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12 March 2021

Fudging the numbers

More storm clouds on the horizon for the EU recovery fund. We noted a piece in Handelsblatt yesterday about fears that disbursement of the Next Generation EU fund will be delayed. Some member states have been quick to point the finger at the EU because it is pushing governments to implement economic reforms prior to receiving the money, under a set of country-specific recommendations published in May last year. But for some of these countries, the problem lies a little closer to home.

In Germany, which is set to receive €22bn, the EU has insisted on ambitious reforms including front-loaded public investment in new housing and green and digital infrastructure, with a focus on sustainable transport, clean and efficient energy systems, education and research and development. Improved digitalization of public services was another key area for reform.  

The problem is that while the German government is moving to undertake some new investment projects, the bulk of its recovery fund spending – some 75%, according to Handelsblatt – has been allocated to projects that were already planned before the pandemic hit.

Manfred Weber, leader of the EPP group in European Parliament, warned that while the Biden administration has just passed a record $1.9tn stimulus package, Europe remains stuck in procedures. According to him, it is incomprehensible that some parliaments have refused to ratify agreements their heads of government concluded nine months ago. Sven Giegold of the Greens, meanwhile, complained that Germany is attempting to pay with EU money what the government would have otherwise financed with its own bonds, which will not bring about any boost in innovation.

We agree with Handelsblatt’s warning that misspent money, combined with dismal vaccine campaign management, could permanently damage the EU’s reputation. Successful implementation of the recovery fund is absolutely critical if it is to become a permanent, debt-financed investment programme. But if the money is lost to sneaky accountancy and pork barrel spending, this path will be abandoned.

11 March 2021

Merkel's dead

It has not happened yet on a grand scale. So far, nobody is blaming Angela Merkel and other prime ministers personally for the rise in deaths, due to their collectively incompetent crisis management.

The SPD politician Karl Lauterbach, who also happens to be a professor of health economics and epidemiology at Cologne University, yesterday made that link, still cautiously, but the implications are clear: a study showing that the UK mutant virus B117 resulted in a 64% increase in mortality means that a lot of people will die before they are due to receive a vaccine. In other words, these are Merkel's deaths because it was her decision to Europeanise the vaccination procurement process.

The data show a fall in infection numbers from end-December until mid-February, and a small rise in reported cases since then. As the UK mutant is now spreading, German epidemiologists like Lauterbach are expecting a rise in case in numbers going forward. With only 5.7% of the population having received a first vaccine - Lauterbach's scenario is a clear possibility. By election day in September, a majority of the population will have received a first vaccination, but the politics of this health policy disaster are likely to reverberate beyond the immediate crisis. Nobody is talking about Merkel's dead yet. The German media try to avoid any personal criticism of the chancellor. But this is not a situation they have under control.

10 March 2021

Vaccine smear campaign - Sputnik edition

We were stunned to hear Christa Wirthumer-Hoche, the chairwoman of the European Medicines Agency, refer to Sputnik, the Russian Covid vaccine, as a game of Russian roulette. She probably meant that countries take risks by loading up on vaccines that are not yet approved by the EMA. Even if that were so, the comparison with one of the deadliest games of chance is not only wrong, but potentially counter-productive. The EMA's job is to approve a medicine or not, but not to speculate.

We will at one point be able to measure the cost of the various EU smear campaigns against specific vaccines in terms of human lives - when we are able to get a clearer picture of the impact of vaccinations on hospitalisation and mortality - broken down by brands. Once we understand the impact more clearly, one can calculate how many lives would have been saved if the EU had pursued strategy similar to those of other advanced countries.

The Sputnik vaccine is structurally similar to the Oxford/AstraZeneca vaccine, but uses different host viruses that embed the actually vaccine. First large-scale test results were positive. If countries are faced with acute vaccine shortages, they will naturally consider alternatives. Even if Sputnik is not as effective as claimed, the purchase of the vaccine would not constitute a gamble comparable to Russian roulette.

We note with interest that Sputnik is now being produced in Italy, in a deal that surprised Mario Draghi and the Italian government, but apparently not the Lega. The Russians partnered with a specialist Swiss pharmaceutical company with production plants in northern Italy. The capacity is low in comparison with European plants. There is no way that the EU will ever rely primarily on Sputnik. Yesterday it became known that Johnson & Johnson warned the EU of supply problems that could complicate plans to deliver the originally promised 55m doses.

9 March 2021

How Italy plans to use the recovery fund?

More details are emerging on the Draghi's government's plan for the recovery fund. Daniele Franco, Italy's new finance minister, appeared in front of several parliamentary committees to lay out the strategy. We are stunned to hear that the goal is to create a long-term growth rate of 3%, as La Repubblica reports. The newspaper didn't say whether this number is nominal or real. A 3% nominal growth does not seem very exciting - if inflation were to increase back to the ECB's target. But a 3% real growth rate would be sensation given the near zero productivity growth performance since the start of the euro. 

