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22 March 2024


De-industrialisation has many faces. A more subtle aspect is a decline in industrial nationalism. In the UK, the Royal Family drives Audis. We are not at the point where the German chancellor drives a Tesla. But a symbolic shift did happen yesterday when the German national football team dropped Adidas as their sponsor after 70 years, and is switching to Nike. The US company is said to have offered €100m in sponsorship, from 2027 to 2034. 

It is quite something for the DFB, the German football association, to be criticised by a Green economics minister for lacking patriotism. Robert Habeck said he cannot imagine the German team without the three stripes. 

In the commercial world of sports, €100m does not appear to be a lot of money. But it is a lot of money for the DFB. It is a not-for-profit organisation that sponsors amateur football - aside from running the national football teams. Adidas is believed to have offered only half as much. They needed the money.

It is a tale of how patriotic industry-based models end. People just cannot afford this any more. High profit margins are what used to feed the model. De-industrialisation does not begin with off-shoring, but with a squeeze on margins. This is what is happening in the car industry, for example. The profit margins for electric cars are much lower. That in turn has a whole number of consequences. There is less money for activities with doubtful commercial returns - like trade fairs, corporate junkets, or the sponsorship of unsuccessful football teams. Maybe we should look at this story in a different way. Adidas, too, has other priorities now.

21 March 2024

Varadkar's moment to quit

Leo Varadkar chose his moment to step down as Ireland’s prime minister. The surprise announcement yesterday had its shockwave effect and prompted the question why now? Varadkar himself said that he wants to give his successor sufficient time to establish themselves before accompanying candidates in local and European elections, and a year ahead of national elections. He also wants time for himself to reflect on what to do next. How to quit a job well depends on spotting when chances are about to turn. It is a matter that defines one’s own reputation and lays down the path for the successor.

Varadkar’s resignation speech was reminiscent of Jacinda Arden, former prime minister of New Zealand, with her frank acknowledgement that does she no longer has enough juice in the tank to do this job well. The mood and the tone of Varadkar’s less than 10 minute speech was similar. With some emotion, Varadkar said that after some soul-searching, he decided to leave for private and political reasons.

This resignation also reminds us of Stefan Löfven, who resigned as Sweden’s prime minister two years ago to give his successor enough time on the job before heading towards elections. It did not work out for Magdalena Andersson, his chosen successor, after the elections. But as a handover, this is as good as it gets in politics.

The other parallel with Löfven’s resignation is that it came on the heels of some proper defeats. In Löfven’s case, his government lost a no-confidence vote over rent controls when he lost the parliamentary support of the Left party. Varadkar’s leadership has come under pressure from inside his own party. There are already 11 MPs elected in 2020 who left the party over disagreements with the leadership. Behind closed doors, Varadkar was also held responsible for this month’s sound rejection of the government’s proposed changes to the constitution in the family and care referendum that should have sailed through given the backing of most opposition parties, writes the Irish Times. None of those rifts will be discussed in public, so as to avoid losing further votes to Sinn Féin. Upcoming local elections also are set to deliver a defeat for Fine Gael, and would have made his resignation a much more embarrassing event. So it may turn out to be the best moment for Varadkar to leave before things turn ugly.

The succession race already began in the media. Simon Harris, the education minister, has emerged as the immediate frontrunner. But Paschal Donohoe or Heather Humphreys are also strong contenders, should they choose to run.

20 March 2024

EU is losing the business community

A survey amongst small and medium-sized companies in Germany has registered a massive shift in sentiment against the EU. Over-regulation by Brussels is cited as one of the main factors that drives companies to relocate production from Europe to the US. 

The survey comprised 1000 companies, a representative sample of small and medium sized companies. It was carried by Stiftung Familienunternehmen und Politik. 

