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7 February 2024

Labour's trilemma resurfaces

This week in British politics is reminiscent of Napoleon’s quip about preferring lucky generals. Labour has been fortunate to have the latest round of Tory infighting overshadow its own internal disputes. But the rift that has opened up in Labour, over green spending, is quite a serious one. It speaks to wider philosophical differences within the party, which could come out into the open.

The issue is what to do with one of the few concrete headline policies that Labour has announced: its £28bn a year spending pledge for green industry. Labour’s problem has been that this is very difficult to keep consistent with a tight fiscal policy, and promises not to raise substantial new taxes. It has already backed out of introducing the plan from the first year of a new government onwards. Now, the question is whether to get rid of it entirely.

Our interpretation is that there are three camps in the debate. One is shadow energy minister Ed Miliband. He is an enthusiastic supporter of the pledge, and an active green industrial policy more generally. On the other side, you have Rachel Reeves, the shadow chancellor. She makes a virtue of fiscal prudence. Sir Keir Starmer seems to be somewhere in the middle. He appears to be convinced on the merits by the Miliband side. But he is also scared of giving the Tories the opportunity to attack Labour as profligate or tax-raising. Hence a recent assertion that he was still behind the pledge, but with the caveat that it had to fit within Labour’s fiscal rules.

What you have then is a trilemma. There is a desire to boost public investment, and a recognition that austerity is one of the reasons for the UK’s moribund economic performance in recent years. At the same time, the party also wants to keep deficits down, but avoid electorally damaging tax hikes or spending cuts. Something is going to have to give.

The political arithmetic gets even more complicated when you think about the few things Labour could do to boost economic growth without spending more money. Top of that list would be simplifying the UK’s planning system, which makes building housing and infrastructure very difficult. But there’s a reason why successive governments have promised planning reform and failed to deliver it. When angry letters from constituents reach MPs, these ideas tend to slow to a halt.

Sir Keir is, on current form, very likely to be the prime minister by this time next year. But if he wants to make a success of Labour’s time in government, he has to get off the fence and figure out what his party’s priorities are. Otherwise, we risk seeing more of the same drift that has been a feature of recent British policymaking.

6 February 2024

Farmers' protests - a cultural view

Farmers' protests are still spreading across Europe. At this moment Austria, Denmark, Finland and Sweden are the only four EU member states where farmers have not taken to the streets, according to Euractiv. We are no experts when it comes to farming, but we are wondering why is it that in some countries farmers protest while in those few ones they do not. Not all farmers that are on the streets have income problems or are against the new green transition norms or are concerned about Mercosur or Ukrainian imports. Some protests are organised out of solidarity with other farmers with the upcoming European elections in mind. 

Living in the UK, we looked into why there are no farmers protests here. Lliam Stokes asked the same question in his article for UnHerd. It is not that UK farmers feel less of an existential threat. A poll showed that 49% of fruit and vegetable growers and 32% of dairy farmers fear their business won’t survive until the end of 2025. But UK farmers seem to feel less of an urgency to take to the streets, also weary that populist parties may exploit their protests and that the public won’t support them. Another factor is that UK farmers differ from the European peers in the sense that two thirds have farms with more than 50 hectares of land, while two third of the EU farmer businesses are a tenth of that size and UK farmers have not to cope with the imports from Ukraine as much as their EU peers have to do.

There may also be cultural differences at play including the roots for healthy eating. In countries like Germany or France, the first organic shops in cities emerged from a movement on the left of the political spectrum. We remember the first products were not enjoyable to eat but people bought them for the good cause. In the UK, farm shops or markets with their emphasis on conservation and tradition have always been part of healthy food shopping. Wealthier city people would drive to farms on a Saturday or Sunday for their veggies and fruits. Small producers and artisans offer their products on markets in the city, while sourdough bakeries shot up over the past years in cities where there had been mostly toast bread from the supermarket before. The green movement seem to come more from farmers and innovative artisans here, not from regulators.  

 

5 February 2024

Changing tack in the Middle East

These are critical times in the Middle East. The US has launched airstrikes on Iraq and Syria targeting Iranian-backed militias in retaliation for an attack on an American base in Jordan, and destroyed Houthi missiles that were ready to attack ships passing through the Red Sea. As long as the war in Gaza continues, the risk of escalation into the region remains significant.

