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06 February 2023

EU worried UK is becoming too competitive

In our lead story this morning, we discuss the paranoia in Brussels about the UK's EU Retained Law Bill; we also have stories about the next looming geopolitical conflict - between Israel and Iran; on Giorgia Meloni's request for more flexibility on recovery fund spending; on how the French government is dealing with the tens of thousands of amendments to the pension reform bill; on long-term problems facing Russia's energy industry; and, below, on the wide availability of western luxury goods on the streets of Moscow.

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Today's free story

iPhones still available in Russia

There is more evidence that western sanctions are not achieving their stated goal - to deprive Vladimir Putin of the financial means to wage war. As it turns out, sanctions are also missing their secondary goal, to create political pressure on Putin from his own luxury-goods deprived population.

Die Welt has a terrific report from Moscow that shows that virtually all western luxury goods are available not through official channels, but through a highly efficient grey market. This list of goods includes iPhones and Mercedes-Benz cars, despite the fact that both manufacturers are no longer supplying their goods to Russia and have closed their local operations.

This is how Die Welt described the transaction chain for a luxury car:

A car is bought in Dubai and transported by ferry to Iran, then across the Caspian Sea to Kazakhstan. There it is registered in the name of a fictitious local buyer, who then sells it on to Russians and has it rolled across the duty-free Russian border by a car carrier.

This is a long chain with a lot of middlemen, who all make money from the transactions. For iPhones, the chains are simpler. They get shipped in small parcels from Kazakhstan. The problem for Russian buyers of western goods is not availability but price. Imported sanctioned goods are more expensive, in some cases double the original price. It has become a fashion statement in Moscow to wear something, or own something, that is on the sanctioned list: Sankzionka, as the Russians refer to goods on the sanction list.

The Russian government is officially allowing those grey imports. The volume of those imports has been reportedly around €20bn in 2022, according to Russia’s ministry of trade. Kazakhstan is responsible for 18% of all imported cars, despite the fact that the country has no car industry of its own.

Another channel is through long-distance commuters, for example between Moscow and Dubai. They buy goods while abroad, and take them home in large suitcases and boxes. A number of Russians are also allowed to travel to Europe and the US, for example people with a dual nationality. Most of these commuter shoppers would buy goods on order. Russia’s largest classified advertisement portal has a popular section Goods from Europe, often with an extra charge of only €15 per delivery. Apart from Dubai, Turkey is another source of western goods.

The economic sanctions have, of course, material effects. On us. And on international supply routes. China’s Belt and Road infrastructure plans are effective suspended. The Northern route, through Russia and Belarus, suffers from the collateral effect of western sanctions. The southern route, through Turkey, is still not operational.

Now that the relationship between China and the US has entered deep-freeze, we can consider the China-Russia relationship to be the most important relationship on the Eurasian continent. Russia is only a small economy, but it is still a large regional power.

3 February 2023

Too weak to withstand recessions?

Eric Le Boucher made an excellent point in his column for Les Echos, arguing that societies have lost the capacity to deal with recessions. This is not only since the whatever-it-takes policy of the ECB or fiscally as a response to the pandemic or the energy crisis. In fact, this is a trend that goes back much longer. Recessions have gotten rarer and shorter over the past 200 years. And it is a predominant phenomenon of the western world.

Since ancient times, generations were used to the cycle of good and bad years. This was evident in agriculture, less so when manufacturing started to take over in the 19th century. Then came John Maynard Keynes, who suggested that the hardship of recessions could be buffered by state intervention. Financing people through recessions was extremely successful, and a great way for politicians to get re-elected. Between 1870 and 1945 the US was in recession 40% of the time, 20% from 1945 to 1980, and only twice since then, in 2009 and 2020, according to Rushir Sharma from Rockefeller International. Europe, too, does not seem to have recessions any more. There is a lot of talk about a recession since the pandemic, but it never really came.