Our experience has been that EU officials have a tendency to dismiss complaints about bureaucracy. They should note that business, especially the German Mittelstand, used to be one of the strongest pillars of political support for European integration. The shift in their position is not only extreme in degree, but also extremely worrying. The headline number is that 90% of small and medium-sized companies are unhappy with the EU to varying degrees. Many had to hire staff to fulfil regulatory reporting requirements, for example on GDPR. A majority of companies believe that Brussels is heading in the wrong direction. 

The EU's supply chain directive, which was passed against German opposition, is considered to be the latest in a long string of anti-business legislation. We wrote that it was watered down almost beyond recognition, yet for German companies it goes too far. It piles on the many, mostly pointless, bureaucratic requirements they already have to undertake.

A majority of these companies believe that the negative business environment will persist for the foreseeable future. Some positive attitudes have been expressed too. Businesses see freedom of movement as a big benefit to them, and would like to see this freedom extended. This is telling us that they are not supporting Dexit or other forms of disengagement.

Whereas countries only have the binary choice of staying in the EU, or leaving, companies have a third choice. They can relocate part of their activities. This is not about closing a factory here, and reopening it there. It is about new investments. They are shifting investment out of Europe. 

We think this is a perfectly rational way for companies to react to what many see as a hostile business environment. They save on bureaucratic compliance costs, become less reliant on increasingly fraught maritime transport, and less vulnerable to trade sanctions if they produce closer to where they sell. The US has become very attractive for European producers, not only because of the Inflation Reduction Act. If Donald Trump gets elected, the avoidance of punitive tariffs will become another factor.

19 March 2024

Michel's rosy war economy

When Charles Michel, the European Council president, calls on Europe to switch to a war economy he does not mean that we need to collect all our steel to melt it so that our soldiers can fight against an enemy that attacks us on the ground. In his letter, Michel uses those big words of war to advocate two things: supporting Ukraine with the weapons they need and relaunching our European economy by focussing on the defence industry. Behind his appeal is the assumption that if the EU cannot provide a good response and Ukraine does not provide enough support to stop Russia, we will be next.

What Michel wants concretely is EU targets to buy twice as much weapons from European defence producers by 2030; to use the profits from Russian frozen assets to finance weapons purchases for Ukraine; to facilitate financial access for European defence industry, including by issuing a European defence bond and getting the European Investment Bank to add defence purposes to its lending criteria. Michel sells it to us as a way to create jobs and growth. It is to provide more clarity to companies with multi-annual defence contracts to increase their capacities. And by investing in defence industry, the EU is boosting its technology and innovation, a confident Michel reassures us.

What Michel talks about is not a European Union we recognise any more - nor one that would work in practice. Perhaps that will be Vladimir Putin’s greatest triumph that he changed the DNA of our union. 

The attempt to base economic integration and economic stimulus on defence creates precedents. If we build up a defence industry, we need conflicts to feed them. Beyond Ukraine, will we do the same for Georgia? Would we want our economy to depend on wars in Africa to prop up our GDP growth data? If the US decides to retreat, does that mean we need to pick up where the US left?

Michel wants a geopolitical Europe, and finishes his letter with the familiar cold war phrase that if you want peace you need to prepare for war. This is not a cold war but a hot war in Ukraine. Are those weapons in Michel’s war economy to speak for our failures in diplomacy? What is our historic contribution to this conflict? Should we not start from there?

The language Michel uses is dramatic and dangerous. Some of our older citizens still remember what it means to live in a war economy. Michel’s loose talk is disrespectful. And it is insincere to suggest that we need a war economy to help Ukraine. He focusses on the bright side of this war, the solidarity the EU shows with Ukraine and the economic growth that could come from an increasingly thriving defence economy. Michel is deliberately ignoring the dark side of this war, with the many tough life-and-death decisions to be taken. Just look at Israel to see where this has gone.

