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07 May 2021

Evidence of tectonic shift in UK...

Our main story is on the likely political consequences of the Hartlepool by-election. We also have stories on a seemingly permanent realignment in Germany too; on how Macron skilfully exploits the divisions of the centre-right; on the EU/India's trade talks; on job losses in the German car industry; and below, on why Merkel is not entirely wrong when it comes to pharmaceutical patents.

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Today's free story

Merkel vs Biden: the patent debate

Outrage yesterday as Angela Merkel broke with the US and opposed Joe Biden’s plan to back a waiver on vaccine patents. Biden’s announcement was billed as an important step towards boosting vaccination production in developing countries such as India and South Africa. Since the beginning of the pandemic, these countries have called for a waiver of the World Trade Organisation’s Trips agreement on intellectual property rights for vaccine patents, arguing it would contribute to scaling up vaccine production at a global scale.

The World Health Organisation welcomed Biden’s announcement as a step towards greater global equity, but Merkel threw cold water on those plans yesterday when her spokesperson told media that Biden’s plan has significant implications for vaccine production as a whole, and that the limiting factors in vaccine production are production capacities and high-quality standards, not patents. Translation: waiving intellectual property rights on vaccines will stifle innovation without fixing the problem.

The incident demonstrates that US-German relations remain at an extremely low point – as bad now as they were under Donald Trump – with Merkel and Biden increasingly at odds over everything from Russia and the Nord Stream 2 pipeline, to economic dependency on China.

But what about her argument against the patent waiver?

She’s right and wrong. Economic arguments for intellectual property protection have hinged on the fact that innovation is expensive. Should other firms be permitted to copy a new treatment, its price would fall lower than the marginal cost of production, leaving the original developer to foot the bill.

This argument is nonsense, as the Economist highlighted in a recent article, because there is no evidence that strengthening intellectual property protection boosts subsequent innovation. In the US, patents offer big profits to pharmaceutical firms, even though private investment accounts for only a third of spending on American biomedical research. Other incentives such as financial prizes could yield breakthrough drugs at a lower cost. And the Covid-19 pandemic is an extreme event that is currently killing more than 13,000 people a day.

It is legally possible for Biden to force pharmaceutical companies to share information with each other under the Defence Production Act, which gives his administration the authority to address national defence needs, including systems important to national public health. Under this act new Covid variants pose a threat to public health, making global vaccination an issue of national security. As Amy Kapczynski at the Yale Law School writes, such a waiver would be quite limited, only temporarily ensuring that international law does not stand in the way of efforts to manufacture, export, and import Covid vaccines and therapeutics.

But neither health nor defence are EU competences, so it falls to member states and their leaders to decide what to do about Trips.

The real problem, as European leaders including Macron and Merkel, as well as German start-up BioNTech have highlighted, is that patents are not the limiting factor for vaccine production. Manufacturing mRNA vaccines is an extremely complex process that took years to develop, and countries like India and South Africa simply do not have the same manufacturing capacities as developed nations. Waiving intellectual property rights is a good idea in theory, but it would not kick-start a flood of new production because most of the world’s vaccine manufacturing capacity is already in use. The limited availability of raw materials and expertise is also a serious constraint to boosting vaccine production in the global south. The biggest obstacle to expanding capacity is not patents, but resources and know-how that are not shielded by patents.

Ursula von der Leyen was right to point out that Europe is the only democratic region in the world currently exporting vaccines on a large scale, and indeed, pharmaceutical companies in the EU have exported far more vaccines than the US or UK. The US does not have the moral high ground here, and furthermore, it did not inform its allies that it was planning to make the waiver announcement, which it could have done at this week’s G7 summit in London.

But this pandemic will not be over in the near-term. If raw materials and know-how are bigger challenges, Europe and the US should be working to remove those obstacles as well. And while Germany might be keen to protect companies like BioNTech and CureVac, patent protection should not supersede its responsibility to protect human life. South Africa and India will eventually have the materials and expertise they need to boost domestic manufacturing – patents should not be a hurdle to when that day comes.  

