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20 January 2022

What if Putin cuts off the gas?

Our main story this morning is on Vladimir Putin's options - and especially that he might consider cutting off gas supplies to Europe; we also have stories on how Emmanuel Macron's visit to Strasbourg backfired; on the fiscal impact of positive yields; on Italy's analogue bureaucracy; on why underemployment, not unemployment, is the real labour market problem in southern Europe; and, below, on why one should not lazily predict that Boris Johnson's days are numbered.

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Today's free story

Johnson wins first round of battle

The plot to oust Boris Johnson is fading away: for now. We cannot rule out the possibility of further embarrassing revelations, but it is important to remember that it is extremely hard to get rid of a British prime minister with a large majority in the House of Commons. A majority of Tory MPs, around 180 of them if all attend, would have to cast a vote of no confidence in him. This is not a constructive vote as is common in some European countries. There will be no leadership challenge in the sense that the plotters can vote for another candidate at the same time. There are many MPs who for sure want to get rid of Johnson, but who distrust either Liz Truss or Rishi Sunak even more. Johnson straddles the political spectrum of the Tory party. He was with the Brexiteers, but he was never really in any camp. 

Yesterday, a Tory MP from one of a red wall constituencies deserted to Labour. His move actually reduced the chance of a successful leadership challenge. For one, the rebels are now one vote down. Secondly, Labour is visibly gaining at their expense. The longer they keep up the rebellion, the worse it will get. A rebellion constitutes an irrational act unless you have a clear alternative path.

On balance, we think it is unlikely that the Tories will get rid of Johnson, in the absence of further developments. Johnson already said he would fight off any challenge. He won’t resign just because the rebels garnered the minimum number of signatures to trigger a vote. They won’t get rid of him quietly. What we think is most likely is that the rebels will cut a political deal with Johnson, which should not be about alcohol in Downing Street, but about a political agenda. The lack of one is the real failure of the Johnson administration.

Also consider that events will intrude between now and the election date. Our lead story points to one such foreseeable event: a war in Europe. Pandemics, energy shortages, inflation, Brexit-related threats and opportunities all lurk in the background. As does the next virus. The parties will soon be forgotten.

19 January 2022

With me or against: Macron's EU pledge

Today Emmanuel Macron will be in Strasbourg to outline the priorities of France’s EU presidency, a grand tour de force of his vision on sovereignty, immigration, growth, ecological transition, digital policy, rule of law and defence. After the official ceremony, Macron is expected to declare himself candidate for the French presidential elections, writes Le Figaro.

Choosing his speech in Strasbourg as the launchpad for his national candidacy follows a simple calculation: Macron wants to use Europe to divide the right, and divide the electorate into pro- and anti-Europeans. The message is: On Europe, you either support it with Macron or denounce it with Marine Le Pen or Eric Zemmour. His strategy is to isolate Valérie Pécresse, with her, in his words, “neither for, nor against, quite on the contrary” attitude.

In 2017, Macron’s discourse on Europe already exploded the left, but the right still resisted. This time, Macron wants to finish the job, and is counting on the EU presidency to help him achieving this goal. Putting up the European flag at the Arc de Triomphe at the beginning of the EU presidency already triggered a polemic response from Le Pen, Zemmour and Pécresse. Macron’s party, LREM, used this controversy as a defining element of their presidential campaign, by choosing the picture of the EU flag over the Arc for the campaign material.

Macron also uses Europe to defend his anti-Covid strategy. In December, he already insisted that vaccination would not have been possible in January 2021 without the EU. It was Europe that procured, organised and produced the vaccines. On Europe, there are no half-hearted positions with Macron. He says you have to defend Europe completely and fight for corrections inside the system. And he is depicting his adversaries as hypocrites when he is warning that one cannot say:

“I like Europe, but I don’t like its legal structure. I love Europe, but the treaties are not applicable here.”

Calling out the right and its voters to take a courageous stance on Europe is Macron’s big political bet. But it is quite abstract. Will his position on Europe convince the French when their concerns over purchasing power coincide with a still unresolved energy crisis in Europe? It will be in the concrete facts of life that this position will be tested. That story has not been written yet.

