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13 September 2024

More for parents, less for pensioners

Falling birth-rates often end up having a double fiscal impact. One side of the coin is that pension expenditures relative to revenues rise, as you have more retirees per worker. The other side is that governments often try to dig themselves out of the demographic hole through taxes, subsidies, and serviced designed to try and convince people to have more children. Managing the balance between the two then becomes critical.

Before now, the poster-children for trying to manage this balancing act in the developed world have arguably been Japan and France. But now Italy is taking its own demographic crunch more seriously. Part of the idea so far from Giancarlo Giorgetti is to orient Italy’s labyrinthine system of tax breaks more towards encouraging children.

This would involve setting ceilings on how much one could claim from deductions. These ceilings would be variable both according to both one’s income and how many dependent children they have. In this respect, it would be similar philosophically to France’s approach, where having more children cuts one’s income tax liability.

On the other hand, it looks like the pension regime will continue its slow tightening. Lega, Giorgetti’s own party, had pushed for a more generous regime, the so-called Quota 41. It would allow workers to retire with 41 years of contributions no matter their age. Now the government is looking at ways of making its current regime, the so-called Quota 103, more sustainable. This currently entails retiring at 62 with 41 years of contributions. It is a step back from the Quota 100 introduced by the Lega-Five Star coalition, which allowed retirement at 62 with 38 years of contributions.

It would not be surprising to see Italy continue this trend in the coming years with Giorgetti still as finance minister. He has both stressed the severity of the demographic situation, and been prepared to fight battles with his own party on finances, including pensions. From this perspective, pro-natalist spending is money saved, and handouts to pensioners is money wasted.

But we have our own doubts about whether this can turn Italy’s demographic tide. Similar measures in Scandinavia and eastern Europe have often been expensive. They have also failed to return countries to a so-called replacement level fertility, which is necessary for a stable long-term population. Another point we'd make is that French-style tax measures in practice shift the tax burden from those with children to those without them, including young people yet to have children. If a lack of resources is a barrier to starting a family, we fail to see how this would solve the problem, rather than making it worse. 

12 September 2024

E tu felix Austria?

The Austrian elections are on 29 September. Given the polls, which seem pretty stable over the past several months, government options could be as complicated and curious as they have been in other EU member countries this year. A straightforward coalition on the right may not take off due to personality issues and divisions over Ukraine. The alternative is another bric-à-brac centre-right coalition. Not the luckiest of choices.

Looking at the poll of the polls, the far-right Freedom party is leading with 27% ahead of the conservative ÖVP with 23% and the Social Democrats with 21%. The liberal Neos and the Green party run at 10% and 8% respectively. Two new parties could be entering the assembly according to the polls: the beer party (4%), led by the leader of the punk group Turbobier advocating the de-politisation of politics, as well as free beer fountains in Vienna, and the communists (3%). Two smaller parties may or may not make it over the threshold, the List Madeleine Petrovivc, founded by a former member of the Green party opposed to supporting Ukraine and Keine von denen, another anti-establishment party. There are also three more parties that run in some states but not all.

The Freedom party, or FPÖ, has clearly been on track for some time to come first in those elections. Their programme Fortress Austria, Fortress of Freedom is focused on migration along the lines of the RN in France. It seeks only the most basic provision of social services to migrants, and wants to end family reunification for migrants that are already in Austria. On foreign policy, they insist on neutrality in the war between Russia and Ukraine, promising to end support for Ukraine immediately once in power and voting against sanctioning Russia. On economics, the programme focusses on reducing corporate taxes and wage costs, which also features in the ÖVP programme.

A coalition between the Freedom party and the ÖVP seems the most straightforward one and would guarantee a majority. They have governed together a couple of times in the past. But there are several obstacles and grievances this time, especially after the last coalition did not end well. Karl Nehammer, the outgoing ÖVP chancellor, does not want to cooperate with Herbert Kickl, the leader of the Freedom party. Kickl is seen as the most radical amongst the FPÖ leaders, and is currently implicated in another scandal about influence peddling, though that does not seem to hurt him in the polls. Nehammer may also know one or two things about how Kickl operates from when he took over from Kickl the interior ministry in 2019.