6 May 2021

Baerbock, the anti-Merkel

It is in foreign policy where the Greens are at their most radical. They are accusing Angela Merkel of siding with human-rights abusers worldwide to foster short-term commercial interests. Whether the Greens will have an opportunity to implement their policies will depend on the post-election coalition. We see two scenarios in which this is possible. The first is a Green-led coalition with the CDU; the second is a Green-led coalition with SPD and FDP. These are, from today’s perspective, possible outcomes, but both are premised on the assumption that the Greens will be able to keep their formidable momentum. So far they have. At this point in the 2017 campaign, Martin Schulz, the SPD’s candidate, had already lost a good deal of the momentum he had at the beginning of the year, with the SPD trailing the CDU by some 5pp, but still at a respectable 25-30% range. They ended up with 20.5%. Big swings are not only possible, but based on past experience very likely.

No matter whether the Greens will succeed or fail, or end up somewhere between the two extremes, they will shape the political agenda. The constitutional court last week mandated a shift in emissions reduction targets. We expect this to happen even if the Greens are not in government. The CDU has also borrowed the Green’s and SPD’s idea of a separate €500bn investment fund. That, too, will happen. A Green-led government would reinforce this trend to a significant degree. In the unlikely event of yet another grand coalition between CDU/CSU and SPD, one should only expect the minimum.

Foreign policy, by contrast, is more binary. A good example of the Green’s exasperation both of EU and German foreign policy is this article by Reinhard Bütikofer, a former party leader, and now an MEP. He said Merkel was completely disinterested in Chinese human rights violations. Germans preach the value of human rights, but

"… the Chancellor’s Office stated that the often invoked common values are of no operational significance for German foreign policy."

In Germany, foreign policy is not a matter for the foreign ministry, which has a much reduced role since the days of Hans-Dietrich Genscher. The main actor is the chancellor. One reason is the upgraded significance of the European Council. If Armin Laschet becomes chancellor, we would expect German foreign policy to go from bad to worse. He is a big fan of the Nord Stream 2 pipeline project, and, like Gerhard Schröder before him, sees the role of politics to enable commerce. A Green foreign minister at his side would make almost no difference.

If Annalena Baerbock becomes chancellor, the situation would change dramatically. Foreign policy is the area of her expertise. She holds similar views to those of Bütikofer. It is the one policy area where the chancellors pull all of the operational strings. It is the operational stuff that matters more than abstract policy strategies.

In the case of a coalition with the CDU/CSU there are two plausible scenario. The Greens comes first, Baerbock becomes chancellor, and Friedrich Merz becomes finance minister. The investment fund would happen, but German fiscal policy would tighten otherwise. Or if the CDU/CSU come ahead, Laschet becomes chancellor, Baerbock becomes foreign minister, and Robert Habeck beomes finance minister. In that scenario, Habeck would be the main green power player in the coalition. Fiscal reform would be high on the agenda. Foreign policy less so. There is a lot at stake.

5 May 2021

Russian military might in the Arctic

The Arctic is fast-becoming an economically relevant region, and Russian militarisation is gathering pace there, too. The Arctic is made more accessible by climate change and offers new opportunities for trade routes. Russia is now projecting military power with increased deployment, exercises and patrols into the Central Arctic, Bering Sea, and North Atlantic.

During the past decade Russia has refurbished Soviet-era airfields and radar installations, constructed new ports and search-and-rescue centres, and built up its fleet of nuclear- and conventionally-powered icebreakers, a Pentagon spokesman told CNN. Its most recent deployment of MiG-31BM interceptors—supersonic, long-range aircrafts capable of destroying air and ground targets, to the Rogachevo Airbase on the Novaya Zemlya archipelago, is of major concern, as this map from the Centre for Strategic and International Studies, CSIS, shows:

Amid increased military activity in the region, CSIS has started an Arctic tracker that lists all active military activities by Russia and Nato allies and partners. Nato allies like Sweden and Finland have stepped up their own regional military capabilities too, with a significant uptick in exercises, deployments, patrols and capability investments.