Europe is not a key player in the mediation towards the end of the conflict. The EU Middle East peace plan proposal, circulated two weeks ago, backed a two-state solution. Member states agree on these principles, but are disunited on how to achieve them amid Israel’s blunt rejection.

But there are things that can be done. UK foreign minister David Cameron backed the idea of recognising a Palestinian state before any Israeli-Palestinian talks on a two-state solution come to a conclusion. Recognising Palestine will not be at the beginning but also does not have to be the end of the process, according to Cameron.

There is also movement on sanctions. Joe Biden signed off sanctions on four young settlers for escalating violence against Palestinians and Israeli activists. It is a small step towards enforcing red lines on extremists. Not that those four settlers would ever want to enter the US or have assets there that they no longer could access to. Nor will those sanctions stop them on their messianic mission. But there are knock-on effects. Other countries like Canada have followed up with sanctions against settlers too. One Israeli bank already froze the accounts of one of them. Banks that deal in the US financial system will have to decide whether to comply with US sanctions or risk secondary effects. The settlers did not act alone, but in a political context that allowed settlers to expand in the West Bank illegally over decades. There is thus an implicit threat that sanctions could eventually reach politicians too.

The EU has been discussing sanctions since December without being able to agree on them. Last week one or two countries are still rejecting sanctions against extremist settlers, according to the Irish Times, naming Hungary and the Czech Republic. Those in favour of sanctions argue that displacement and violence of Palestinians make the two-state solution less likely. But all EU countries need to agree on this. The latest spat amongst member states is over the EU’s aid to Unrwa, the United Nations relief agency that supports two-thirds of Gaza’s population. Within the EU, Germany, Italy, the Netherlands, Finland, Estonia, Austria and Romania followed the US and suspended funding for Unrwa, after Israel accused 12 employees of being involved in Hamas’s October 7th attacks. The EU promised an audit, but did not suspend funding.

Other ideas have come forth which do not stand much chance of being adopted. Leo Varadkar suggested in Brussels last week that the EU, as Israel’s biggest trading partner, should look into the EU-Israel Association Agreement on the grounds of a breach of its human rights clause, which would put free trade arrangements into question.

Neither Hamas nor Benjamin Netanyahu’s government have an interest in a truce if they cannot survive politically. Pressure and solutions thus have to come from the outside for Israel to put the two-state solution on the table. As Bernie Sanders pointed out, it is our reputation that is at stake too. The promise of normalisation between Israel and Arab states once there is a fair solution for Palestine could help take the air out of the extremist movement. Recognising Palestinian rights to the land would be a first step to ensuring Israel’s right to exist.

2 February 2024

Sunak's successful NI fudge

Rishi Sunak delivered on what Boris Johnson had promised the DUP in Northern Ireland, a compromise that is acceptable to everyone - the EU, Brexiteers and the DUP. It allows the Northern Ireland Assembly in Stormont to reconvene for the first time in two years. It is no small achievement, but it is a fudge, comments Sam Coates from Sky News.

Northern Ireland still has a special status in the UK as the only one of the four nations with borderless access to the single market. It also means that most EU regulation is still expected to be implemented only in Northern Ireland and not the three other nations of the UK. But assurances were enough for the DUP leadership to accept that this is as good as it gets.

The latest deal builds on the Windsor Agreement, in force since October last year, which divides exports from Great Britain into a green lane for those destined to stay in Northern Ireland, and a red line for transit to the EU or elsewhere. Two new pieces of legislation are now expected to be agreed by the UK-EU Joint Committee, which will ensure that there are no checks for goods destined for Northern Ireland under any circumstances, and confirm Northern Ireland’s place in the UK. It also promises an East-West Council, a new trade body to facilitate trade inside the UK, and one UK cabinet meeting in Northern Ireland annually. Northern Ireland will also receive with this deal £3bn to spend on public services.

The real test will come in the future. The commitment may discourage the UK from diverging too much from EU regulation if they have to do an impact assessment for every piece of legislation. There is also still potential for trouble in the future. The Windsor Framework introduced a mechanism called the Stormont brake, which would let the assembly object to new EU rules that could affect Northern Ireland's trade arrangements. This has not been tested yet, since the assembly has not convened for the past year. But if the EU were to take a different regulatory course from the UK, expect objections to come forth from the assembly.