President Alexander van der Bellen already indicated that he does not have to nominate Kickl as prime minister, and that he could nominate another personality from the FPÖ instead. Whether this would do the trick for Nehammer, or whether the ÖVP would fold in the end, as Kickl expects them to do, will be part of the cat-and-mouse game the two parties will be playing after the elections.

The alternative to a right-wing coalition between FPÖ and ÖVP is that the latter enters into coalition talks with other partners from the centre. A coalition between ÖVP the Social Democrats and the liberals could get a majority together. A coalition including the Greens could be tricky. Their current coalition is not a happy one. Then there is the entry of new parties that could change the results and mess with the possible coalition options.

The Austrian parliament has 183 MPs elected by a majority vote in Vienna and Vorarlberg, and by proportional representation in the remaining seven states. To enter parliament, a party running candidates nationwide must get at least 4% or a direct mandate, that is 25% of the votes in one of the 43 regional constituencies.

11 September 2024

Meet the Conservative Progressives

“The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of Conservatives is to prevent mistakes from being corrected. Even when the revolutionist might himself repent of his revolution, the traditionalist is already defending it as part of his tradition. Thus we have two great types -- the advanced person who rushes us into ruin, and the retrospective person who admires the ruins.”

G.K. Chesterton, a British writer and philosopher

A new party group may soon be formed in the European Parliament that combines Chesterton's two forms of ruinous politics in a single party: the Conservative Progressives. Its main constituent is the Sahra Wagenknecht party - straddling the left and right, and busy trying to prevent mistakes from being corrected. One of Wagenknecht's main policy ideas is the resurrection of the Nord Stream 2 pipeline, and the strengthening of old industries.  

There are three parties so far - not enough yet to form a group: there is Wagenknecht's BSW, Robert Fico's Smer and the Czech Stacilo! (Enough!). They want to the group up and running within a year, and hope to define their political space against the progressive left, focussing instead on traditional values such as worker rights, peace and economic stability. The three together have 13 MEPs. To become a group, they need at least 25 MEPs from seven different member states. They are confident that this can be achieved. And given that the wheel between progressives and conservatives is always turning, they may just have to wait their moment. So we could end up with a traditional left group other than the S&D, while fragmentation continues.

Politics always has its progressive or conservative forces. This is a new variant. They two run circles around each other, each of them having their go before being taken over by the other. In the past, those currents would run inside big parties. But with the emergence of new parties this tendency has expressed itself more outwardly.

Over the past decade, we have witnessed the creation of new parties in Europe and fragmentation of parliaments. Progressive new left wing parties rose on the back of the financial crisis, motivated to strive for more fairness in societies with increasingly complex identities, and to act against climate change. Amongst the progressive forces, there was also the centrist revolution of Emmanuel Macron in 2017. He came to power with the promise of bringing an end to the old left-right divide. But instead of uniting, he is now likely to leave behind a more polarised political landscape with a stronger far-left and far-right. Elsewhere in Europe, far-right parties claimed back political space and even rose to power in Italy and the Netherlands with their family values and chez-nous identity against migration, coupled with a touch of nostalgia. 

 

 

10 September 2024

Germany suspends Schengen

It is almost comical that as Mario Draghi presents his report on the future of Europe, Germany has the brilliant idea to re-impose border controls and suspend the Schengen system of passport-free travel. The German government has come under pressure to crack down on immigration by trying to stop refugees at the border. Nancy Faeser, the interior minister, said the reason was to protect Germany against Islamic extremism, following a series of murders and attempted murders committed by immigrants in the last few weeks. The Schengen rules require an over-riding national security interest.

The collateral damage will be huge. Austria already said it will not take in any immigrants rejected by Germany. So Austria will almost surely do the same and close its border. Nobody to the east and south-east of Germany has the physical capacity and political willingness to absorb immigrants. The Czech Republic, Slovakia, Hungary, Slovenia and Croatia will all do the same. We assume that Switzerland, not a member of the EU but a member of Schengen, will follow. Italy has no border to close, but France does. Germany has now become an active participant in the beggar-thy-neighbour refugee policies of EU member states. Except that when Germany plays this game, it has much more serious consequences. This is a serious threat to the whole idea of Schengen. This is where the unravelling of Europe could be starting.