Is Michel acting alone, or is he building a case for leaders like Emmanuel Macron or the next European parliament? Macron recently talked about European troops in Ukraine and a defence union. We think this loose and un-coordinated talk is careless. It gives rise to fear narratives that the public is not in the position to judge within a rational framework. It does not solve the more fundamental disagreements amongst European countries either. Then there is the European Parliament which is expected to swing further to the right after the elections in June. We have to resist the temptation to reduce our policy options to defence-only. Europe will need to a lot more, in terms of diplomacy especially, to become a geopolitical player in its own right.

18 March 2024

Trump's European friends

In 2016, a populist uprising in Europe presaged the election of Donald Trump. We make no causal inferences here, but we could see a stream of events happening this year. Polling would suggest that the European Parliament shifts to the right in June, and that Trump will win the US presidency. A lot of things will intrude into these scenarios. But it is worth thinking this particular scenario through to the bitter end.

Previously we asked the question how a social-liberal Europe will deal with Trump. Maybe the question should be how a conservative Europe will deal with him. If Trump gets elected, two of his European counterparts will be Giorgia Meloni and Viktor Orbán. During Trump's four-term presidency, the socially conservative Friedrich Merz might become the next German leader. France will also have a new leader. Could there be a transatlantic alliance of the right? 

That would be the ultimate irony, and something centrists should be watching out for. We would argue that the threat to them is not Trump, but a structural shift in European politics to the right. Trump will undoubtedly court Europe's right-wing leaders as he did recently with Orbán, whom he described as a fantastic leader. This episode should serve as a reminder that Trump is not breaking with Europe as such, but with liberal Europe. Even the Nato-defence spending target is in reach. What has he got to complain about?

This is where centrist-liberal Europe has failed - to make itself independent of the US in defence, macroeconomic policy, and innovation. We left the most lucrative and strategically most important areas of 21st technology to the US and China, retreating to the field of regulation. Here at Eurointelligence, we have been poking fun at the EU's phantom programs, like Juncker's investment plan, the recovery fund, and tons of programs that have acronyms as names, which are hard to remember and even harder to see the point of. The macroeconomic reality is that the EU's annual budget is 1% of GDP. The EU, as it is constituted today, is a geo-economic irrelevance. On our calculations, it would take a fiscal and capital markets union that can lever some 5% of GDP and a much broader-based single market to make a difference. Liberal Europe has missed the moment. The euro crisis was perhaps the most obvious one to move forward.

For the right, however, the EU as it is constituted today, makes the perfect vehicle to promote socially conservative policies, and place Europe in the junior partner role forever. In other words, an EU that is fit for Orbán and Meloni.


15 March 2024

What are we forecasting?

Financial market participants will always take views, and disagree, on the future level of interest rates. We ourselves claim no better understanding of the future than others. What we see quite clearly, however, is that the deep implications of the shift from model-dependence to data-dependence is not yet fully absorbed by both market participants, and some central bankers too. Maybe, this is so because data-dependence is counter-cultural to mainstream economics and finance.

In a world in which inflation-targeting central banks are data-dependent, surely a forecaster should be focusing on the data first, not on the decision. The latter would be comparable to a weather forecaster who tries to forecast the number of visible umbrellas. The link between the data and the decision is not mechanistic. But if you are confident enough to predict four ECB rate cuts this year, then this is only so because you are implicitly forecasting a gradual decline of inflation towards 2%. That is the daring part of your forecast, not how the central bank would react to it. The conditional forecast is trivial, but not the condition itself. 

We saw in the US this week that the path towards the 2% target is rocky. The latest inflation report for February came up with 3.2%, which is slightly higher than what was expected. We know that quite a few economists can easily live with a 3% inflation target. If we were to enter a higher-for-longer scenario on inflation, many will probably not think that the pain to get towards 2% is worth it. But then we would be at risk of falling into the what-cannot-be-that-shall-not-be fallacy. Central banks cannot, and will not, shift targets when they miss them.