It also will be interesting to watch how the executive will function with Michelle O’Neill and Sinn Fein as the largest party and the DUP in second. This order has not been tried ever before. It is likely to make some unionists uncomfortable with a first minister of a party that supports leaving the UK and unifying with the Republic of Ireland. That would, of course, end any ambiguity about Northern Ireland's status in the single market.

Flexibility, pragmatism and trust were some of the words used in the accord. This will eventually be tested. But Northern Ireland has a regional government again. Let’s hope they use this time to improve daily life for people there in health, education and the various other area in their competence. This would give less prominence to the identity battle between unionists and republicans that has dominated the political discourse since Brexit.

1 February 2024

How will they repay the debt?

We had a laugh this morning when we read a news headline in Handelsblatt: How can Italy and France ever dispose of their debt?

This is a question that nobody else in the world would ever ask in this naive way, including most fiscal conservatives. The reason why Germans are prone to ask this questions is that their language uses the same word for debt and for guilt. Language affects how we think. The Germans don't like Schulden, and assume, wrongly, that no one else does either.

The more important questions to ask about French and Italian debt are under what conditions the combined level of private and public sector debt in these countries is sustainable, and what would happen in the event of a sovereign debt crisis. Even though Italy has a higher level of public sector debt than France, we are more concerned about France, because of very high level of private-sector debt, the current fiscal dynamics, and French politics. It may just take a downgrading by a ratings agency to unleash a truly toxic dynamic.

The EU would be without an instrument for a sovereign debt crisis in a large country. The ECB's Transmission Protection Instrument is relatively flexible, but it cannot credibly be used for a country like France that has exceeded the 3% deficit rule for more than a decade. 

The ECB would be confronted with an existential question. If they agree a bailout against all prudential principles, the euro area would become the profligate debasement zone that German economics professors of times past always warned us about. And if they don't, the euro area would collapse in an instant. To say that there are no good options would be an understatement. This is the kind of risk you run in a monetary union that is not a fiscal union. EU countries cannot bail each other out. 

In our lead story about today's EU summit we made the point that the impasse with Viktor Orbán was not only foreseeable, but also foreseen, including by us. This is the big foreseeable financial accident. 

So the answer to the Handelsblatt question is: They won't. But you will.

31 January 2024

Germany - stuck in the 20th century

A hilarious debate has broken out in Germany - about whether teachers are lazy. The debate was triggered by the OECD's Pisa study co-ordinator Andreas Schleicher, who told a German newspaper that German teachers had not arrived in the 21st century. This debate comes in response to Germany's poor results in the last Pisa comparison between schools. Schleicher said teachers were complaining too much about their workload. We think Schleicher missed a trick. You don't ever win arguments about work ethic, but the criticism that German education is stuck in the 20th century is right. It is part of a much broader issue. The car industry, too, is stuck in the 20th century.  

We can offer three observations. First, as we write in our lead story this morning, the way the German government implements austerity has led to an underfunding of critical public services. Teaching is the authority of the federal states, which had particular funding pressures. Germany spends 4.1% of GDP on education. France and the UK spend 5.5% each. Estonia, the leader of the Pisa studies in Europe, spends 6.6%. 

Second we note that Germany's aversion to all things digital is particularly strong in the education sector. If you want to criticise the teachers, this is where we would start. We recall that back in 2015, the head of the German teachers association said that there was no evidence that children in schools with computers performed better than children in schools without. He argued that the digital revolution should have no impact whatsoever on education. This comment reflects widespread attitudes in German society. One of the consequences had been that German schools were wholly unprepared when Covid struck. We are not talking about mobile phones, but the use of electronic whiteboards in class, the use of software for data visualisation for example, and homework discussion groups. 

And finally, we note that the majority of Germany's 800,000 teachers have tenure: they are civil servants. This does not imply they are lazy. But it is also not surprising that they are not to ones who are most open to change.

