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12 July 2021

Fourth wave, no lockdown?

Yesterday France joined the UK and Greece in rejecting the notion of new lockdowns to contain Covid-19, with Clement Beaune, European affairs minister, telling media the country must learn to live with the virus instead.

Although he didn’t rule out reintroducing limits on the number of people allowed in bars and restaurants, and to extend the use of a Covid health pass, Beaune said positions aren’t as hard as they used to be because vaccines are available.

He was echoing Kyriakos Mitsotakis, who announced last week that while he can’t make vaccinations mandatory, Greece will not close again to protect a few unvaccinated people at the expense of the vast majority of the Greek population. The Greek prime minister also cited the availability of vaccines as the primary factor in his decision, arguing that there are some people who consciously choose not to protect themselves and their loved ones, and whose behaviours always carry the risk of a new wave. In the UK, Sajid Javid said the same late last month, stating that data on vaccinations was heading in the right direction and that the UK must learn to live with Covid.

This no doubt came as a relief to many, but as some countries are learning, opening too fast too soon carries its own risks. We previously noted that Catalonia’s fourth wave was rising after the government allowed nightclubs to reopen until 3.30am, with new positive cases among the 15-29 year old demographic in Barcelona rising eightfold in just 15 days, and hospitalisations rising by 33% in the 10 days to 7 July.

A similar situation is playing out in the Netherlands, where the number of new cases rose to 10,283 on Saturday, an eightfold increase compared to one week ago, with the under-30s again accounting for the bulk of new infections.

On Saturday Mark Rutte announced cafes and bars will close at midnight, and nightclubs will have to close entirely, stating that it is not a question of blaming an age group or sector, but of protecting the vulnerable. At the same time, the Dutch prime minister said there was no indication masks should be brought back in shops, and that testing for entry will continue at theatres and sports stadiums, which will remain open.

A new trend is clearly emerging, in which young people free to socialise but not fully vaccinated are the most-affected by the fast-spreading Delta variant. Mortality is not surging as it has in previous waves, which is likely the deciding factor for many governments in rejecting new lockdowns, but rising hospitalisations among young people could soon overwhelm health systems in hotspots. Any hopes that this summer will be like the last are quickly fading. We also note that the most vulnerable segments of the population would have received their second doses around six months ago by now. Booster shots will likely be on many country’s pandemic agendas by the end of the summer.

9 July 2021

Women leaders in far right parties

A new generation of women is emerging to lead far right movements. There is Giorgia Meloni of the Fratelli d'Italia. In Germany Alice Weidel had been a leader of the German AfD since 2017. And there is, of course, Marine Le Pen.

The Finn's party is to elect a new leader in August and Riikka Purra, vice president of the party, said she wants the job. She is close to the current leader Jussi Halla-aho, who said he would not stand for re-election. Like Meloni, Purra is tough on immigration. Purra wants zero immigration into Finland, even for humanitarian reasons. She cited the Danish Social Democrats as an example. She has no problems with international laws on refugees, and sees no reason why every country has to take in immigrants. Unlike Meloni, Purra has been in politics only shortly, and this may be her biggest handicap. What they have in common is that they are blond and attractive, and thus may pull in a new kind of voter. They can be charming and can have other identity hats too. Purra is a vegetarian and juicer, Weidel is a lesbian. These identity mixes allow them to transgress the traditional boundaries of far-right politics.

Le Pen is old school by comparison, more of a maternal type. So is Pia Kjærsgaard, co-founder of the anti-immigration Danish People’s party, or Siv Jensen, leader of the country’s similarly anti-immigration Progress party. Le Pen clearly went the furthest of them all, getting into the second round of the presidential elections in 2017 and predicted to do so again next year. If she were to fail to get into the Elysee palace next year, it may clear the way for niece Marion Maréchal to emerge as the next-generation leader in France. 

8 July 2021

How to fight Orbán

Viktor Orbán is the most dangerous of Europe’s new breed of far-right/populist leaders because he is smart. Last December he held the EU hostage when he blocked the budget. In return the EU effectively agreed not to use the rule-of-law-mechanism against him. We think the compromise killed the mechanism in all but name.

The best way to get to Orbán is by doing what the European Commission did yesterday: Withholding funds from the recovery fund unless Hungary fulfils the strict compliance criteria. This is not about the LGBTQ law. The EU has no effective means to stop this. The argument in this case is about corruption and procedures to deal with it. That’s where he is most vulnerable.