The danger is that it gives people a false sense of security, and an exaggerated notion of what policy can achieve. It also created massive piles of debt for states that future generations will have to pay off, or that their creditors have to write off. This world, where no real long-term hardship exists, does not prevent us from pretending it does. There is no lack of complaints in German or French media. What would happen if a real recession where to hit them? How resilient would our societies be coping with what used to be natural cycles of life? Could the snowflake generation build up their lives from scratch? The skill-set needed to get through tough times is largely absent. Nor is our memory long enough to remember those times. We chase the good things in life.

2 February 2023

Are pension reforms really unjust?

French trade unions and opposition politicians have rejected the government's pension reform with the argument that it is unjust. Technically speaking, this is true. Every pension reform is unjust because one generation retires with better conditions than the other. But the confrontations we see on the streets and in the National Assembly suggest that this protest movement is not about an intergenerational conflict. Protesters compare increasing the legal retirement age from 62 to 64 to an extension of a prison sentence. They call for special conditions for those with longer careers, hardship at work, and women.

What does seeing work as a prison sentence tell us about the French relationship to work? The French are used to this expression: metro, boulot, dodo, referring to the repeated circle of daily struggles to get to work, work all day, and come home to sleep, with not much time to do anything else. This comes from a country that has a legal 35-hour week and the the largest numbers of years in retirement amongst OECD countries. The expected number of years in retirement for an average French worker is 23.5 years for men and 27.1 years for women in France. So is this all myth?

There are clearly those who find their work-life balance is off-kilter. One of them is Sandrine Rousseau, a provocative green politician, who defends the right to be lazy to be acknowledged at work. Before the pandemic, there had been a series of suicides in large companies, which sparked the debate about the quality of working life. Pressure at work, whether real or perceived, has been rising. At the other side of the spectrum we now have the worry, discussed in many talk-shows and social media, that the French got too lazy over the lockdowns and do no longer have what it takes to get the economy going.

A survey done by Institute Montaigne seems to give a different picture. About three quarters of the 5000 polled are satisfied with their work. They seem to put in more working hours. They are dissatisfied with salaries, recognition of their work, and career prospects. Over the past five years, about 60% find that their work load has intensified, and 26% of them consider it excessive. This factor, psychological or real, mostly has to do with the management. With the pandemic, there is a new division in the world of work between those who can telework from home and those who cannot. About 60% of those who cannot find this a source of huge frustration. Many also are looking to change their jobs either inside the same company or elsewhere. When it comes to the pension reform, most consider 62 as retirement age either appropriate (45%) or excessive (47%). There is a relative majority of those who want some transitional conditions at work some years before the retirement age.

So the protests are as much about the retirement age as they are about the quality of their relationship to work. This is also recognised by the government, which is set to run a new campaign on value of work. Is this just an empty slogan or are more substantial reforms coming? What we take away from this is that one cannot solve the resistance against later retirement age without addressing what happens at work before they retire.

1 February 2023

Europe is losing the AI battle

Having missed the first stage of the digital revolution, Europe is now in danger of missing the next big phase: that of artificial intelligence, a technology that is now experiencing explosive growth. The US is leading, followed by China, and this is pretty much it.

The German government has commissioned a study on large European AI models, which argues that unless the EU can develop its own technology, it will become dependent on the US, which would also mean dependence on a lower standard of data protection. The problem is that Europeans see artificial intelligence as a threat against which they want to protect themselves. It is hardly surprising that they are not the lead developers.

Can we stay outside and be happy? The problem is that ordinary companies will eventually need to buy AI-service and technologies to stay competitive. This is exactly what is now happening with digital technologies, which Germany in particular was reluctant to adopt. We recall when some large German companies deluded themselves in the 1990s that they could out-compete digital technologies through sophisticated analogue technology. Remember Francois Mitterrand’s and Helmut Kohl’s high-definition television? The EU is committing the same mistake on AI.

The issue is not research. Many of the world’s top AI researchers are European. The problem is computing power. Microsoft is about to invest $10bn into OpenAI, a open-source AI lab. The German government has a budget of €3bn to invest into a whole series of small projects. The problem is that the technology is moving at a faster speed than the debating schedule in the Bundestag.

