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22 November 2021

Stages of mourning: crypto edition

It is fortunate that the debate about crypto-currencies among central bankers and economists is starting to get a bit more mature. In the stages of mourning for the gradual passing of the old monopolistic world of fractional reserve banking, we have reached the level where denial and anger are still the dominant emotional responses, but where bargaining, depression and acceptance are becoming frequently heard.

The biggest delusion in the central banking debate on the future of money is the idea that central bank digital currencies will drive crypto-currencies out of the market. That notion misunderstands not only why people want to hold crypto and transact in it, but also why people want to hold physical cash. On this issue we agree with Peter Bofinger, the German economist, who compared digital money to wine without alcohol. We would add to this observation: the kind of people who want to hold digital money are not the alcohol-free crowd, but those who want to transact outside the control of the authorities. Bitcoin was designed not to replace money, but to act as an alternative transaction currency.

A much more important debate is how central banks and financial regulators are interacting with the world of crypto-currencies, the real digital money, and their most important derivative product, the stablecoin. The Europeans are not engaged in this debate to the extent that they should be. We still think of it as funny money.

Chris Waller, a member of the Fed’s board of governors, argued this week that stablecoins should be allowed to become full competitors to banks as payment providers. Stablecoins are crypto derivates that are backed by a reserve asset, like the US dollar. Waller crititised the prevailing attitude in the US to force the new world into the old world, and only to allow banks to issue stablecoins. He said there is a case for competition. Stablecoin providers should be regulated, but not as full-blown banks, since they don’t offer savings deposits. The Biden administration is proposing that only banks should be allowed to issue them.

This is the conflict that is also going to play out everywhere in the west. The fledgling crypto world brings competition to an oligopolistic world, a competition that has some characteristics reminiscent of how social media affects traditional media companies. There is value in banking that the crypto-world is unlikely to challenge or replace. Just as there is value in pockets of the old media. Finance, like the media, are not a fixed-sized cake. There is no reason to think that the new world of crypto and that of traditional banks cannot co-exist, just as internet media companies have not fully destroyed the traditional media. What happened in the media industry is that the new world eliminated the monopoly profits of the old world. The fabled licence to print money is no more. It is best to think of crypto in those terms.

In the long run, we expect the view of central bankers like Waller to prevail, but that the line from here to there won’t be a straight one.

19 November 2021

What if UK won't budge over fish?

Paying off the loser is one way to move through conflict. But it is hardly ever the end of the conflict. The spat between France and the UK over fishing licenses in British waters seems to follow this pattern.

The French government put forward the idea of taking boats without a licence out, and compensating the fishermen for their loss of income. According to Paris, there are still 150 licences requested and not granted, while London said that 220 were approved, which is 98% according to their measure. So, are the French prepared to move on then? The French fishing directorate has been told to come up with some proposals on how to indemnify the fishermen, for which a budget of €40-60m has been set aside.

French fishermen are furious about this proposal, accusing Paris of giving up. They do not want their boats and livelihoods destroyed. But Jersey is turning out to be non-cooperative on this matter. About 46 licence requests remain without any response so far, while 53 licences expired in October, according to Les Echos. Among the latter are 13 boats that are considered a priority by the French, which are now barred from entering the waters around Jersey. The situation around Guernsey, another British Ireland, is less confrontational.

Brexit has opened up a Pandora’s box of old scores to settle, playing out even on small islands like Jersey. The fishing row is likely to last for a while.

18 November 2021

Merkel's ghost

The Green MEP, Reinhard Bütigkofer, wrote yesterday that Ursula von der Leyen had personally intervened to stop the EU from upgrading its ties with Taiwan. We ourselves would like to know whether this decision was preceded by a phone call from Berlin, or whether the spirit of Angela Merkel is already roaming independedly inside the Berlaymont building.

The acting German chancellor said yesterday that it would be damaging for Europe to decouple totally from China. We happened to agree with her on this point, but it is worth reflecting on this issue in some detail. The impasse the EU has got itself into is the result of a foreign policy that was dominated predominantly by short-term commercial consideration. We have been calling it foreign policy mercantilism.

So where do go from here? Our suggestion is to agree on what we want, beyond trading widgets.

Nikolas Busse writes in FAZ this morning that the EU’s focus on soft power had been rather naive. It was one of those fair-weather ideas that seem plausible at a certain moment, and that gelled with some intellectual fads, but then failed to stand the test of time. There is a role for diplomacy, a high art invented by Europeans, but we also know that diplomacy does not act independently of policy. There is a diplomacy that solves problems, and one that kicks the can down the road. That is our diplomacy.