There is rarely a week without a new Russian deployment, exercise, missile test, air operation, or naval patrol. The uptick in military exercise,  as well as the testing of the hypersonic missile capabilities in the White Sea, with its wide range capacity, suggests that this power projection is not strictly defensive. 

We already discussed the Arctic as a strategic route for trade, spanning all the way from Norway to Alaska. Using this route would halve the time it currently takes from container ships to reach Europe from Asia via the Suez Canal. This, together with the militarisation along its routes, is why it is a region of upcoming strategic importance. Watch the space.

4 May 2021

What if a country votes no on recovery fund?

There is no contingency plan if a country rejects the recovery fund. The German constitutional court could have blocked ratification, but decided not to. Germany is not going to be the problem, at least not this time. But Finland might be. Just last week the parliamentary committee on constitutional affairs decided that a two third majority will be required in parliament to approve the recovery fund. This means the government will need the votes from opposition parties. What if they do not get the votes? 

The Finnish prime minister wanted to find out what a rejection means, and asked the European council's legal service. There was a resounding response from the council: if a member state fails to ratify, the structure would collapse and the member state would suffer dire consequences, unprecedented reputational damage and political pressure from other member states.

This threat revealed by YLE is now making the waves through Finnish media and may provoke what it was intended to prevent: a No vote. 

What we know is that the European Commission and member states have no plan B if the recovery plan is rejected in a member state. In principle it means that they have to start all over again. New proposals, new ratification procedure. Rejecting the stimulus package would also overthrow the EU's seven-year budget agreement. 

The Finnish government could try and come up with some political statement or bring to parliament another proposal. But these are grey zones and on shaky legal grounds. The fact of the matter is that if one country rejects the recovery fund, the whole fund won't be able to go ahead.

The public debate will have to assess what it means for Finland to reject the recovery fund. External threats usually do not go down well in national debates. They may provoke a demonstration of power by those elected by the Finnish people, only compounding the problem for the EU as a whole.

30 April 2021

Vaccine crisis over, but no joy

Germany is now entering the phase of the third wave where vaccination rates are accelerating, infection rates are falling, but where the lockdown persists. The fall in reported infection rates during the Easter holidays proved to be a statistical mirage. But now they have come down for real - from a peak of 165 infection per 100,000, to about 155. On Wednesday, the number of people who got vaccinated reached a new daily record of 1.1m.

But Germans are discovering, as the Brits did before, that there is still a long slog ahead.

This morning, the Robert-Koch Institute reported a fall in the national average infection rate to 153.4, with 306 fatalities. On our own calculations, there are 158 regional districts where infection rates are still above the critical level of 165 - the one that triggers the automatic closure of schools under the new federal pandemic law, which came into this force last weekend. We observe some similarities with the economic downturn. The biggest danger is not the crisis itself, but the aftermath, when companies declare bankruptcy, or in this case, when people realise that their freedoms going forward are likely to be more curtailed than they imagined.

The government is now considering legislation to pacify the growing unrest, by allowing those who have received their second vaccination to go out on a night-time stroll, and to meet indoors with other people who have been vaccinated twice. This is going to be a nightmare to police. Based on the current evidence, the vast majority of infections occur indoors. The closer we get to the elections, the greater the temptation for the government to relax the measures.