Annalena Baerbock, the foreign minister, warned her colleagues not to endanger the EU’s migration deal, and not to succumb to the illusion that European countries can solve the refugee problem at a national level.

The border closures do not come with a change in current laws. The German border guards will have to take in anybody who mentions the word asylum. But a majority of immigrants do not. FAZ notes that Friedrich Merz wants to go much beyond the current rule. He wants the police to be able to even reject people who claim asylum. The argument he uses is that Germany’s borders only with safe countries, so it is technically impossible for anyone to claim asylum at a German land border. He also maintains that law and order within Germany have a higher priority than Germany’s obligations under international law. The man most likely to become Germany’s next chancellor appears to have a low regard for international law. We recall his comment about the arrest warrant for Benjamin Netanyahu by the International Criminal Court – that it was not meant for advanced countries.

The present government already stepped up border controls over the last years, as a result of which the number of immigrants have already fallen. FAZ writes asylum applications at the Polish-German border were down from 2268 in Q1 2023 to only 450 a year later. Asylum applications were also down at the Czech border. Whatever problem the border controls solve, it does not appear to be the problem of immigration. But it causes massive collateral damage to the rest of the EU.

9 September 2024

My Big Fat Greek Divorce

Stefanos Kasselakis was ousted as leader of the left-wing Greek Syriza party by its central committee yesterday via a motion of no confidence a year after he won the leadership contest by surprise. After a tense two-day session, Syriza approved the no confidence motion with 163 to 120 votes. A relieved Kasselakis steps aside, and a new round of leadership contest beckons for a party that is at risk of losing its role as Greece's main opposition party. An extraordinary party congress will have to be organised within the next three months where the leadership is to present its candidates.

What can we learn from this episode? Kasselakis took over the leadership of the party as an outsider from Miami with no connection to Syriza whatsoever before the elections. He posted on social media a four minute video where he told his life story and immediately became the voters’ frontrunner. When he then arrived in Greece, the 34-year-old presented his husband to a country that was not accustomed to this kind of openness. The party's rank-and-file supporters idealised him. By voting him in as their leader, they hoped he could rejuvenate a party that had just lost elections two times in a row. His insistence on absolute transparency exposed some crucial lies in Greek society, where he called out matters in justice, the economy, as well as inside the party and power.

But Kasselakis was a one-man show and did not work well within the party’s leadership and institutions. Ideologically, he also was out of sync and shocked his party with policy proposals like stock-options for employees, his constant social media posting, and his lavish lifestyle replete with mansions and swimming pools.

This is a cautionary tale of what can happen if a party has loose election rules. Syriza voters just turn up on election day, declared themselves a friend of a party, and paid a fee of two euros to vote. Syriza’s story showed that in today’s world with its social media possibilities, any candidate can show up last-minute and take over with no party credentials whatsoever if he or she looks like a star and hits the right tone with the crowd. It is reminiscent of how Jeremy Corbyn swept to Labour's leadership in 2015, thanks to similarly relaxed voting rules. But he at least came from within the party, and had support from one of its traditional factions. Kasselakis didn't. 

It is also a tale of cultural differences, however. Kasselakis, with his openness over his personal life, became a sensation overnight. And there was hope that openness and transparency could become the big thing on the left in Greece too. But this is not how it works in Greece. We are reminded of the film My big Fat Greek Wedding and its story of how a Greek family, proud of its history and role in the ancient world, is eager to preserve its historic values in the much more liberal US they were living in. It is even harder if not impossible if an outsider tries to break up those historic norms in the country itself, even if he is Greek.

6 September 2024

Turkey's hedging bets

Turkey is slowly repositioning itself geopolitically. Within the past weeks Turkey filed an application with the Brics+ and concluded a historic deal with Egypt. Turkey is hedging its bets, which could allow the country to play the west against its opponents and could thus carve itself out a space to leverage power over both.