Franco noted that this increase in the structural growth rate was contingent on reforms, which need to happen soon. The paper also reports that there is a small drop in the allocations Italy stands to receive from the recovery fund - from a previous €196.5bn to €191.5bn - due to a recalculation of GDP. These numbers include the loan component. What matters for the long-term growth performance is the interaction between investments and structural reforms. What became clearer yesterday is that the new government started with the blueprint of the old government, what Le Repubblica calls a re-write. One problem is that the government crisis effectively lost Italy two months during which there was no work on the programme.

The obstacles to structural reform are significant. What we applaud is that this is the first administration to prioritise structural reform in an intelligent way. That in itself does not mean that they will have a majority for the most important of these reforms, like a complete overhaul of the public sector, judicial reforms to restore a degree of legal certainty in civil cases, and shifts in social policy to increase the labour participation rate of women. As Franco pointed out, the investment programme itself will constitute a big challenge. During the previous EU budget period, Italy managed to spend only €34bn out of a previously allocated €73bn. The recovery fund is in many ways very similar to the way structural funds work. Italy needs reforms, if only to be able to absorb these new investments. With increased absorption capacity, the recovery fund is like pulling on a string.

We see it as a useful complementary tool to structural reforms, and agree that the two together could be quite effective. One obstacle to structural reforms in the past was austerity. Governments did not find themselves in a position to cut expenditure and introduce reforms at the same time. The solution is therefore to couple reforms with more spending. In this sense, the European debate has advanced. But the structural reforms will still face a lot of opposition, which we don't think the Italian political system is yet ready to confront. The most we expect from Draghi is to start this process and to steer it in the right direction. We don't think that a technical government will ever have the ability to see this process through to the end. That said, it is the first time that Italian voters might be presented with a coherent reform/investment agenda. The question is whether a political party, or coalition, would try to take ownership of this process. This has not yet happened.

The timeline is this: The government will present its final document on the reform programme by March 30. The deadline for submission to the Commission is April 30. The plan is to disburse 13% of the foreseen money before the summer break. From the news reports we cannot gather whether this percentage refers to the grants component only, or the grants and the loan components together. Nor do we know whether the Draghi administration will plug both components at the same time, or frontload the grants component. We think the smart move is to do just that, given the time it might take to increase Italy's investment absorption capacity. In this case, the disbursements would be lower - some 13% of the €80bn grants component only - around €10bn. As we pointed out in our coverage yesterday, this amount is dwarfed by the economic slump. Which is why it is wrong to think of the recovery in terms of fiscal stimulus. Brace for disappointment.

8 March 2021

Draghi hires McKinsey

We are in general no fans of the notion of a technical government. There have been no successful technical governments in Italy since the 1990s. Politics needs management, but you cannot turn the situation on its head. What is good for Fiat is not necessarily good for Italy.

So what to make of the Italian government’s appointment of McKinsey to draft the government’s recovery fund investments? It is on one level unsurprising that a technical government would draft technicians to help with its most important policies. We are not buying the argument that the act is undemocratic. The recovery fund money is not Italian, but European. It is designed for a specific purpose. It was intended to make certain types of investments subject to criteria - most importantly a focus on green and digital technologies. It was not intended as a slush fund for the government.

What is problematic in this case is that Vittorio Colao, Draghi’s information and digital transformation minister, happens to be a former partner at McKinsey.

When politics goes wrong, perceptions of conflicts of interests are often where it starts. In business you give a job to someone you know. That does not work in politics - as our lead story so amply demonstrates. Politicians should not hire their former employers. If anything, they should hire the competitors of their former employers, of which there are quite a few.

David Broder writes in the left-wing political magazine, Jacobin, that the appointment could backfire. He makes an important point that you don’t see much written about in the media, a point we also have been making. Italian media put the headline size of the recovery fund money at €200bn. But some €120bn are loans, leaving €80bn in real money. Those €80bn are disbursed over a five-year period, leaving some €15bn a year. This is not nothing, but the loss of Italy’s GDP last year alone was of an order of magnitude of 10 times that much.

The appointment of McKinsey is therefore not quite the scandal it appears. The bigger problem for Italy, and the EU as a whole, is the relative lack of stimulus.

5 March 2021

That sums it up

The mercantilism at the heart of German foreign policy was expressed with brutal clarity by Gerhard Schröder in a rare article published in the newspapers of the Handelsblatt group. He is saying: forget human rights. Foreign policy is about self-interest and gain alone. A moralising foreign policy, as he calls it, does not work. This is obviously a position we disagree with strongly. But it differs from Angela Merkel's foreign policy only in terms of its honesty. He describes the status quo. He is not calling for something that does not exist, both in Germany and the EU. It is also the guiding philosophy of the EU-China comprehensive agreement on investment, with the exception that Schröder, unlike the proponents of CAI, does not pretend that the deal would co-opt China into a dialogue. 