The US is dominating the global market for cloud servers, which is already causing problems with the data protection standards for Europeans. With AI, the problem will be so much worse. If there is no domestic capacity, the EU will lose its regulatory powers.

What will need to happen would be a massive catch-up programme, but high capacity computing costs billions to develop. When we read the report in ARD Tagesschau, we can already see why the German and the European approach is not working. There are several domestic and EU kickstarter initiatives that operate at a small scale. And we don’t see political leaders turning this into a high-priority matter. At least Kohl and Mitterrand were interested in technology. They just bet on the wrong one.

The politics has not changed either. In Germany, the CDU is in favour of de-regulation, but the Greens, who run the economics ministry, want to prioritise data protection. This is why we are where we are. The headline of the ARD article is: Will Germany be left behind in the AI boom? The article tries its best to be hopeful. But we see this as a triumph of hope over experience.

31 January 2023

Scholzing wins

It is common to see the media - us included - poke fun at Olaf Scholz, and his scholzing. In Germany, scholzing works politically. The media were very tame during the period when Scholz came under pressure to deliver tanks, but criticised Annalena Baerbock’s comment: "we are fighting a war against Russia". It was an unwise comment, and created tensions between Baerbock and Scholz.

The polls show that over the last six months, the SPD has regained its pole position over the Greens, through both are trailing the CDU/CSU. In the Insa/Gov polls, the Greens led the SPD all through the summer until October, but the SPD is now 4.5pp ahead. The CDU/CSU is relatively stable at around 28%, a level it has been lingering at since May of last year. At these levels, whether the present coalition maintains a majority would depend only on the fate of the Left Party. The Left Party polls at the exact representation threshold of 5%. Last time they didn’t meet the hurdle, but got into because they met the qualifying criteria for an exemption: at least three directly elected MPs. Their performance is too close to call.

From a purely electoral point of view, Scholz's dithering is paying off. The Greens, CDU, FDP are all pushing for greater German engagement in Ukraine. The SPD is the only large establishment party that speaks to the half of the population whose position on support for Ukraine ranges from the sceptical to the outright hostile. The only party that is vehemently opposed to aid for Ukraine is the AfD, which is now polling at 15%, up from an election result of 10%.

What these numbers are telling us, the scholzing will go on. Where we disagree with the consensus view amongst political observers abroad is that Scholz will always cave in at the end. We are not so sure.

30 January 2023

Traffic light flickers red

Olaf Scholz's legendary dithering of arms deliveries to Ukraine is in part due to disagreements within his coalition. Spiegel reports that these divisions encompass the entire realm of national security policy. A meeting of senior ministers in the chancellery broke up without resolution after Scholz and Annalena Baerbock failed to settle their disagreement over a national security council. The idea is based on the US model, in which a body exists to co-ordinate security policy between various departments: foreign, interior, defence, economics, finance and the chancellery itself. Lack of co-ordination is exactly what happened in the run-up to the decision, with Baerbock pushing in favour of tank deliveries and Scholz against. Baerbock won that battle, but Scholz is now insisting on concentrating oversight of national security policy in his own office.

The chancellery is, of course, the natural place for this to be located, but Germany is run by coalitions where the largest coalition partner always get the foreign ministry portfolio. A power shift from the ministry to the chancellery is a power shift between parties. Germany’s foreign ministry has been jealously guarding the few remaining powers it has. They lost EU policy during Helmut Kohl’s time in office. Scholz has now taken charge of weapons deliveries for Ukraine. The foreign ministry is not willing to yield further powers.

A related dispute is about the Nato 2% defence spending target. Boris Pistorius, the new SPD defence minister, discovered that the Bundeswehr is massively underfunded, and is now asking his cabinet coalition to put their money where their mouth is. He wants an immediate increase in defence spending to achieve the 2% target. We report recently that Germany is on course to miss this. The Greens are sceptical of this target, and demand that any increase spending has to be accompanied with equal increases in diplomacy and civilian projects. Scholz does not agree with this. And Christian Lindner disagrees with both: he prioritises a balanced budget.