The build-up of military capability that is currently being discussed in Brussels is not going to change anything, unless the EU agrees how and when to use it, and how to decide. Those conditions are not met. If you do not have a consensus in favour of qualified majority voting in foreign policy, you do not have a consensus to deploy armed forces. Ask yourself: If you had an EU rapid reaction force, would you have dispatched it to the Polish-Belarus border? To do exactly what? Fight refugees? Would you have taken military action against Alexander Lukashenko’s regime? Maybe bomb Minsk airport? We don’t think so.

A rapid reaction force is several steps ahead of what needs to be decided right now. Which is start where Merkel left, with the definition of what constitutes our strategic interest in respect of the two big powers on the Euroasian continent: China and Russia. Legitimate commercial interests should be complements by security interests. But do we really want to engage in the China/Taiwan issue? Or should we accept that there are problems in the world the EU cannot, and perhaps should not, get involved in? It would be perfectly plausible for the EU to adopt a narrow foreign policy strategy, based on the defence of commercial, ecological and security interests. That’s already a lot. And if that is so, then surely, Merkel is right that it would be a mistake to decouple from China over Taiwan.

Furthermore, we should reflect on what we mean by economic interests. At the moment, it is confused with the interests of large corporates. Nord Stream 2 is a quintessential example of why the commercial interest of companies need to agree with the economic and security interests of the EU. The EU is a desert for high-tech start-ups because we pin our technological future on 20th century companies. A capital markets union will be more important for the EU to achieve its strategic goals than a rapid reaction force that can never be deployed.

Remember the Juncker investment fund from 2014? You don’t want to sacrifice soldiers to a vacuous PR exercise.

17 November 2021

Indicators as political weapons

Politicians like to use economic and social indicators as weapons, either to defend their position or attack the opposition. Yet, what indicators actually mean is mostly elusive.

France’s obsession with purchasing power has produced a number of studies. One of the more prestigious reports, written by three independent research institutes, sums up the results in figures and simple lines like these: under the presidency of Emmanuel Macron, purchasing power increased on average by €397 per year, but the poorest 5% lost €39 per year. Only hours after the publication, press headlines already suggest that the rich are the big winners and the worst-off 5% the big losers of Macron’s presidency. In a presidential election campaign where purchasing power is one of the big themes, this is bad news for Macron.

Reality is much more nuanced. It will be hard to find any French person with €397 more in their pocket. Averages hardly ever reflect perceived reality. Also, this is nominal. The real income effect, with all this price inflation, will be lower. And the 5% with the lowest income are not a homogenous group that the state took money away from. Various autonomous decisions play a role that have nothing to do with the state.

With these numbers, we all imagine real people behind them, and yet they are just fabrications of our minds. It would be much more useful to go and talk to those people, and see what and how disadvantaged they are. That would give at least a clue of how their situation can improve. A sheer average income number does not.

Going into the presidential election campaign defining who were the winners and losers of Macron’s presidency quickly turns into dynamite. This is about redistribution, and a potential source of social conflict.

Looking at the measures during the presidency, there are a couple of points worth making: Macron’s abolition of the housing tax and the solidarity wealth tax benefited the better off more. Then there are the reductions in income tax, which is paid by half of the French: what about the other half?. The VAT rise on tobacco and petrol hits poorer households more, as they spend a larger part of their income on both. Then again, supporting measures such as the employment premium and energy cheques were exclusively to their benefit. One criticism is that the measures for the better off are perennial, while those for the poorer households are transitory in nature. Something you could not have picked up from simply looking at the numbers that the studies on purchasing power produced.

Also, what this all means after two years of stop and go lockdowns is a mystery. This pandemic was a massive rupture of life as we know it. How a society emerges and adjusts will be crucial for its resilience. Will the French economy continue its stellar rise from the lockdown, employing more people, with higher incomes for everyone? Rather than looking into the past, the electorate would be better off asking what the future brings.

16 November 2021

EU's crisis diplomacy

Angela Merkel called Alexander Lukashenko, Emmanuel Macron called Vladimir Putin, the EU imposed new sanctions on migrant smugglers to Belarus, and Nato issued a warning over Russian military build up at the Ukraine border. All in one day.

Russia plays it well with its military build up at its two borders to Ukraine and Belarus. Putin lets everyone guess what is yet to come. Military aggression towards Ukraine, or a military presence in Belarus? Nato and the US are warning, the EU is flustering. A well rehearsed game.

The EU faces a security and migrant crisis at its eastern borders. The provocations from Belarus and Russia expose the weaknesses in the EU when it comes to responding to both crises appropriately and credibly.

The EU is imposing sanctions on those smuggling people to the Belarus borders. It intends to halt the migrants coming to Belarus, but this won’t address the problem of the migrants already at the borders. We also wonder how they are going to enforce those sanctions. Those networks are skilled and agile, and it takes some consolidated efforts between various nations to pull this off effectively. Thousands of migrants, meanwhile are camping at border checkpoints. How long before Poland decides to close its border completely, and get on with building its wall?