18 January 2022

Le Pen and Macron thrive on competition

Three months ahead of France's presidential elections, there are several competing personalities that aim for the limelight. The fragmented left has seen many of them. The late entry of Christiane Taubira as a new candidate complicates matters even more. Competition is also thriving on the right. Today we take a closer look at two of those, on the far right and within Emmanuel Macron's group.

Eric Zemmour has one advantage for Marine Le Pen. He makes her look more centrist. In that sense, her attempt to normalise her image has succeeded. A Kantar poll for Le Monde suggests that only 40% consider Le Pen a representative of the far right. This is a fall of 11 points since 2018. 46% see her as a patriot who represents traditional values. Le Pen is not yet seen as a president, though. Only 21% would like her to win, and her party is still seen by half of those polled as a danger for democracy.

When it comes to Zemmour, he is clearly perceived as an extreme right-winger and xenophobe. And he offers ample reason for it. He just kicked off another controversy over his remarks about the obsession with handicapped children and was condemned by the courts to a €10,000 fine for calling young immigrants thugs, murders and rapists. These remarks have their fans on the far right, but they won’t help him enlarge his voters base. The polls suggest that Zemmour lost support since his fulminant start, and is now hovering around 12%. This number may underestimate his support and he could get more at the ballot. But even with those lower rates, Zemmour could deprive Le Pen the entry into the second round. At the moment, Le Pen is running neck-and-neck against Valérie Pécresse at 17%. Pécresse has a well established party behind her and thus can count on an effective promotion to push her over the finishing line, that is if nothing comes out of the closet last-minute like it did for Francois Fillon. Le Pen now sits somewhere between Zemmour and Pécresse, and has to fight for her place more than ever before.

Another one who has to fight for his place in his political group is Edouard Philippe, the popular former prime minister of Emmanuel Macron. Now Macron refused to grant Philippe his wish to merge his party Horizon with the Agir party of former minister Franck Riester. Both are part of the majority and back Macron as presidential candidate. A merger would have given them a group in the assembly and more finances for their campaign. It would have increased their power inside the majority, which matters to shape the agenda for the parliamentary elections in June.

Macron normally does not meddle in the affairs of his majority. But this time he did. Why? Le Figaro looks at why Philippe could become a threat to Macron. First, if Macron were to win the presidential elections, this would kick off almost immediately the competition over who is to succeed him. The more powerful someone becomes inside the majority, the less control Macron has. To exert power, it would be better for Macron if his underlings compete against one another.

If Macron were to lose in April, the challenge would be even more direct. Macron himself has indicated that he aims to remain in politics, one way or the other. This would lead to a rivalry between the two men. The issue is not so much what happens now, but what happens after the presidential elections. 

17 January 2022

Reinventing Boris

We wrote last week that there was a trajectory for Boris Johnson to replaced. We still think that the odds are against it because of a fundamental asymmetry: the 360 Conservative MPs have the right to cast a vote of no-confidence, which would require 181 supporters. But they don’t control what comes next. All they can do in the second round is nominate two candidates for a final selection by the Tory party membership. Johnson straddles the party’s rival camps: the pro-business moderates and the party’s right. The latter want to make the most of the freedoms offered by Brexit.

The political columnist Matthew Parris, formerly a Tory MP himself, writes that the real arbiters of Johnson’s fate are the ideological right wing among his Commons colleagues. He said that he is close to concluding that his usefulness to them has passed, but they are not quite there yet. We think this is a correct balance of assessment. This political conflict is not about Downing Street parties. But they may give a potential excuse for a wider political realignment that could see the Tory party move further to the right. So be careful what you wish for.

Looking back, Lord Frost's resignation may make strategic sense after all. He might have left a sinking ship. If Johnson were to be replaced by his current foreign minister, Liz Truss, Lord Frost could end up as her foreign secretary, back in charge of managing relations with the EU. Truss is a much more focused politician than Johnson. A Remainer once, she has shifted gradually to the right. She is a darling of Tory party conferences. Her priority will be to make Brexit work. We keep hearing the expression of a bonfire of regulations.

Her main opponent would be Rishi Sunak, the finance minister, who we believe has the support of most MPs. We see him as a political moderate. He would most likely emerge as the winner in the first round of a leadership contest. But MPs only make a preselection. The two first-placed candidates would be put to the Tory party members. The members are unpredictable. Sunak would be a safe pair of hands, a John Major character. But Truss is popular among Tory grassroots. Parris' judgement is that the Tory centrists are less well organised than the right.