Schröder's point is that under the Biden administration, the US is now focused on China as a systemic rival and is asking the European to join the coalition. He questions whether this is in the European interest. We think it is legitimate, of course, to defend the European interest. Where we disagree is the definition of what constitutes the European interest. Schröder's definition is narrowly focused on corporate investment. He said German exports to China last year compensated for losses in other export markets. German car manufacturers sell 40% of their entire production in China. He didn't quite say: what's good for VW is good for Europe. The reason he did not say this, we suppose, is because for him it is self-evident.

A serious point he is making is that the only way to get China to comply with international climate goals is not by forcing the country to adopt western values, but through technology. That's also an issue discussed within the Biden administration. We consider this to be the genuine dilemma in the western strategy towards China. Our view is that a country that violates human rights is unlikely to comply with climate targets either. But an excessively confrontational strategy might be counter-productive, too.

4 March 2021

Oops, Germany forgot to buy the self-tests

Angela Merkel has had a lot of fans in the German and international media. This is changing, at least in Germany itself. Long-standing readers will know that we have been criticising her for a tendency to paper over cracks - during the eurozone crisis for example. The kicking-the-can-down-the-road mindset has revealed itself to many more people during this pandemic. Merkel was personally behind the decision to shift vaccination procurement to the European Commission, without even considering whether the Commission had the capability to do this effectively. When that failed, the German government declared self-tests to be the royal road out of lockdown. That sounded like a good idea, even to us. As it turned out, the German government has not even bought them yet, because they are still haggling over the price. This is, unsurprisingly, the headline of Bild this morning. The lockdown persists because the government failed to order the tests.

Germany is lucky so far that the mutant virus has not yet led to an explosion in infection rates, as is now happening in France, Italy and the Czech Republic. Objectively, the reasons in favour of a lockdown have not shifted. Infection numbers are not falling. Vaccines and self-tests are not yet available in large numbers. What has shifted is the political mood. People want this lockdown to end. And they are taking a closer look at what has revealed itself as a strikingly incompetent government.

Yesterday Merkel held another Covid crisis summit with the state premiers, which ended with an agreement on a smoke-and-mirrors strategy. The only material shift is the drop of the official target of an infection rate of less than 35 out of 100,000 inhabitants, as a precondition for the lifting of the lockdown. They dropped it because it is out of reach. The national infection rate is 64 - and rising. The new target is 100 infections - below which a partial lifting of the lockdown is possible. But not now.

The way this will work is through uncoordinated discretion, each state to themselves. There are important elections in Baden-Wuerttemberg and Rhineland-Palatinate in ten days, followed by the federal elections in September. The lifting of the lockdown is first and foremost an act of politics. The Robert-Koch Institute has recommended a different strategy: stick to the target of 35 infections per 100,000, and phase-out the lockdown based on that target. That would keep Germany in lockdown for another two to three months. Merkel supported that strategy until the political wind shifted.

What we are now likely to see in the next few weeks is very confused and regionally uncoordinated partial lifting of the lockdown, possibly with reversals if case numbers rise. The hairdressers already came first. The next step will be garden centres, flower shops and book stores (don't ask why); the third stage will be the big one: retailers and museums; eventually followed by theatres and cinemas. As FAZ put it this morning: Germany is trapped in small print. The lockdown will remain. The Merkel-friendly German media can't sugar-coat this any longer. 

3 March 2021

A bad day for Sturgeon

We will, for the time being, keep an eye on Scottish politics given the importance it has for Scottish independence and potential EU membership.

Yesterday, two key witnesses in the Scottish parliament's investigation of the Alex Salmond affair corroborated the former SNP leader's version of events that the Sturgeon government unduly interfered in the legal process. The Scottish government yesterday published the legal advice it received, which shows that its own lawyers cast doubt on the government's pursuit of the case.

The Scottish Conservatives responded to the news by tabling a vote of no-confidence. To succeed, it would require the support of all opposition parties. The BBC's political analysts believe that the Greens, whose votes would be critical, will for now not support a censure until the parliamentary committee has reported. Labour and LibDems say they first want to hear Sturgeon respond to these allegations. BBC television yesterday played clips of her denying knowledge of certain facts when it appeared that she had been informed.

We won't recount the many details of this story, which involve many actors, many meetings, and many accounts of who said what to whom at what time. In a nutshell, this is about whether Sturgeon tried to frame Salmond in a series of cases involving sexual assault. A court cleared him on all counts a year ago.