At stake is €7.2bn, which includes a €1bn tranche planned for this year. The Commission has blocked the payments because Hungary has not fulfilled all the criteria. Ursula von der Leyen said one of them would be a smooth co-operation with the European Anti-Fraud Office, also known as Olaf.

As FAZ reports, Olaf has found more irregularities in Hungary than in any other country. In the 2019 report, Olaf challenged almost 4% of all EU payments that went to Hungary. The second worst offender is Slovakia, but only 0.5% of payments are suspect. The country-specific recommendations for Hungary have criticised systemic irregularities and corruption at the highest level. Olaf has provided the Hungarian prosecutors with the data, but no action was taken.

The details are quite shocking. Ten companies with connection to Orbán received €6.5bn in state procurement orders from 2010 to 2018, including the company of Orbán’s son-in-law, István Tibor­cz.

The Commission wants to make sure the recovery fund money does not end up in the same channels. The recovery fund is designed with strong benchmarks countries need to fulfil to receive the next tranches. Hungary will be an important test to this commitment.

7 July 2021

Long road towards EU migration pact

The UK and Denmark are sharpening their policy tools to keep asylum seekers away from their territories, even considering offshoring them on to remote islands or countries, which would be in breach of the 1951 UN convention. A regional court in the Austrian state of Styria has just ruled that the practice of pushing back asylum seekers into Slovenia is illegal. Yet, the practice is likely to continue in other parts of Europe. In the absence of any meaningful migrant and asylum policy, the EU decided to send another €3bn to Turkey to keep refugees there. Don't come to us, is the message. 

Fuat Oktay, Turkey's vice president, warned the EU that reducing migration cooperation to just a financial dimension is a big mistake. We happen to agree with this. Turkey wants the EU to open legal migration routes for Syrians as part of the principle of fair burden and responsibility sharing.

Margaritis Schinas told L'Opinion that the EU cannot allow itself to be without a migration policy. The absence of a common approach resulted in dire humanitarian situations on the Greek islands, Calais and the Canary islands. It made the EU vulnerable to blackmailing threats from Turkey and Morocco. 

A common approach is needed also to face the next waves: 20m in Northern Africa cannot find work as the result of the pandemic, while the Taliban are about to take over Afghanistan again and climate change will force people to find a way to survive elsewhere. 

The EU Commission tabled a reform proposal for the Dublin pact last year. Schinas hopes to move forward under the French presidency early next year. But given the elections in Germany and France, it is unlikely that anything will be wrapped up before the end of next year. In the meantime, the EU continues to throw money at problems, rather than solving them. 

6 July 2021

Greenwashing European hydrogen

A positive headline for European hydrogen development yesterday, when Armin Laschet, the CDU chancellor-candidate, launched the continent's largest hydrogen electrolyser at a Shell refinery in Germany.

The unfortunately-titled Refhyne polymer electrolyte membrane project will use electrolysis to produce hydrogen gas, a clean burning fuel that has been touted as the future of European renewable energy. Refhyne is capable of dealing with fluctuations in energy supply, making it particularly suitable for use with variable renewable electricity derived from wind and solar.

But there is something fishy about this project. We noted a strange description of how it will work in a Euractiv article sponsored by the Fuel Cells and Hydrogen Joint Undertaking, a public-private partnership between the EU and the European hydrogen lobby. According to the article, the new plant will produce around 1300 tonnes of green hydrogen annually, provided sufficient amounts of renewable energy are available.

If they are not, the alternative will be to used natural gas to produce the hydrogen. And funnily enough, hydrogen produced by the new electrolyser will be used to refine petroleum at Chemicals Park Rheinland, Germany’s largest refinery.

We thought it was strange that Laschet would tout a renewable project given his backing for coal-fired power plants and general aversion to all things green. But we wonder now whether Refhyne will be green after all. Authorities have announced plans to scale up production at Refhyne to 1.3m tonnes per year by 2024 – will enough renewable energy be available to meet this target?

We think it is plausible that the EU’s hydrogen development will wind up being dependent on Russian gas. Let's hope all future electrolysers will also be designed to handle fluctuations in energy supply. Or that they are actually built on green inputs and used for green applications, rather than greenwashing a rather ugly reality.