So it will be up to the Tory right to decide whether to seek the putsch now and risk a Sunak victory, or whether to keep an ineffective prime minister in his job, and wait until the right moment comes. Johnson, meanwhile, is responding with the usual deflections: an alcohol ban in Downing Street, and a debate to end the licence fee for the BBC. As though this would solve any problems.

We should remember that there is a reason why Johnson is in this job. He made a cold-blooded decision to support Brexit when he didn't believe in it, and then chose the right moment to grasp power. It will require a similar degree of ruthlessness to get rid of him. We are not seeing it yet. If it were done when ’tis done, then ’twere well It were done quickly, is what Shakespeare's Macbeth has to say about this. Each day that passes plays in the hands of Johnson.

14 January 2022

Heat’s on for Boris

Boris Johnson has not exactly had the best two months of his life. A crescendo of scandals has built up, and polling shows Labour reaching leads last seen during the austerity era of the early 2010s. But if he can make it through this series of crises, which we think he will, he’ll be jumping out of the frying pan and into the fire.

Or rather, into the lack of fire. His problem will be a looming, energy-induced cost of living crisis. Emily Pinchbeck, the CEO of Energy UK, said last month that the firm expected consumer energy prices to rise by 45-50% in the spring. Should the government socialise the cost of that price hike, the estimate is that it would cost £20bn a year. To put that into perspective, the vaunted tax rise to provide surplus funding to the NHS and social care will aim to generate £12bn a year.

Some of this, of course, is not of the government’s own doing. Johnson and Rishi Sunak can point to global factors shaping the energy crisis. Pointing out that there was a crisis more or less everywhere was the government’s tactic during the petrol shortages that the UK experienced in September. It worked for them then.

But this is a more serious one. And the problem is that much of it has been caused by the policies of this government, and previous Conservative governments. First off, there’s the state of the energy market in the UK. Britain has been hit by a series of supplier failures because of two countervailing policies.

One of them is market liberalisation, a hallmark of the Cameron-Osborne years. This broke the dominance of the so-called big six energy suppliers in the UK, reducing their market share from 100% to 70%. But it also let to an ugly trend from a consumer perspective. Suppliers would lure customers in using cheap rates, and then jack up the price when they stayed longer. The only way anyone could get a reasonable deal was by constantly switching.

To stop firms from taking advantage of consumers like this, Theresa May’s government introduced a price cap, reviewable every six months, in January 2019. The last time the price cap was re-set, in August 2021, it rose by 12%, to £1277pa. This is, in normal times, a pretty significant rise, but it is not much compared to how much wholesale energy costs have risen since.

Both policies work in good times, when wholesale prices are relatively low. When they’re not, the lag causes problems for energy firms. They will buy energy on a shorter-term basis, taking the hit the longer time it takes for the cap to catch up. If they haven’t hedged properly, then you have a series of unviable smaller suppliers.

Then there is Brexit. When leaving the EU, the UK also left its internal energy market. Now, they no longer benefit from the EU’s market coupling mechanism, which allows buyers to simultaneously book day-ahead country-to-country interconnector capacity and prices. British buyers have to do both separately, reducing efficiency.

Key dates to watch out for are 7 February, when Ofgem, the British energy regulator, will announce the next price cap, and April, when the government has promised a response. But the problem will be how to pay for it. Amidst the spectre of rising interest rates, the UK also has to foot the bill for repairing services, like healthcare, social care, and education, that have been battered by the pandemic.

To manage the outlay, there will either need to be a tax hike, or more debt. Either, or both, will put Johnson into conflict with the right-wingers in his party. We think this is a more serious issue for him than bring-your-own-booze garden parties.

13 January 2022

Poland's fine mess

The stand-off between the EU and Poland is about to get worse, since Poland is not paying its fines, and the EU is getting ready to withhold budget payments. The European Court of Justice imposed fines on the Polish administration in two cases. One is a €1m-per-day fine for not suspending the disciplinary chamber of the Polish supreme court. The other is a €500,000-per-day fine for not closing down its Turow lignite mine, which the Czech Republic says is draining water reserves from the border region.