The Brics are an inter-governmental organisation formally founded by Russia, China, India and Brazil in 2009. Since Russia invaded Ukraine and the West imposed its sanctions on Russia, the Brics+ has become increasingly active and attractive to those countries that did not want to join the western sanctions regime, those that want to challenge the US-dollar dominated financial international system or, as it is in Turkey’s case, are seeking an alternative to the EU. The Brics+ currently counts 9 members including South Africa, Iran and Egypt. Economically it is a giant representing 35% of world GDP compared with 14.5% for the EU. The gap is even stronger if you measure it on a purchasing-power basis. But new members also could add more conflicting relationships, like the ones between Saudi Arabia and Iran or Egypt and Ethiopia, thus making common decision-making more difficult. Its importance is not only in the economic sphere, be it on trade or an alternative international payment system. Their influence could also matter in the UN, the World Trade Organisation or the IMF and World Bank. They also have a very different take to the EU when it comes to security.

The second move is a historic deal with Egypt, opening a new chapter for Recep Tayip Erdogan after he cut off relations with Egypt’s president Abdel Fattah al-Sisi 13 years ago over the ouster of Egypt’s Muslim Brotherhood-led government at the time. Both presidents signed 17 cooperation agreements on economic, technological and strategic cooperation. Egypt could even buy drones and patrol ships from Turkey. Their strategic high-level consortium starts to meet as of next week.

This alliance with Egypt is part of Turkey’s goal to repair broken ties with regional players. For Egypt, this alliance is of strategic importance in light of Israel’s war in Gaza. Egypt is increasingly fed up with Israel’s accusations that it is allowing Hamas to smuggle in weapons. Benjamin Netanyahu’s order to the IDF that they are to prepare for taking over delivering humanitarian aid also suggests to them that they are in Gaza for the long haul. This brings many problems for Egypt not only at the border crossings with Israel. Egypt is thus looking for new partners and found one in Turkey.

4 September 2024

What it takes for Ukraine to join

We reported recently on a story that Poland, under its new government, has taken a much more nuanced position towards weapons deliveries to Ukraine. Now, Donald Tusk threatens to veto Ukrainian membership after feeling offended by Dmytro Kuleba, the Ukrainian foreign minister. Kuleba said that the 1947 operation Vistula – the resettlement of 150,000 Ukrainians from Poland after the second world war – had been conducted from Ukrainian lands. He called on the Polish government to honoured misdeeds against Ukrainians, as Visegrad Insight reports. The Polish president, and government minister, have also re-opened the issue of German war reparations.

These intruding events are a reminder that the tri-lateral relationship between Germany, Poland and Ukraine is likely to be a big obstacle to Ukraine’s accession. It is about a lot of money, not just reparation claims. Ukraine’s accession would require treaty change, and in particular a reform of the EU’s cohesion funding. It would turn Poland from a net recipient of EU funds into a net contributor. If Poland resists, as it surely will, existing net contributors like Germany and the Netherlands would have to agree to bankroll both Ukraine and existing members who are net recipients like Poland. We see no room for manoeuvre given current fiscal trajectories, and no political willingness to shift the boundaries.

In other words, we struggle to see even scenarios in which a Ukrainian accession is possible. It would require all of the following: treaty change, involving the EU’s budget and voting laws; readiness by current net recipients of EU funds to forego subsidies; readiness by fiscally conservative countries to expand the EU’s own resources. You cannot fund Ukraine's access through bilateral transfers, the mechanism used for the recovery fund. The EU requires a proper federal-level funding source.

Christian Lindner will not always be the German finance minister. Poland may one day have a prime minister not as thin-skinned as Tusk, and not as nationalist as the previous lot. Or maybe they will. What we struggle to see is the readiness to accept treaty change. That requires a level of trust the EU has lost over the years.

On this subject, Andrew Duff has produced an excellent paper in which he outlines the minimum reforms necessary. It really is a minimum.