30 January 2024

Another German party

With the AfD and Bündnis Sahra Wagenknecht, Germany now has two populist parties that operate outside the mainstream of politics. A third one is in the process of forming: a national-conservative split-off from the CDU. It is to be led by Hans-Georg Maaßen, a former president of Germany's national security service - the office for the protection of the constitution.

After he left his job, Maaßen joined the CDU and became chairman of a conservative caucus inside the party, the union of values. It is a group that over the years distanced itself from mainstream CDU positions. The union, for example, rejects any form of immigration. It is also open to a coalition with the AfD, a taboo subject in the CDU. 

A poll, commissioned by a weekly conservative magazine suggested that the potential for such a party is 15%. The potential is a category that has become increasingly important in German opinion polling because it reflects overlapping party preferences, as opposed to the highly volatile pinpoint forecast. The potential for a Maaßen party is similar to that of a Wagenknecht party. Success will depend primarily on a party's ability to project itself with a clear profile. We think there is a political space between the CDU, which has moved increasingly to the centre, even with Friedrich Merz as leader, and an AfD that has moved to the right. But that space needs to be filled intelligently. We are not sure that Maaßen is of the same political calibre as Wagenknecht. 

In the past, it has always been difficult for such parties to form because the CDU accommodated conservatives in its leadership, and because any attempt to create a national-conservative alternative always ended with an infiltration of neo-Nazis. That is exactly what happened to the AfD, which started off as a party of economics professors opposed to the euro, and ended up where it is today. A similar fate befell Die Republikaner in the 1990s. 

We think that Maaßen has a chance to defy the same fate, if only because the AfD already exists. There is no point in neo-Nazis trying to infiltrate yet another party, given their high success rate with the AfD. The strong radical Christian overtones of the union-of-value may also set it apart. We think this party could have legs, not necessarily for this year's election, or even the federal election in 2025, but afterwards. If the CDU/CSU returns to power in 2025, it will form a coalition with either the SPD or the Greens - or both.  This will open up political space for a conservative party on the right. 

Maaßen's group is not yet an official party. He has now left the CDU, and this week he assembled a leadership group of people ahead of a process towards the formal formation of a new party.

29 January 2024

Iran's role in the conflict

Israel’s war in Gaza changed political power relationships in the region. Iran and Saudi Arabia are playing opposite roles when it comes to defending the Palestinian cause. Saudi Arabia is keeping the door open for normalisation with Israel once there is a fair solution to the Palestinian problem. Iran stands by its categorical denial of Israel and its right to exist, even if this is and always has been more in word than in deed. Saudi Arabia, meanwhile, is trying to take the oxygen out of the conflict.

The longer the war in Gaza lasts, the more weight Iran carries in this chaotic world, where the west looks weak, observes Dominique Moisi in Les Echos. Its militias, the Houthis and Hezbollah, are competing to show who cares most about Palestinians by throwing rockets at ships in the Red Sea or at targets in Northern Israel. Tehran started to flex its muscles too, with a missile attack in Pakistan in retaliation for an attack on Iran’s soil, and another attack into Iraq on what was supposedly an Israeli espionage centre. Their drones are also proving their worth for Russia in its war against Ukraine.

These actions look like advertisements, a reminder of Iran’s presence and military capabilities. Tehran talks loud but acts with prudence. There seems to be no appetite for a forlorn military response on behalf of the Palestinians or a general mobilisation against the West. According to Moisi, the regime has its own survival as a priority at the moment and a military confrontation with Israel and the US would threaten this. The fact that they are getting closer to having a nuclear bomb serves as an insurance policy that is better left unused.

Iran’s more subtle influence is on the rise, however, and it may also play out in the next generation of muslims. The longer the war lasts, the more muslim countries come under pressure from their own people to do something more significant. And Iran’s strong positioning against Israel could be seen as a valve for their frustration given the restrained response from Saudi Arabia and the Gulf states. In that sense, Israel’s war could become a recruiting ground for Iran and its militias.

For Benjamin Netanyahu and his government, a rising threat from Iran and its militias, as well as its increased isolation in the West, helps to justify its hardline narrative. In contrast to this is the prospect of a normalisation with, and recognition of, Israel from Saudi Arabia and other Arab States under the Abraham Accords. Those normalisation efforts remind us of the early days of European economic integration after World War II. It offers an alternative vision of Israel as integrated in the region. For that, however, the Israeli government will have to let go of its extremist elements, which would be the end of the government under Netanyahu.