This is still a very fluid situation. Pressure is building on her to resign. With just two months to go until the Scottish elections, it is quite likely that this affair will eat into the party's support. Sturgeon enjoys strong personal popularity because of her sure-footed handling of the pandemic, but as we see in other countries, such support can easily flip.

We already saw early polling evidence of a shift in support for independence, which is highly correlated with support for the SNP itself. The rule that divided parties so badly in elections is unlikely to be suspended. Salmond still enjoys strong support among the party's rank and file. The independence polls are now on cliff-edge. Sturgeon's own approval rating had already fallen ahead of yesterday's events.

2 March 2021

Future of Europe not too bright

After months of wrangling, the Portuguese Council presidency has drafted a joint declaration on the Conference on the Future of Europe. The conference represents perhaps the last opportunity for the EU move forward on establishing the legal structures for a real fiscal union – but if the joint declaration is anything to go by, we should not expect much.

The conference was first proposed by the European Commission and European Parliament at the end of 2019. It aims to plan the mid- and long-term future of the EU, including reforms that should be made to policies and institutions, by providing a discussion forum for the public, civil society, experts and EU institutions. It will be co-run by EU institutions and member states, one of many problems it faces.

The conference was originally planned to last for two years, beginning last spring. Covid-19 scuttled those plans, and the conference will now last less than one year, during which time stakeholders will need to identify themes through online consultations, convene citizens’ panels to discuss them, and conclude the discussions.

Alberto Alemanno argues that what strikes him most about the joint declaration is that it is lacking any sense of what the conference aims to do and how it will do it. The conference is meant to be a citizens-focused, bottom-up exercise for Europeans to have their say on what they expect from the EU. But details are scant, with the joint declaration only mentioning plans for conference events, physical or digital, that can be organised at different levels, and should involve civil society and stakeholders reflecting European diversity.

The conference has been in the headlines in recent months because of infighting over who would chair it. European Parliament wanted Guy Verhofstadt, but this was rejected by the Council, triggering an acrimonious stalemate and warnings from various stakeholders. The solution, as outlined in the joint declaration, is a governance structure that Alemanno generously describes as sophisticated.

The conference will be overseen by the presidents of the Commission, Council, and European Parliament, as well as an executive board with three representatives and four observers from the same institutions.

The Conference of Parliamentary Committees for Union Affairs of Parliaments of the European Union, Cosac, will also participate as an observer, and other committees may be invited, as well as representatives of other EU bodies and social partners.

But wait, there’s more: a common secretariat will also be established to ensure equal representation of the three institutions and assist the executive board. A conference plenary will be established to bring forward recommendations from European and national citizens’ panels, the latter of which will be established in every member state but grouped by themes in the plenary. These panels will respect a conference charter that will establish a set of principles and minimum criteria reflecting EU values, and defined by the conference structures. Citizens, MEPs and EU representatives are also expected to join the plenary, although its total size was not included in the joint declaration.

It is a mind-bogglingly complicated set-up for what the document describes as a lean governance structure, leading some observers to fret that the conference has failed before it has even begun.

This is a problem because the eurozone is not properly regulated, and will require treaty change to establish the legal basis for a proper fiscal union. The Lisbon treaty was a step in the right direction, widening the scope for enhanced cooperation, but even this procedure hasn’t been used for anything of great significance. If the conference on the future of Europe is a fudge, rational observers will draw the conclusion that a fiscal union is not going to happen.  

1 March 2021

Hopeless and serious

The European vaccines story falls in the category of hopeless and serious - but not fast-moving. The lack of progress that was there last week, is still there this week, and won't be resolved for months to come. There are three categories of problems for European countries: lack of supplies, hoarding of AstraZeneca vaccines following an official smear campaign and logistical difficulties.

Germany got only 18m vaccines in Q1, to be followed by 77m in Q2. That's enough for less than half the population. Another 127m are due to arrive in Q3. If they can administer them in time - which is not a given - some degree of herd immunity should be reached in the late summer.

All of the EU countries grapple with unused vaccines. In Germany a third is unused, unsurprisingly because people don't want AstraZeneca. The German authorities are now considering ending the ban of the vaccine for the over-65 year olds. The prime ministers of Baden-Wuerttemberg, Bavaria and Saxony have called for unused AstraZeneca vaccines to be given to younger people ahead of schedule.

The other issue is distribution. The German government has still not done the work to get the vaccines to doctors and pharmacies. Some states have unrolled their own schemes, but without coordination. They will eventually organise themselves, but we are probably not on the fastest track possible.

The situation in France is almost exactly the same as in Germany. CovidTracker reported yesterday that while France has received more than 1m doses of the AstraZeneca vaccine, it has administered less than 250,000 so far. Observers are asking why the country is sitting on such a large stockpile. After a concerted smear campaign, we not surprised.