Data dependence has a lot of deep implications that people have yet to reflect on, in addition to the uncertainty about the data themselves. It involves skill sets different from macroeconomic modelling, new types of data; and different attitudes towards uncertainty, and ways of measuring it. It feels to us as though a lot of people are clinging on to a world in which they measure interest rates as a stochastic process with normally distributed shocks. Christine Lagarde, who is not an economist, hinted at this when she criticised the narrow focus of the economics profession on models, and its lack of interest in relevant data that arise in epidemiology, geology, and geopolitics. Non-economists seem to grasp the idea of data dependence with greater ease, it seems.

14 March 2024

More Catalan problems for Sánchez

The good news for Pedro Sánchez is that Carles Puigdemont, his latest separatist frenemy, will be watching the next Catalan regional election from Waterloo. The bad news is that this is because Catalonia’s government has collapsed, and the next elections will be in May. One of the most farcical stories in European elections has now taken another dramatic turn.

Catalonia going to early elections is mostly a problem for Sánchez because of the rivalry between the two main separatist parties, who both support his government. The disagreements between the two are numerous. But the main one is how to approach Catalan independence. One, the more left-leaning ERC, wants to do it with Madrid’s consent, like the SNP in Scotland. The other, Puigdemont’s more right-leaning Together for Catalonia, is more favourable to confrontation with the central government. There are also interpersonal issues dating back to the aftermath of 2017’s failed independence referendum.

Sánchez, like the rest of us, would probably rather not have to deal with this. But he doesn’t really have a choice anymore. His government will need support from both parties to do pretty much anything, including finding an agreement on Spain’s belated 2024 budget. This has recently been ongoing, as last year’s elections prevented the government from passing it before the end of 2023. Stalled progress on the amnesty law for Catalan separatists facing 2017-related criminal charges, which the lower house of Spain's parliament will vote on today, has delayed it further.

The government could always scrap the budget for 2024 and focus on next year’s instead. Given the current situation, this may look like a better option. Things may become more difficult now that the two parties are running against each other. This gives them an incentive to out-bid each other on concessions they will try to extract from Madrid, given the overlap in their voter bases. The ERC in particular is also running against the Catalan branch of Sánchez’s Socialists, the other key protagonist in the regional elections. That is another reason for them to choose confrontation over cooperation for at least the next couple of months.

Where this gets even more awkward is that one of the main sticking points in the budgetary negotiations is the status of Catalonia. The previous, ERC-led regional government has been pushing for Catalonia to have its own independent budgetary process separate from other regions. This would be a similar arrangement to the Basque Country and Navarre, but on a much bigger scale because Catalonia is larger than either of those regions. This may become a theme in the regional elections, which would set the government's progress towards an agreement back further. 

13 March 2024

Scholzing, Season Two

The problem with straw man arguments is that, once revealed, they put you on the spot. We do not really know the reasons why Olaf Scholz is refusing to send Taurus cruise missiles to Ukraine. But the stated reason is clearly wrong. They do not require the dispatch of German ground troops to Ukraine.

FAZ's chief political commentator, Berthold Kohler, said Scholz had lost the air superiority over the debate. What happened is that Annalena Baerbock, the foreign minister, is now trying to solve Scholz's German-troops problem through a ring exchange: send the Taurus to the UK, and let the UK increase its supplies of Storm Shadow missiles. But Scholz does not want that either.

Kohler raises a potentially disturbing reason for why that might be so, in addition to political opportunism. It is possible that Scholz concluded he needs the Taurus missiles himself in case Russia wins the war against Ukraine, and then starts to attack Nato territory. 

This week's published annual report on the state of the German armed suggests that the Bundeswehr suffers from acute personnel problems, material shortages, and what it called a disastrous infrastructure. The armed forces are a mirror image of the society - they are ageing and shrinking. The Bundeswehr has 20,000 unfilled jobs. Sexual abuse and Neo-Nazi sympathies are rampant.