The cohesion funding mechanism needs to change. But so much else needs to change along with it. The way the EU functions right now is not suitable for a union as large as it would be if Ukraine were to join, along with Moldova and countries of the western Balkans that are waiting in the EU’s antechamber. The voting procedures would not be suited to a union that large, the European Parliament needs to be able to propose legislation, and, most importantly, the procedure which the EU can use to abandon the unanimity principle that still prevails in several policy areas like foreign policy needs to change. The existing mechanism, the so-called passerelle clause, has not worked because it requires unanimity to abandon unanimity. Once unanimity is gone, it never comes back. You cannot run a union with 35 member states, or thereabouts, with everybody using their veto rights for rent extraction, an art Viktor Orbán has perfected.

With Ukraine, a large country would join. This would change the dynamics of EU voting procedures in many ways. Population size plays an important role in the current procedures. What currently protects the interests of Germany in particular is the clause that a qualified majority needs to surpass a threshold of 65% of member states’ population share. Germany plus one other big country and a couple of small-to-medium sized countries constitutes a blocking minority. That would shift dramatically with enlargement. It would also shift the delicate political balance between the east and the west. The UK is gone. The east enlarges.

Duff also notes that unanimity needs to go for the accession process, except the final decision. None of this can conceivably work with the current size of the EU budget at 1% of European GDP. It is legitimate to express a desire for enlargement, or some other political project, without knowledge of how to fund it. What you cannot do is be generally in favour of EU enlargement to Ukraine, and at the same time insist on EU fiscal red lines. Fudging your way through is not going to work. This is why any serious debate on Ukrainian accession would have to be accompanied by an equally serious debate on treaty change. But we see no appetite for such a debate in the EU institutions. Which leaves us to conclude that they are not serious about Ukrainian accession, and that this is largely an exercise in virtue-signalling.

3 September 2024

Time to blame foreigners again?

It’s difficult to deny that the EU has a China problem. The union’s most important outside trading partner has turned into an existential problem for some of the key industries of the future, like cars or renewable energy infrastructure. At the same time, the EU has deepened its own import dependency on China, according to recent research from the Peterson institute.

But it would be an equally serious mistake to see this as all about China, as opposed to economic and industrial policy decisions the EU has made too. There is, we think, a risk of this happening. We noted, for instance, a recent interview in Het Financieele Dagblad with Wopke Hoekstra, where the China issue was a major theme. Hoekstra is the outgoing climate commissioner. He will likely return to the European Commission this year as the Dutch nominee. Hoekstra is also part of the centre-right EPP. His own views, to a certain extent, reflect those of the EU's biggest political group.

In the interview, Hoekstra acknowledged what he regarded as internal failings of the EU: labyrinthine bureaucracy, and the lack of a single, functional capital market. We would agree these are both problems. But if dealing with these internal problems is the expressed preference, the revealed preference is more to go after China. Progress on the capital markets union has been crawling along. Tariffs on Chinese electric cars have been swift by comparison.

One way of seeing it is that the fixation on the China problem is a mirror image of our fixation on immigration. When we have difficult issues that need resolving, it is easier to blame foreigners, or some other outside force, than acknowledge our own failings. Even if, like Germany, you might be worried about the implications of angering such an important partner, pointing the finger at China beats singling out someone who might vote for you. Or yourself.

Instead, the real core problem is that we have fallen behind, and done so because our economic and industrial system is stuck in the past. The Chinese electric car, battery, and solar companies that now dominate these markets are relatively new, and there are a lot of them. The US’s tech giants are more consolidated, but have also sprung up quite recently.

If you look at the largest European firms, in contrast, it really is the old continent. Most either date back more than 50 years themselves, or were derived from other firms that do. The trifecta of corporations, unions, and governments we have built does not easily allow for new entrants. This is not sustainable when you need them to gain a foothold in new technologies.

2 September 2024

Age of the slump

Konjunktur, as the Germans call it, is not the problem. Konjunktur is the notion of various external economic factors descending upon the business cycle. Conjunctural downturns are normal, and are usually addressed by monetary and fiscal policy. Structural slumps are much rarer. They fall into the category of the over-predicted. We often find out, to our surprise, that tomorrow we are sober after all. Most slumps are not structural.