29 April 2021

Waiting for Godot - vaccine passport edition

The Germans were shocked to discover that the government and the federal states made no progress on the vaccine passport - the ticket to freedom as it is portrayed in the media. The European Commission yesterday warned against giving privileged rights to those who are vaccinated, or those who recovered from the illness. We agree. We think the vaccination passport debate in Germany in particular is where the pandemic response has gone wrong. People still regard vaccination as a medical contract between yourself and the state, something that buys you privileges. They don't see it as a step towards herd immunity. Where the UK succeeded is not only in its vaccine procurement and the fast roll-out of vaccines. The far bigger success is the UK government's decision, and the support it received, to link the lifting of the lockdown to the total numbers of vaccinations. In Germany, people are jumping queues to get vaccinated. They demand privileges. They even go to the Constitutional Court to defend what they consider to be their fundamental rights. In Germany, the notion of public health is almost non-existent in the wider public debate.

We agree with Didier Reynders, the EU's justice commissioner, who told the European Parliament that the EU should not open up the borders to those who are vaccinated. What about virus mutants that are resistant to the vaccine? As FAZ reports, Reynders also rejected calls from a majority of MEPs who demanded an immediate end to the restrictions of travel in the Schengen area, and that the EU should set up free testing at the borders. FAZ noted in its coverage that there are big differences in opinion between Commission, Council and Parliament on vaccine passports. To get a vaccination certificate ready in time for the summer holiday, the EU would need to find a compromise by the end of the May. In the meantime, some member states are pressing ahead with national certificates. What can possibly go wrong?

28 April 2021

How Germany will spend the money

The German end of the EU recovery fund is not the most important part of the project. Much of the background work had been to fit old things into new boxes - things Germany wanted to do anyway, but reclassified to meet the EU conditions and taxonomy. That’s in itself not a bad thing. It means that investment projects will not be subject to fiscal spending cuts if and when they come. But even at this much reduced ambition, the size of the programme, at least for Germany, is vanishingly small.

The German plan is valued at €28bn, out of a total of €312bn, the grants components of the recovery and resilience facility. If you look at this as a five-year programme, it constitutes a volume of between 0.1 and 0.2% of German GDP each year at 2019 levels.

The one element we think is interesting is the focus on hydrogen technology - the central plank in the decarbonisation section, which accounts for some €3.3bn of the German recovery fund investment, with co-funding of €3.5bn from the German energy and climate fund. The details are presented in a separate section which says Germany will create electrolysis capacity of up to 5GW. This is part of a joint Franco-German project, which also includes a transport infrastructure for hydrogen and a European supply chain, including for fuel cells and for hydrogen refuelling infrastructure. Hydrogen is quite possibly the most interesting strategic direction in German energy policy - with high but uncertain payoffs.

While we agree with the need for mass digitalisation, another plank of the German programme, the volumes needed to make up for two decades of under-investment in schools and the public administration stand in no relation to the size of this programme.

27 April 2021

Border watch: Bosnia. Again.

You would have thought that Europeans would not be discussing borders as the 21st century advances, but this is not so. Another stark reminder of the fragility of international borders yesterday came from Bosnia-Herzegovina. After the Dayton agreement of 1995, the country turned into a federation of two republics, the confusingly named federation of Bosnia and Herzegovina, and the Republika Srpska, the Serbian part of the country.

 

 

One of the institutions created at the time was the High Representative for Bosnia and Herzegovina, set up by the EU and the US in Dayton to oversee the peace process. The OHR has the powers, for example, to take binding decisions when the two sides cannot agree.

Yesterday, the OHR warned about a discussion in the state legislature in the Serb-controlled Republika Srpska about what they euphemistically call a peaceful dissolution of the country, a discussion fortified by an online advertising campaign. The OHR said such discussions are not only irresponsible, given the country’s history, but that separation would constitute a violation of the peace accord and international law. The peace accord guarantees the existence of Bosnia-Herzegovina as a sovereign state. The OHR condemned what it called inflammatory rhetoric and the attempt to redraw maps.

At the end of the statement, there was a chilling asterisk:

“The Russian Federation does not agree with this statement.”

26 April 2021

EU sours on China

The EU’s days of compartmentalising business and politics in its relations with China could be coming to a close.

As Stuart Lau reported yesterday, a leaked high-level progress report on China has revealed a sharp shift in the EU’s stance on China.