January 10 marked a deadline for Poland to inform the European Commission of when and how exactly it plans to dismantle the disciplinary chamber. In the absence of evidence that Poland has fully complied with the CJEU ruling from July, the Commission will proceed to send the first request for payment. Counting from 3 November last year, when Poland was officially notified, the claim has added up to around €70m by now. The Commission can decide over deadlines and procedures. The EU is already withholding Poland’s request for €36bn from the EU recovery fund over rule-of-law concerns. And they could withhold other EU budget payments if Poland refuses to pay the fine.

This is what is about to happen in the second case, over the Turow mine. The Polish government has shown no inclination to pay those fines nor to close the mine. The Commission is now preparing to withhold payouts from the EU budget for non-payment of fines, a measure which could enter into force within days or weeks. The total amount owed in this case at the moment is at €50m.

12 January 2022

A philosopher for a king

A new candidate has entered the race for the French presidential election. Gaspard Koenig, philosopher, editorialist and founder of the think tank Generation Libre, decided to put his hat in the ring with a single aim: simplifying the laws and thus the lives of French citizens. As a staunch defender of individual freedom, Koenig believes that most problems in citizens' daily lives are related to rules and norms that defy common sense and restrain the people to do what they want. One of his ideas is to divide by 100 the number of norms and laws.

Koenig certainly knows how to expose the absurdities of modern life. In his latest column for Les Echos, he points out the inconsistencies of the new Omicron rules: the French are to wear masks outside all the time. They are allowed to take them off inside when drinking or eating in a restaurant or café, but are not allowed to drink even a sip when travelling on the train even for long 6h journeys. Joggers are exempted outdoors, but what about smokers? Dance clubs have been closed down, while taking the fully packed train to work is still okay.

The fate of bad laws is that they will see the addition of some small amendments and exceptions, ending in an avalanche of new rules and restrictions. It would be wrong to think that these micro-hassles are benign, says Koenig. By introducing almost permanent legal insecurity, they foster an anxiety-provoking relationship between the population and the police. By making the law a simple symbolic instrument, they actually help to undermine the rule of law, he argues. Over time, people get accustomed to renouncing their freedoms, and end up believing that anything that is not allowed is prohibited.

It also invites disobedience. Inapplicable laws remain unapplied. People will continue to get their drink at the bar, and will sip their water in the toilets on the train. Human dignity does not respect, or pretend to respect, instructions that are contrary to common sense.

No doubt, Koenig has no chance of getting close to the top in this election race, but his message of simplification might catch on. Since the pandemic, the French have been the most administered, controlled, regulated, and monitored of all. But will the political class follow suit? Nicolas Beytout has his doubts, even if he likes Koenig’s idea. The people took comfort in their normative protection by the state. No one really read the fine print of the obligations that come with accepting state aid. No one has even an idea of an alternative plan for how to survive this pandemic. The next president will not be the one to manage the pandemic, but to help people get on with their lives. What will happen to those laws and norms? More amendments and exceptions? Or up into the bin? There is clearly a case for simplification at the horizon.

11 January 2022

When theory ends...

The Guardian had a good discussion about what happened to the end-of-theory predictions from the first decade of this century. They largely held up, with some nuances. The basic idea is that statistical methods, based on large data volumes, would gradually supplant structural theoretical models in natural and social sciences. The article does not mention economic models, which is our main concern here. But we see this happening too.

One of most egregious cases of where theoretical models fail is inflation forecasting. As we keep writing, they have no hope in hell of capturing underlying trends because they exclude too many interlocking factors, and because they do not take account of structural societal shifts. The ECB’s inflation forecast has been so appalling that it would have been beaten not only by the proverbial dart-throwing monkey but probably even by astrologers. This is for the simple reason that the model is biased towards a return of inflation back towards the status quo. Any method without such a bias will outperform it. The rise of modern statistical tools has also started to impact economic policy making and economic research. We would expect central banks and governments of the future to hire more data analysts and statisticians and fewer paper-writing economists.

We have also witnessed the theory-versus-statistics debate in our own line of work. As observers of European media, we have been relying on translation services, without which we would not have been able to read Finnish or Greek newspapers. When we started 15 years ago, the world of translation software was dominated by services using structural linguistic models. The linguists scoffed at the statistical translation techniques developed by Google and others at the time. Statistical translation ended up winning the battle. Things in life that are too complex and too chaotic to be subjected to linear structural models. Language is one of them.