But the one Germany is experiencing is, because of two irreversible shifts – in technology, and global demand. Germany’s economic system is too dependent on manufacturing industry, and its political system never knew anything else than to feed it. In our lead story, we wrote about the meltdown of the government coalition in the east German state elections. Last week we wrote about the fall and decline of ThyssenKrupp. The two issues are indirectly linked. As FAZ wrote on Saturday, in the steel industry, everybody sits in the board room: politics, works councils and trade unions. The steel industry is the embodiment of a system known as Rhenish capitalism. It is a system where politics runs business.

This is no longer working at ThyssenKrupp, and increasingly less so elsewhere. ThyssenKrupp’s future will be as a slimmed-down producer of highly specialised steel, a market segment that requires deep technological know-how. We will find this will happen to cars, to machine tools and to chemicals as well. It is means fewer, more specialised companies. In the absence of diversification, it means a structural slump. The decline of the SPD, visible in this weekend's results in Saxony and Thuringia, is the mirror image of that shift.

The political choices in Germany are between a left that is still stuck in the industrial past, and a right that blames foreigners. The FDP and the Greens at one point offered competing versions of a politics that looked to the future, but both reverted to bad old habits whilst in government. All politics exists inside the system. There is no debate whatsoever about resilience, robustness, diversification, renewal. No one there is thriving on chaos.

A gridlocked political system is an integral part of a structural slump. Germany is not a country where a Javier Milei could get elected and succeed. The constitutional court would stop him. Nor do we see cross-party support for reform as in 2003, when the German political system agreed the beggar-thy-neighbour policies that have now run their course.

In other words, it’s not conjunctural. It is a historical phase, like the early modern period. It will play out.

30 August 2024

No business as usual for Israel

Europe’s response to Israel’s war in Gaza is mindbogglingly weak compared to its strong position it took with Ukraine. The Jewish community is such an integral part of European politics and the media, yet European states seem to be of no help to end this war, but lost in the either-you-are-with-us-or-against-us polarity of the conflict.

Instead of normalisation, the Middle East is now bracing for a war that has no ending and a significant risk of escalation. The fighting in Lebanon and in Gaza continues and the West Bank is rapidly approaching boiling point. Ceasefire talks between Israel and Hamas are going nowhere. This week, Israel’s military started a campaign in the West Bank.

Where is the prospect for peace? The two-state solution, the only thing European states agreed on, has disappeared into the background. Inaction and apathy best describes what we see in Europe, diverted with other things closer to home. The US remains the main arbiter, yet Joe Biden’s team is weak, and elections are looming. Prospects for anything dramatically different from the status quo are slim. Donald Trump's top foreign policy advisors warned that the strategic relationship between the US and the UK would be at risk should the Labour government ban arms exports to Israel in protest of its conduct in the Gaza war. In other words, Europe, you are on your own. Germany probably never questioned its military support to Israel.

Yet, the war-mongering continues. Statements and actions of Israel's national security minister Itamar Ben-Gvir and finance minister Bezalel Smotrich received worldwide condemnation, but to what effect?

Europe is hopelessly divided over how to respond. Josep Borrell proposed sanctioning Israeli ministers for hate speech and incitement to war crimes. But there is no majority of member states to back such a proposal. Euronews reported that the Irish and Slovenian foreign ministers have so far backed the proposal, with Spain and Belgium also calling for more stringent sanctions against violent settlers.

At yesterday’s meeting of EU foreign ministers in Brussels, Ireland insisted that the EU must rethink its relationship with Israel. This war is against Palestinians, not Hamas, Micheal Martin told the press. The International Court of Justice ruling that Israel’s occupation of Gaza and the West Bank is unlawful obliges the EU to take action. This cannot mean business as usual, Martin insists. Ireland and Spain have been pressing for reviewing the association agreement between the EU and Israel. But disunity prevails. To some EU countries this may come as a relief and a fig-leaf to hide behind inaction. What a frail position to be in for a union that was built to cement peace between former warring countries in Europe. Somehow Europe seems to be missing out on exporting its expertise on this most precious of all public goods.