5 July 2021

Vaccine take-up is slowing

We note that vaccination campaigns tail off after a while. The US is now falling behind schedule, and even in the UK, where the campaign has been well organised, it is becoming progressively harder to get the remaining part of the adult population vaccinated. In Germany, 37.9% of the population have received a full vaccination, and the campaign is now slowing down - from a relatively low absolute level.

What happened in Germany is that the government has now decided to ditch the AstraZeneca vaccine altogether for second shots on the ground. People get superior protection if they receive an mRNA vaccine as a second shot after a first shot with AstraZeneca. The problem is that AZ is widely available, whereas this is not the case for the mRNA vaccines, like those of Pfizer and Moderna. The result is that health centres will have to cancel vaccination appointments. The health ministry of Hamburg warned that the vaccination campaign will slow down as a result, and that it will become harder to vaccinate the younger people in particular.

An FAZ commentator made the astonishing statement on Saturday that people with two AZ shots did not receive the best possible protection. Germans still see vaccinations as a private luxury good, where everybody tries to get the best.

Objectively, it is not yet clear at all which vaccines work the best against the delta variant. Preliminary data suggest that the Pfizer and AZ vaccines are both effective. As Germany and the rest of the EU are now in a race against time with the delta variant, it seems odd to us to slow the vaccination campaign at this point. Is this industrial policy? Given the lack of hard data to support strong conclusions on relative vaccine effectiveness, we think this decision is worth investigating in detail.

2 July 2021

OECD tax reforms look toothless

A historic moment for global tax reform yesterday as the OECD announced that 130 countries had agreed to a minimum corporate tax rate of at least 15%. The only problem is the hold-outs.

In the EU, Ireland, Hungary and Estonia are not on board with the deal. Paschal Donohoe, the Irish finance minister, said he was not in a position to join the consensus, and that he has expressed Ireland’s reservation. The country’s corporate tax rate is set at 12.5%, and the finance ministry had previously estimated that boosting the rate would cost Ireland more than €2bn of annual tax revenue. At 9%, Hungary’s rate is the lowest in Europe, and as we reported, Viktor Orbán has rejected a 15% minimum rate because it would hurt investment. Estonia applies taxes only on distributed profits of companies, and has criticised the OECD deal as harmful for enterprise, international competition and job creation.

Perhaps more significantly, the FT wrote yesterday that the UK is set to receive an exemption for its financial services sector, which will protect London’s largest banks from paying more tax on their profits in other countries. In exchange for this concession, the UK government will back down on its digital services tax that mainly targets large American tech companies.

The UK was reportedly shocked by American demands to apply the tax rules to all sectors, because regulations compel banks to be capitalised separately in every jurisdiction where they operate. This means they declare profits and pay tax in the countries where they do business. As a result, tax revenues received by the UK treasury would have been reduced as banks pay more tax to other countries. France and Italy might follow the UK in abolishing their own digital taxes, although both the OECD rules and digital tax phase-outs will likely be staggered and conditional on each other’s progress.

What this tells us is that European tax havens will continue to thrive despite intense diplomatic pressure, and that the OECD plan may not be all it’s cracked up to be. As we argued previously, the OECD plan will only come into effect on profit margins of more than 10%, and tech companies like Amazon have put tremendous efforts into keeping their profit margins low, on paper at least. If the biggest banks and tech companies are essentially spared any tax increases, the 15% plan will be a flop. Which once again begs the question – who is going to pay for the post-Covid economic recovery?

1 July 2021

Why the US needs a strong Turkey

We wrote a lot about why Turkey needs Nato and adapted a more moderate tone after heightened tensions last year. The arrival of Joe Biden in the White House played a role in this. But what is the US interest in a show of cameraderie with Turkey despite remaining conflicts? Recep Tayyip Erdogan gets away with buying Russian S-400 systems, attacking US allied Kurds in Syria, supports Hamas Islamist terrorists in the Gaza Strip and provoking Greece and the EU. Turkey's government ignores international law on maritime borders and provokes with its military might in proxy wars and the Mediterranean. But Turkey gets away with it. Why?