Some first repatriation efforts are underway, though. Iraqi authorities have announced that on November 18, the first special flight from Belarus to Iraq will evacuate Iraqi citizens from the border with Poland. Others may follow. We have no doubt that there is some compensation for their repatriation. The EU has no proper migration strategy in place, and is thus at mercy of efforts from third states. This has its price.

Will Lukashenko play along? Berlin did not reveal much about the phone call, other than that Merkel and Lukashenko discussed humanitarian aid for migrants. For Lukashenko, the phone call itself is a success, as it boosts his role as a legitimate negotiating partner. What will come out of the two-hour conversation Putin had with Macron is less clear. The two phone calls were obviously coordinated. Russia continues to hold the reins.

15 November 2021

How to counter Zemmour?

How to campaign with Eric Zemmour in the mix? Marine Le Pen expects the Zemmour hype to peter out eventually. She counts on January to launch her campaign. Emmanuel Macron is building his capacity as a pacifier. The new majority group will be called Together or United together. There are clear risks with both strategies.

Le Pen is cast by her team as the tortoise in Aesop’s famous fable. The idea is to stay low-key until January, with small reunions, preferably in villages that politicians usually don’t visit. The advantage is that it is cost effective. This is a big deal for a party that is still in the red, and that finds it difficult to get a loan for big events. There were also some firefighting missions, such as the photo op with Victor Orbán in Budapest. But what will the party members do if Zemmour gets ahead of le Pen in the polls? At the moment, both poll between 15%-19%. If in January, Zemmour ends up at 20% and Le Pen at 10%, would her party still stand behind her? Some already have itchy feet. Marion Maréchal, Le Pen’s nice once hyped as a future RN candidate herself, refuses to chose one over the other. For her, this is an opportunity to rally 37% behind a united candidate, Le Pen or Zemmour. So this is framed as a sort of primary by the militants. A bet that Le Pen could lose.

For Macron, with Zemmour as the disruptor, Macron is up for a new role, the candidate for reconciliation. His ministers already spread the message. Amid an exhausted and fragile country, the belief is that his management of the pandemic, on health and the economy, gives him enough credibility to launch his campaign as a unifying candidate. But will this basis be enough for a president who has disruption in his DNA, wonders Cecile Cornudet? François Mitterrand became affectively known as the Tonton, the uncle, winning the re-election in 1988 after co-habitation. It is still hard to imagine Macron to receive that kind of affection.

12 November 2021

Tit-for-tat threats from Belarus

There are two different policy responses required from the EU to address the crisis at the border with Belarus. One concerns how to stop more migrants coming to Belarus; the other is what to do with those migrants already at the borders. While we hear a lot from the EU about hybrid warfare, and Belarus encouraging those migrants to get to those borders, we hear little about how to solve the humanitarian situation there.

At the moment, Poland is fighting off migrants entering their territory with push-backs, illegal measures themselves. What if the Polish let those migrants through, like Hungary did in 2015? Most migrants do not want to stay in Poland anyway. Is the EU prepared for some burden-sharing if they head all towards Germany? Poland has some scores to settle with the EU. It depends on whether they want to meet the EU head on, or in cooperation.

With Belarus, the situation is escalating, with threats and counter threats. Media reports indicate that the EU is about to impose sanctions next week, which may include airlines that fly migrants to Belarus. There are already some reactions, according to BBC. Turkey’s national carrier Turkish Airlines, has said it will be restricting the sale of tickets on some routes for citizens of Iraq, Syria and Yemen. Iraq has said that it is organising repatriation flights for Iraqi nationals from Belarus. Getting those migrants back from the borders would indeed give some relief to the pressures there. But who is paying for this?

To the threat of sanctions, Alexander Lukashenko responded with a counter threat: putting gas supplies to Europe on halt. If he was able to carry through this threat, energy prices could rise even further in the EU and UK. The map from the BBC shows that there are two crucial pipelines running through Belarus.

Those pipelines belong to Gazprom, which has its own complicated relationship with the Belarus’ regime. Lukashenko would need Russia to back this threat, and pay for it in terms of loyalty. This is not such a far-fetched scenario. Russia used gas politics most recently in Moldova, and successfully extended its sphere of influence through a fabricated energy crisis. There are much bigger fish to fry. But the EU need to focus on the humanitarian side as well, if it does not want to fall afoul of its own values and commitments.