Just four months ago, the European Commission signed off on a controversial investment agreement that was intended to open more of the Chinese market to European companies. Last week’s report demonstrates that things have not gone according to plan, with the Commission expressing unusually direct concerns about Xi Jinping’s authoritarian shift.

The stronger language is likely owing to another problem highlighted in the report: that China is making little progress in delivering on its economic promises, particularly by opening up its digital and agricultural markets, addressing steel overcapacity, and curbing industrial subsidies. Under the EU-China comprehensive agreement on investment (CAI), European companies were promised better access to Chinese agribusiness and digital markets – but as the Commission itself now acknowledges, there has been little progress in implementing the agreement.

This is important because the EU and its largest member states have taken a determinedly business-first approach, refusing to mix human rights with trade and investment in a bid to build bigger and better economic ties with China. If the economic benefits of turning a blind eye are falling short of expectations, the EU has little reason to continue staying silent on human rights and democracy.

Last month’s sanctions battle also likely had an impact on the change in tone. The EU announced a relatively mild round of sanctions against a handful of Chinese officials and one company for their role in Uighur repression in Xinjiang. China responded with its own, farther-reaching sanctions targeting MEPs, NGOs, think tanks and academics. Many MEPs have since vowed not to ratify the CAI until sanctions are lifted. And with Joe Biden coming to visit Brussels in June, and China expected to be the main item on the agenda, pressure on the EU to toughen its stance will only intensify.

Reality can no longer be ignored, as the Commission now acknowledges: In a letter to the European Council outlining the report, Ursula von der Leyen and Josep Borrell wrote that the EU and China have fundamental divergences, be they about economic systems, human rights and democracy, or how to deal with third countries. They urged the Council not to brush these difference under the carpet.

One area to watch will be public procurement. As we noted in January, China won more than €4.5bn of contracts in the EU over the previous decade, including €2bn in 2020 alone. According to last week’s report, the Commission is now planning to put up barriers to Chinese companies bidding on public tenders because of new political momentum, as well as member states’ growing awareness of the difficulties faced by EU businesses in accessing China’s procurement market. This will probably get worse before it gets better.  

 

23 April 2021

Will the CSU go it alone at some point?

There is a poll out this week that will be analysed with intense interest in the CSU headquarters in Munich. It shows that if the CSU were to end its alliance with the CDU and become a nationwide party, it would receive 24% of the votes. Shockingly, the CDU would be left with only 10%.

 

source: @Wahlen_De

 

That’s more than the combined total now. Astonishing also that the CSU alone would be bigger than the Greens. Obviously, these numbers reflect a lot of anger within the CDU about the choice of their candidate. That anger might dissipate at one point. But it may not dissipate completely. Even if the CSU does not gain anywhere near as much as these numbers suggest, it would still be advantageous to split because it would produce a power shift in the relation between the two parties.

German journalists and political commentators are 100% sure that this will never happen. Really? If the CDU/CSU joint poll rating under its new candidate Armin Laschet does not improve in May, and if it stays low into June, will the CSU not be tempted?

Theoretically, the CSU could split off before the elections. As a party that is represented in the Bundestag and the Bavarian legislature, the hurdle is low. The law does not foresee any minimum number of members. You need three people in each state to form an executive as a condition for eligibility.

As a first step the CSU is now offering online membership to every German - whether resident in Bavaria or not. The CSU general secretary, Markus Blume, yesterday publically welcomed a resident from Schleswig-Holstein as a CSU member. That’s how it starts.

We would expect the CSU not to take this step now, but wait for the CDU to dismantle itself, either before the elections if Laschet’s campaign fails to take off, or afterwards. The state elections in Saxony-Anhalt, scheduled for June 6, are a moment to watch out for. These elections are close enough to the federal elections in September to be regarded as a bellwether. If the CDU performs badly, all bets are off. Our main scenario, however, is for that discussion to start after the elections.