The Russian newspaper Vzglyad (hat tip To Vima) came up with a list of reasons why the US needs a strong Turkey. First, to hold back Russia. Turkey diverts Moscow's attention from European affairs, causing trouble in the South Caucasus, and having a subversive presence through soft power in Crimea, the Volga region and Siberia. The second reason is to confront China. The more islamised and unstable the region is, the more difficult it will be for the Chinese to trade with Europe through central Asia. Third, to face Iran. Not to fight Iran but by interfering with its appeal to a pan-Turkish identity and by alliance with Azerbaijan. Around 15% of the Iranian population are Azerbaijanis, also called Azeris, who were excited after Turkey won the war for Azerbaijan in the Karabakh war. Opposing Turkey openly is not something Iran is ready to do. And finally the US needs Turkey to take over in Afghanistan, defending American interests there after the withdrawal of US troops. 

The list of strategic interests is longer than the concerns. This is why Erdogan gets away with his provocations without being put into place. 

30 June 2021

How not to defeat Orbán

When bad guys are winning, it is usually because others let him. The Christian Democrats tolerated Viktor Orbán for too long. Angela Merkel cut a dirty deal with him, so that he would lift the veto on the EU budget. The very last thing you want to do now is to give him the honour of being censured by the media, and feed his fake narrative of a resistance fighter.

What he did is place adverts in several European newspapers, defending his law to ban LGBTQ material in schools and on public television under the cloak of family values. And to attack the direction the EU is taking right now. Several Belgian newspapers have refused to run this ad. The argument in favour of banning the ad is that Orbán has censured his own media, so he should not buy media space elsewhere. This is a very dangerous argument.

We think this is an own goal. Newspapers became so influential in the 20th century because editors resisted the pressure from advertising. But this goes both ways. Once editors start to vet advertisements for political correctness, you give them the moral high ground to do the same to you. They will.

29 June 2021

Why Labour does not win

We have not written much about British politics because not much of substance has changed. An event to watch out for is this Thursday’s byelection in a Batley and Spen in West Yorkshire. The sitting MP resigned to become mayor, triggering a vote.

Batley and Spen is part of the infamous red wall - erstwhile Labour seats in northern England, many of which fell to the Tories in the last election. Labour narrowly hung on to Batley and Spen. The expectation is that Labour will lose this byelection just as it lost the Hartlepool. Another complicating factor is the candidacy of George Galloway, a well-known politician of the hard left.

The news this morning is about the campaign turning toxic. What we like to focus on instead are the broader ramifications if Labour were to lose this by-election.

Labour’s problem in the north is that its leader, Sir Keir Starmer, was the architect of Labour’s support for a second referendum ahead of the last elections. We called this decision at the time one of the riskiest political moves we have ever witnessed. There was only ever a very small probability of success, but the many downsides of that decision are now becoming apparent. The UK ended up with the hardest version of Brexit. And Labour lost the Brexit voters of the north. Sir Keir wisely chose to turn attention away from Brexit when he became leader, but northern voters have long memories.

To get out of its hole, Labour will ultimately need a leader who can bring back the north, and who is not tainted by the disastrous policy U-turn in 2019. We think of Andy Burnham as the most plausible candidate. The mayor of Manchester supported Leave, but also appeals to Labour's metropolitan base in the south. Since the second referendum campaign has essentially killed any notion of a return to the EU, Brexit is no longer a narrow political issue even in the north. It is the credibility gap that turned out to be most persistent.

Sir Keir said he won’t resign if the byelection is lost. We think the most plausible outcome is that he will fight the next election, and lose. The question is whether the Labour Party will try to stage a coup beforehand. It would be out of character - though not impossible.

In a political system with two parties, the winner is not the best but the least worst. For as long as Labour remains in the state it is, Boris Johnson will be safe in Downing Street. Political problems are brewing up for the Tories in the south of England, largely because of rural planning policies. The resignation of Matt Hancock as health secretary is ultimately not important. It falls into the category of political entertainment. Another character who does not matter is Dominic Cummings.

With Sajid Javid back in the front line of politics, another potential successor has entered the cabinet, but the time is not yet ripe. During the reigns of Helmut Kohl and Angela Merkel, people wasted an awful lot of time speculating about potential successors. Those who ended up in that position, Merkel herself after a short interlude and now Armin Laschet, were not on anybody’s list.

We conclude therefore that the current constellation will keep Johnson in power for a while yet, well beyond the next election which has to take place by December 2024, but which could take place earlier, as the fixed-term parliament act is now in the process of being repealed.