Geopolitically, China’s mute reaction on Iran is troubling, writes Moisi. China could have pressured Iran in a friendly way to rein in the Houthis. After all, they are disturbing their main shipping routes, which economic costs for China. But instead, China gave priority to ideology, and everything that can be a nuisance for the US and the west, over its own economic interests.

26 January 2024

A farmers' daughter to lead Renew

Farmers are having a moment in France. Spontaneous actions have been erupting nationwide, and a more structured mobilisation is on its way. Their grudge is not only against high costs, but also the avalanche of regulations from the government and Brussels. For example, to raise a hedge around a field, which helps the crop and protects habitats, they would have to consult 10 different pieces of legislation to conform with the law. Over-regulation and shrinking revenues due to high costs and low prices recently brought farmers in several EU countries to the streets.

With only four months to go until the elections, those agricultural grievances are already becoming part of the campaign agenda. The conservative EPP is expected to heavily lean into this issue, in competition with far-right parties, with their claim to be defendants of traditional life.

The liberals too seek to re-discover rural values. There is a long history of pro-agrarian European liberalism. Renew still includes numerous Nordic and Baltic centre parties. They draw much of their support from rural areas, and aim to defend farmers and agricultural life. The group has cemented this more recently by electing French MEP Valérie Hayer yesterday as their new leader.

The liberals could not have found a better candidate to address the rural world. “I'm a farmer's daughter, a farmer's sister, a farmer's sister-in-law and a farmer's granddaughter”, Hayer said yesterday after her election by 100 MEPs from 24 countries. She is the second woman to lead the liberals after Simone Veil, and is the youngest leader, aged 37. Originally from Mayenne, she spent all her weekends in nearby Laval in the Loire region, where she consulted with local representatives from agriculture, companies, local government, schools, and the military on a regular basis. In the European parliament, she quickly became well-known for being an MP who works hard, taking on complicated issues, and possessing a phenomenal memory. She will be Emmanuel Macron's lieutenant in Brussels, while Gabriel Attal is to lead the efforts in Paris in this campaign.

Hayer’s rise to the helm of Renew was only possible after current interim President Malik Azmani, from Mark Rutte's VVD, failed to gain enough support due to worries about his party’s involvement in coalition talks with the far-right in the Netherlands.

25 January 2024

Italian constitutional questions

One of the more consequential, disputes taking place within Giorgia Meloni’s coalition is her proposed constitutional reforms. It is one that could help determine whether the reform actually passes.

The setup the government proposed last year is billed as a directly elected premiership. But it doesn’t exactly work like this in practice. What happens is that voters elect the prime minister and there are parallel legislative elections. In those legislative elections, the party or coalition which the elected prime minister belongs to gets a majority bonus, which allows them to govern in the legislature.

But under the current proposals, the winning party or coalition’s legislative faction would be able to depose the prime minister. The faction could then replace them with someone else from within their own ranks. This effectively changes the system from a semi-presidential one, in the style of France, to a parliamentary system that forces each coalition to assign a prime ministerial candidate. The prime minister is basically a figurehead, since the real power to dismiss them lies with their supporters in parliament.

Now, Fratelli d’Italia wants to change this. It is saying, instead, that a vote of non-confidence in the prime minister should automatically trigger new elections. Doing this would tilt the balance of power significantly in favour of the prime minister. The parliamentarians couldn’t just sack the prime minister and change them out if they were doing badly in the polls, or had disagreements over policy.

Lega, one of FdI’s coalition partners, wants to keep things as they were before. The reasons for both parties taking the positions they have on this issue are pretty obvious. If the system FdI wants was introduced and the current coalition held, Meloni would have a lot more power. Nobody could get rid of her without calling a new election. Lega’s preferred system would give the party much more influence, since the prime minister would still need to command majority support.

We will still have to wait a bit longer to see who prevails on this. The deadline for amendments in the Italian Senate will expire this coming Monday. Only after that will we move closer to a vote on a final text. We also expect that, whichever way this debate goes, it will affect the chances of this proposal succeeding in a referendum. That would be necessary for the reform to become law.