What can possibly go wrong, we wonder. The traffic light coalition, born in the pre-war days, turned to be a fair-weather construction from a distant period. It is only just over one year old. Amongst the various feasible political constellations in German politics, the traffic light is the one with the greatest disharmony on foreign and security policy. Under Angela Merkel, they fudged it, but nobody called them out.

27 January 2023

A new currency for the Brics?

The Brics countries will discuss plans for a common currency at their summit meeting in August, announced Sergey Lavrov, Russia’s foreign minister, yesterday. This format could challenge the US dominance in finance and trade, but as the history of the euro shows, there is a limit to how far this can go.

The term Brics was created in the early 2000s, referring to the economies of Brazil, Russia, India, China, and South Africa. Initially this group reference was created to attract investors to the then still-developing countries. But it later developed a life of its own. Since 2011 the four countries have hold regular meetings on trade and mutual support. Together they represent 42% of the world population.

What unites them now is a desire to challenge American hegemony in finance and trade, and to circumvent sanctions. As tensions between the west and China increase and become irrevocably hostile with Russia with its economic sanctions and diplomatic cut-offs, the two want to find an alternative to the dollar.

A common currency, be it a reserve currency, would not only help circumvent the sanctions. There are also benefits for trade. Intra-Brics trade as a percentage of world trade was around 10% in 2017. Politically, this prospect has become more feasible under the newly elected Luiz Inácio Lula da Silva in Brazil, who has his own misgivings towards the US. India, too, has a new agenda. India doubled its GDP over the past decade and is looking to become a major geopolitical actor in its own right. The Brics group may become a platform to do this.

The Western compulsion to isolate countries when they do something wrong creates incentives for those countries to think of alternative structures. Maybe the Brics will succeed. They are the largest group amongst those mulling alternatives, and they are getting organised. Over the past years they have held talks with some Middle Eastern actors and developed a Brics Plus format for new members to join. Brics Plus offers countries alternatives when it comes to trade, energy, and now also finance. The institutionalisation is still weak, and India still opposes the push to give it an anti-Western face. But there is momentum happening. There are already 12 states lined up to join the group. Iran is one of them. Turkey, Saudi Arabia and UAE have expressed their interest in joining, according to the Middle East business media Albawaba.

A reserve currency would challenge Western dominance more directly. There are also plans to strengthen the role of the BRICS New Development Bank (NDB) as well as the China-led Asian Infrastructure Investment Bank (AIIB). This would constitute a move away from the IMF and the World Bank for most of the BRICS members, especially China. How far this could go depends mainly on China. Watch this space.

26 January 2023

Tsipras calls no-confidence vote

It is an election year in Greece and politicians are likely to exploit every opportunity to score with the voters. Alexis Tsipras made such a move yesterday by tabling a motion of no confidence against Kyriakos Mitsotakis and his government over the wiretapping scandal. Will the public care enough to shift away from New Democracy to Syriza?

The move came after the independent Hellenic Authority for Communication Security and Privacy (ADAE) shared its findings from its investigation into the wiretapping scandal. They found evidence that six public figures, one minister and five high-ranking military personnel, had been spied upon, according to Macropolis. If confirmed, it would throw into doubt the government’s claim that there is no evidence. The second line of defence from Mitsotakis' team is that this has been the work of a rogue element of the intelligence service, of which the prime minister did not know about even if he was the one with overall responsibility for the intelligence unit. This will be much harder to prove.

The government also went into counter-attack mode, trying to discredit the head of the independent watchdog, Christos Rammos. The government speaker yesterday described Rammos as overstepping his mark and sacrificing his independence. As long as there is a denial of responsibility on Mitsotakis’ part, this strategy could turn out to be a slippery slope in a culture where independent institutions get the blame when something in politics goes wrong. This was for example the case of Andreas Georgiou, who is still being pursued by the Greek judiciary for allegedly inflating Greece’s 2009 deficit that pushed the country into the bailout.

Will it matter for the elections this year? So far, Greeks have other things to worry about. Tsipras put a political bet out there by making the wiretapping scandal a theme for the campaign trail. It is irreversibly now linked with his chances in the elections. Will it allow him to catch up in the polls?