The degredation of Germany's armed forces has been going on for a long time, and will not be quickly reversed. Eva Högl, the Bundestag's military commissioner who wrote this report, said the Bundeswehr is on course to miss the personnel targets it set itself for 2031. This is why Boris Pistorius, the defence minister, is ruminating in public about the return of the draft. 

This is another story of German unpreparedness. The two things that will need to happen are a change in immigration policies and a reform of the debt brake to exempt investments, including on security.




12 March 2024

Keep calm and carry on - French edition

Bruno Le Maire may promise as much savings as he wants, but Emmanuel Macron and Gabriel Attal have more important priorities. For them what counts is to keep the French off the streets until after the summer at least. We are three months away from the European elections, and five months away from the Olympic games in Paris. Every sign of a protest movement, be it at at the ballot box or on the streets, could ruin the reputation of France and the sink the government's policies. What counts is to extinguish the social fire before the Olympic fire is lit.

There will be fiscal sweeteners for those with a legitimate grudge. Civil servants who work extra hours during the Olympic games are promised a premium payment of €500-€1500, while security personnel will get €1900 extra. This will add another €1bn for Le Maire to counter-finance. It may not be the last expense. The rest will be covered with a mix of carrots and sticks.

And they keep the show of active governance going. Their latest announcements give the impression that they are driving forward on matters that are dear to voters. After enshrining abortion rights into the constitution, the president talks now about active support for euthanasia. This is part of the palliative care bill to be presented in April, the result of two years of consultations. So here we are with Le Maire on the one side holding up the image of caring for budget discipline and on the other Macron and Attal, who will not hesitate to use the public purse in pursuit of their missions. With a deeply engrained culture of resistance in France, what could possibly go wrong?

11 March 2024

... and how not to fight the far right

Renaissance started its European election campaign last weekend. Rather than talking about European subjects, they focussed mostly on attacking Marine Le Pen's Rassemblement National, and its lead candidate for the European elections, Jordan Bardella. Clearly, Emmanuel Macron and his people did not follow Jacques Chirac’s advice never to talk about the adversary to avoid building them up. This seems to be yesterday’s world. Donald Trump has shown successfully that by talking about your adversary in a certain dismissive way, one can win votes today. The trick is to chose the right enemy.

Renaissance chose to hammer RN over its ties to Russia, and its inconsistencies. They seem to have decided to run a campaign based on fear rather than on ideas. Before a recent campaign rally in Lille, Emmanuel Macron warned about the risk of war for Europe against Russia, and he put forward the idea of sending troops to Ukraine. This framing serves a purpose nationally by calling out other parties for their positioning. But ambiguity in positioning is not a sole trademark of RN. Other parties, like Les Républicains, the Socialists or the Greens, also find it easier to say yes to Ukraine but no to war. Invited to the Elysée Palace last Thursday, they were far more critical than expected, writes Cecile Cornudet. A consultative vote tomorrow will be indicative for future support in particular for a war budget.

For Macron turning his party into the be-prepared-for-war party is a risky bet. Polls suggest that the French support Ukraine, but not French engagement in the war. It is not clear how will voters will decide in a contest between between those who advocate French involvement, and those who reject it.

Also the narrow focus on RN, which is leading the polls by 12pp, makes them an easy target for others. Bardella dismissed it as a sick obsession that relies on insults and fear. Rafaël Glucksmann, the lead candidate on the left who was only recently mentioned by Renaissance head candidate Valérie Hoyer, was not even mentioned once during the Lille rally. Glucksmann reacted by saying that this is not a match between Gabriel Attal and Bardella, but the quest for the two main groups in the European parliament to stay ahead of the Eurosceptic parties.

If they continue to narrow down the subject to Russia, it also reduces the discourse to one of stark choices, and lets go of subjects they built up in the last election campaign. We too were wondering why all those themes that are so critical for the EU’s and France’s future have disappeared. There is plenty to say on the green or digital transition, on farming and food, on immigration or the rule of law. How are the voters to decide if the main political party is no longer talking about these important choices?