11 November 2021

EU prepares for Art. 16 scenarios

Sometimes, it takes tough decisions to stand up for one’s principles, even if it hurts. The EU is about to prepare for the UK to trigger Art. 16 of the Northern Ireland protocol in the withdrawal agreement. Depending on what this means, there are different scenarios for a response on the table. The most benign is that the UK continues to apply the protocol even after triggering Art. 16, with all its border checks etc. The worst case scenario is a full suspension.

The UK warns against a disproportionate response. From London’s perspective, this is about finding a solution for Northern Ireland. But from an EU perspective, it is not only that. The credibility of the EU’s trade agreements are at stake. If they let the UK have its way, suspending the NI protocol without much consequences, would China and Russia not have an incentive to do the same? London never really understood this about the EU. Consistency is key to its credibility. Clearly, if the EU were to suspend the whole trade and cooperation agreement in response to, say, the suspension of the protocol, this would hurt EU businesses as well. But, as Katya Adler from the BBC tweeted, the consensus in Brussels is that the EU wants to be seen as prepared for robust action if the UK goes to extremes.

The Irish are getting quite vocal with their warnings too. Micheal Martin warned that triggering Art. 16 would be reckless, and that Northern Ireland’s access to the single market could be jeopardised. Leo Varadkar says the UK will not end up with a better deal if it triggers Art. 16.

There is plenty of mistrust between the parties, and they will have to work it out until the deadline looms in December, to avoid the decision on triggering Art. 16. Both sides have come closer on border checks already. But Lord Frost put the jurisdiction of the Court of Justice of the EU on the list of obstacles, an issue that the EU cannot and will not compromise on. If the UK were to trigger Art. 16 in December, suspending the Northern Ireland protocol would certainly be seen by the EU as an extremely aggressive act, that would have to be responded to accordingly.

10 November 2021

On the limits of multilateral action

Of the things that move the world, multilateral action is way down the list. The effects of climate summits is not exactly net zero. But it is unsurprising that the Climate Action Tracker report concluded that

policy implementation on the ground is advancing at a snail’s pace.

Of course it is. It was always like this. Even though the world faces a common threat, it is not a symmetrical one. Which is why we think the focus on average temperatures is misguided. This report claims that the world is heading for a 2.7 degree increase in global temperature by the end of the century. It says this estimate was lower than what they had forecast a year ago, but this was not due to policy developments.

That conclusion makes complete sense. The big lift-off on climate change will come from technological developments, mostly from stuff that has yet to be invented, from changes to consumer behaviour, and from investor preferences. If investment funds channel their investments into countries that meet climate targets, and carbon neutral industries, the impact will be immeasurably larger that grandstanding summits, or speeches by former US presidents.

The reality is that not a single country has the policies in place to be on track for the net zero target. The UK is probably more advanced, but this is due to the fact that de-industrialisation started earlier. To criticise China, India, Indonesia, Vietnam for having too much coal in the pipeline takes a rather western perspective. We agree with the Spectator’s brutal assessment that

it is highly improbable that other countries will choose to make their people poorer, or colder, in order to meet arbitrary carbon reduction targets.

The seminal theme of our time is the decline of multilateralism as a political force, from its heyday during the latter part of the 20th century. As it turned out, multilateralism was not so much a secular trend, as even we thought, but a specific institutional setup to deal with the political and economic instabilities of the time. It has its role. But in a world of asymmetric climate change, crypto-currencies and crypto-finance, and digital consumer power, there is only so much that governments can do in meetings that take place behind closed doors.

9 November 2021

How to respond to Belarus?

The images from the Polish-Belarus border are deeply troubling. A large group of some 1500 migrants was sent to the Belarus-Polish border, escorted by armed convoys, some trying to forcefully enter Poland. The numbers are getting larger. And with it the humanitarian crisis that those migrants face. How will the EU react?

Ursula von der Leyen called on EU member states to approve extended sanctions and possible sanctions on third country airlines involved in transporting migrants to Belarus.

Over the last couple of days, reports came from Minsk saying that never before were there so many migrants on the streets. According to different estimates, between 8000 and 22,000 migrants from the Middle East are now stuck in Belarus, without housing or status. It's an organised human trafficking scheme, an orchestrated escalation by Alexander Lukashenko’s regime. This would not happen without Russia’s consent. Europe has been pushed around over Nord Stream 2. Now Belarus uses migrants to show that guerrilla tactics can go a long way towards pressuring Poland and the EU. 

What is the security strategy? Poland employed 12,000 soldiers to defend the border behind the barbed fences that migrants tried to cut their way through. What will they do if hundreds or even thousands of migrants attempt to storm through the border defences? Will Poland take this into its own hands? What does the EU have to offer, other than condemning the situation as it is? Muddling through is no longer an option. Minsk, meanwhile, accuses the EU of inhumane behaviour, saying that most of the migrants are Kurds, with Germany being their intended destination, writes Der Standard.