party are not making the news for critiques of the government. Instead, Labour’s headlines focused on a row over internal party rules between Sir Keir Starmer, the party leader, and Angela Rayner, his deputy. The infighting escalated yesterday afternoon when Andy McDonald, the shadow transport minister, and a member of Labour’s hard left, resigned and publicly accused Sir Keir of splitting the party. 

Labour elects their leader and deputy separately, so the party is no stranger to fratricidal dynamics. Jeremy Corbyn, the previous leader, effectively tried to kick Tom Watson, the last deputy, out of his role. And beyond the rules dispute, Sir Keir and Rayner represent opposing leadership styles.

Sir Keir stands for a clean break from Corbyn’s scruffy, vintage socialist approach. He is a softly spoken, sharply dressed barrister from the leafy southeast of England. And he is a fan of constructive criticism, emphasis on the word constructive.

How Rayner’s style compares to Corbyn’s is complicated. She was not always in sync with Corbyn’s circle over policy. And as a single mother from a northern English working class background, she is not vulnerable to accusations of champagne socialism. But, like the ex-leader and his followers, Rayner is a firebrand.

We think that Rayner’s aggressive approach is bad for the state of public discourse. It is, however, a more effective strategy. Our advice to any political party after a string of lost elections would be to consolidate the base first. Trying to win floating voters is hard if you cannot mobilise your own core.

And, whether they like it or not, Labour’s base has changed. The big difference between Labour and the governing Conservatives is not policy: it is political culture. The Conservatives appeal to individuals’ personal beliefs and interests. Labour appeals to institutions, which encourage their members to view their interests collectively.

The important collectivist political institutions of the 20th century were trade unions. In the 21st century, they are universities. And Labour’s support base has shifted accordingly. Labour loyalists are now, overwhelmingly, young graduates. They are not as likely to turn out as the Conservatives’ elderly base. But what they are is angry: about Brexit, housing, and cultural issues.

Slavishly following the policy preferences of this relatively small voting segment would not be wise, especially on Brexit. That was the mistake of the Corbyn era. But what Labour can do is match, or at least recognise, their tone. Sir Keir and his party can only threaten the Conservatives if they can fire up their base, and get them to the polls. To do that, they need someone like Rayner.

27 September 2021

A tale of two central banks

Poland and Hungary have been experiencing high levels of inflation for several months. In April, both countries saw their inflation rates rise dramatically, and by July Poland’s rate was 5%, and Hungary’s was 4.6%. This is well above the target rates that both countries’ central banks have set, as well as their upper tolerance thresholds.

But their central banks have handled the situation very differently. Over the summer, Hungary became one of the first European countries to adopt a more hawkish monetary policy. Their base interest rate has gone from 0.6% in June to 1.65% in September, thanks to four consecutive rate hikes. Although the latest rate hike was less than expected, the base rate still went up. And in August, the Hungarian central bank began tapering its asset buying programme.

Not so in Poland. The Polish base rate is still at 0.1%, lower than Hungary’s to begin with. And Poland’s central bank has not raised it at all since April. This is despite the two countries now sharing several macroeconomic similarities. Both have relatively high inflation, strong post-lockdown growth, and low unemployment compared to the EU average.

When comparing Poland and Hungary to other European countries, there are caveats. Both countries had rising inflation before the pandemic. The Hungarian volte-face is interesting. Gyorgy Matolcsy, Hungary’s central bank governor, resisted any notion of a rate hike in the months before the pandemic, when Hungary’s inflation was climbing.

The two countries are also special cases because their central bank governors are not exactly independent. Adam Glapinski, Poland’s central bank governor, is a long-standing ally of Jaroslaw Kaczynski, leader of the ruling Law and Justice party. Matolcsy has also faced accusations of being a political appointee, though he recently put the boot into Hungary’s economic policies, blaming them for the inflation.

That said, there will be lessons for the rest of Europe from the two approaches. The debate right now is whether tightening is necessary to deal with inflation, and if so, by how much. Poland and Hungary provide an example of the two different sides of the argument, put into practice in countries with broadly similar macroeconomic indicators.  

Though both central banks say they expect inflation to be temporary, Hungary is clearly hedging against the possibility of a sustained increase. Poland, meanwhile, fears strangling growth prematurely. Watching how the two compare over the coming months will be potentially instructive.

24 September 2021

EU tries to ban lightning. Good luck.

We read in Suddeutsche Zeitung first that the Commission is now ready to impose a unified charger on all electronic devices, including of course mobile telephones. This is consistent with the EU’s attempt to seek global power through regulation, even in industries Europe has long abandoned. The thinking is that 500m of the worlds wealthiest consumers clearly have some muscle to counter high tech oligopolies. Or do they really?

We have been critical of the EU’s attempt to become the global super-regulator in industries in which EU companies are at best peripheral actors. In the past, product regulation was never primarily done for the consumer, but to provide a level-playing for producers, within reason. Since today’s high-tech producers are mostly American and Asian, strategy has shifted. In the case of the now mandated USB-C charger cable, it has probably met its nemesis.

The Commission said the idea is to reduce electronic waste. It had given the industry time to come up with the solution for the electronic charger problem, but to no avail. Apple uses the lightning charger for its phones, while most Asian manufacturers of Android phones use USB-C. As users of too many electronics gadgets ourselves, we, too, would welcome a reduction in the variety of charger cables. But our experience has been that the main problem is the reliability and longevity of USB-C cables, whose lifespan compares unfavourably with fresh dairy products.

In any case, we agree with Apple, unusually for us, that this directive would stifle innovation. There have been several USB standards over the years. No standard has ever been final. A next-generation product might require a technology that does not currently exist, and that may not be deliverable in the confines of the USB-C socket. What will happen is that the European consumer could end up with dumbed-down product versions or, more likely, resort to the unregulated grey market.