According to the first Pulse poll this year, New Democracy still has a lead over Syriza. With 10% of voters still undecided, ND has a 33.5% indicative vote share against 26% for Syriza. If the polls are correct and the two parties on the far-right and far-left fail to qualify, there will be only six parties in the race and the threshold for an outright majority would fall below 38%.

25 January 2023

Turkey's threat match

Turkey cancelled the tripartite meeting with Finland and Sweden over their Nato bid. We do not expect any serious efforts to resolve Ankara’s hold before Turkey’s elections in May.

The west has seemed to scramble over how to react to Turkey. Could Finland join alone without Sweden as Pekka Haavisto, Finland’s foreign minister, suggested on Monday? Haavisto backtracked on his comments since, saying it is still the aim for Finland and Sweden to join together. If Erdogan were to succeed in dividing the two Nordic countries, it would increase his sense of power within Nato.

Turkey clearly has high blackmail potential over the two Nordic countries' accession that has yet to find its match within Nato. Earlier reports that the US could grant Turkey the purchase of its F-16 fighter jets in return for their green light for Sweden and Finland joining Nato may well reflect the intention of Joe Biden’s administration. But this comes from a position of weakness, not strength and integrity. The sale to Turkey is unlikely to make it through Congress and the Senate. Bob Menendez, chairman of the International Relations Committee of the Senate, made it clear that as long as Turkey continues its politics of threats, there will be no F-16 fighters for Ankara. Menendez has also linked this to the aggressive stance Turkey takes towards Greece. It is Turkey, not Greece, that is violating its neighbour’s airspace, encroaching on its maritime boundaries and threatening its sovereignty and borders.

He also criticised the rhetoric of the State Department, which called on Greece and Turkey to resolve their differences through dialogue on the basis of international law. This should change since there is only one side who is the aggressor, according to Menendez. If Turkey is willing to de-escalate, there is room for talks again. A principled position, and the first credible move we have seen to face down Recep Tayyip Erdogan’s threats. Will Biden dare to override the refusal and stand up to Menendez, who is after all a Democrat too?

A scenario with no F-16 fighter jets for Turkey but F-35 jets for Greece creates a new dilemma, as the US would be shifting the region’s power balance. And this will come with its own dynamic.

It is still unlikely that Erdogan implements his threats. Yet accepting his rhetoric and blackmail is not a way forward either, neither for Sweden, nor for the US or Nato.

24 January 2023

More maths in the UK, less in Germany

Sometimes you get a truly surprising statistic, like this one. The number of German first-year student enrolments in technical and scientific subjects has fallen from a peak of over 40% in the last decade to 37%. We look at the equivalent UK statistics, and note that they were around 40% in 2021. For those who try to check this claim, we made some adjustment to the UK numbers, since the UK counts psychology to the group of mathematical, scientific and technical subjects, whereas the Germans don’t. We would not have thought that the UK would have overtaken German in this specific category.

The lack of interest in science and tech subjects matters for an economy like Germany’s whose industry requires a steady flow of skilled labour, which it currently does not get. What has happened is that the strong rise in the total number of students during the period of 2006 plateaued in the middle of the last decade, and has started to fall in the couple of years. Of those, the portion of STEM students is also falling.

FAZ writes this morning that one of the deep problems is that Germany is falling behind in educational standards in schools, especially in mathematics and science. This trend started in 2012, and is still continuing. German schools also do not teach computer science to the same extent that it is taught elsewhere.

One thing Germany and the UK have in common is an acute shortages of maths and science teachers. In Germany, an estimate from the state of North-Rhine Westphalia is that schools will only be able to fill one third of their vacancies in maths, sciences and computer studies until the year 2030. It is not hard to see a link between lack of teachers at school, and a falling number of tech students at universities.

It will be fiendishly difficult to reform the German school system, which has not changed much since the late 1970s, because education is a competency of federal states. In the German debate, this issue lingers, but politics right now has other priorities.