The issue is not only that computers are better at finding relationships between data than humans. Perhaps the bigger issue is their lack of cognitive biases. We have never met an economist who admits that his or her framework is wrong on the grounds that it is not supported by empirical. When a computer errs, its head does not turn red. The big advancements of the last decade is deep learning. It does not necessarily replace all theory, as it did in the case of translation. In some cases it might complement theory, for example in medicine. The more beliefs creep into your model, the more prone your profession is to meet the same fate as the first generation of translation modellers. If you believe that money and debt are the same thing, the central premise of modern monetary theory, no data will ever get you out of this belief system. Macroeconomics in particular is closer to language translation where error correction is important, as opposed to areas where scientists are constantly updating their understanding of reality.

10 January 2022

Meloni's world

Amidst the wheeling and dealing of other Italian political party leaders, Giorgia Meloni has been keeping a fairly low profile. She hasn’t issued a grand call for unity, like Matteo Salvini. And she has also not been feverishly trying to bring her party into line, like Giuseppe Conte.

That belies, or perhaps confirms, that Meloni is in the best position of anyone heading into the next few weeks. Over the past two years, FdI has been steadily eating away at Lega in particular, and now typically poll as the most popular Italian political party. More importantly, FdI are the most popular party within their right-wing electoral grouping. If, or when, an election does happen, Meloni would be a good bet for prime minister.

Though FdI would probably benefit more from an early election, Meloni could also stand to win out from parliament’s term continuing to 2023. During the last year of Mario Draghi’s government, FdI have effectively been the opposition, and have done well from it. In this light, supporting Silvio Berlusconi for president, as FdI has formally done, makes sense. Another year opposing the government while keeping Forza Italia onside strengthens her electoral coalition, keeping it compact ahead of 2023.

At the same time, though, there are a couple of reasons why Meloni and FdI could prefer either Draghi or some other consensus candidate, like Giuliano Amato. One, pertinent to Draghi, is the increased probability of early elections. The other is credibility. The prospect of a Meloni premiership scares investors, something she is well aware of. A less divisive figure than Berlusconi could assuage at least some of those fears.

And this will continue to be a theme for Meloni even after the presidential elections: how she balances between two opposed positions. On the one hand, she needs to sound uncompromising, to take advantage of FdI’s decision to go it alone. A recent campaign ad saying that FdI and Meloni could look voters in the eye was a great example of this, showcasing her credibility to a right-wing populist electorate.

On the other, it will not help the right-wing coalition overall if Meloni’s strength sparks fears of a widespread political, economic, and social crisis. Meloni’s own voters probably won’t care, but more moderately-inclined Lega and Forza Italia voters might. And she still needs their numbers if she wants to ultimately win power.

7 January 2022

Pécresse wants Zemmour in the race

The race towards the French presidency has been dominated by a double act: Emmanuel Macron’s verbal insults, and Valerie Pécresse's pledge to clear the streets of thugs. She says they are the ones that should be harassed and whose civil rights should be restricted, not the unvaccinated. Macron, though, has already moved on, and is talking about poverty instead. His staff covered it up as a slip of the tongue after an emotional exchange with a nurse. Macron and Pécresse play a game of the hide and seek, writes Cecile Cornudet. Will this be the new game the two will play, using buzz words that catch media attention to discredit the other?

Behind the scenes, there are other forces at play to get Pécresse into the second round. We note a report in Europe 1, which suggests that Les Républicains give a silent nod to their members giving their signature to Eric Zemmour, with the promise not to sanction such tactical behaviour. The far-right shooting star has no problems raising money for his campaign, but he is still short of signatures from officially elected deputies to back his candidacy. At the moment, Zemmour has around 300, but needs at least 500 until the deadline in March.

For Les Républicains, the calculation is that they are better off if Zemmour stays in the race and splits the far right vote than if he were not to qualify. In the latter case, most of his votes would go towards Le Pen. This would raise the the bar for Pécresse to get through to the second round. They have thus a strong incentive to keep Zemmour in the running.

Zemmour himself wrote to the association of the mayors to propose a more radical reform of the system, where backing would be anonymous. This could increase his chances, but also those of Le Pen and other extreme candidates. It is one thing as an elected official to sympathise with them, but quite another to be officially seen as doing so. This tactical manoeuvre could turn out to be costly within the party, and it could backfire in different directions.