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24 June 2022

Habeck sounds the alarm

In our main story, we discuss Germany's gas emergency, and Robert Habeck's warning of a Lehman-style event; we also have stories on the fragmentation of Italy's centre; the return of a version of cohabitation in France; on Nato's blink to Turkey; on why we should not bet on the end of petrol and diesel just yet; and, below, on why few things on earth are as cheap as EU candidacy status.

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Today's free story

A historic moment for the EU - or not

Beware when politicians refer to their own decisions as historic. Awarding candidacy status comes cheap. Waving blue and yellow flags also comes cheap. Tweets cost nothing.

But nothing is quite as cheap as EU candidacy status. Turkey has had it since 1999. North Macedonia has had candidacy status since 2005, Montenegro since 2008. What really matters is the start of negotiations. And from there a long road still waits ahead, paved with good intentions mostly.

The deal reached in the European Council is a classic EU fudge, high on symbolism with the purpose of allowing EU leaders to indulge in fantasies about their own historic role.

Kid yourself not. Ukraine will not be in the EU for a long time, if ever. The biggest obstacle to Ukrainian membership is probably not even Ukraine's readiness, but the EU itself. Ukraine, a large country, would become a significant net recipient of EU funds, at the expense of other net recipients, like Poland. Under the so-called Copenhagen criteria from 1993, enlargement also goes hand in hand with reforms in the way the EU operates. Voting rights and the number of MEPs would have to change, as we reported yesterday. Voting rights are a zero sum game. This is not just about the number of raw votes in the EU’s qualified majority voting system, but also the ability of countries to form coalitions. How many small countries does it take for coalitions to form that have the power to outvote Germany and France? With the accession of so many smaller countries, we would be getting close to this point. Germany already staked a claim for more proportional representation to reduce the probability of being outvoted.

Together with Ukraine and Moldova, there are now seven countries that have candidate status, all of them in the east and the south east of Europe. Bosnia and Georgia have made applications, and Kosovo is another potential candidate.

The accession of so many countries, combined with the departure of a large western country, is shifting the balance. There is no way that France and Germany can maintain their current power in an enlarged EU, or even their informal role as agenda setters. The geographical centre of an EU that includes Ukraine would be somewhere to the east of the German border. With a population of 44m, Ukraine is larger than Poland, and just behind Spain. Ukraine and Poland together would be bigger than Germany. The total population of all candidates and applicants is close to 80m, without Turkey, with whom membership talks are frozen. If you include Turkey, the total would rise to 150m.

EU membership is a binary option. You are in or out. Norway and Switzerland have their deals, and so does the UK. But these deals have mostly not given rise to happiness. One route forward for the EU would be differentiated integration, a term we prefer to variable geometry, where the emphasis is not so much on opt-outs as opt-ins. Amid all the mutual backslapping and self-congratulation in Brussels yesterday, we heard the voice of Alexander Schallenberg, Austria’s foreign minister, who suggested that Ukraine should join the single market as a first step, as he said, to avoid disappointment. We think this is a sensible proposal, for disappointment is otherwise guaranteed.

Behind the decision to award immediate candidacy status to Ukraine was a bitter fight over the beginning of accession talks with North Macedonia and Albania, the two countries that have lingered in the EU’s antechamber for years. Accession talks with North Macedonia and Albania are blocked by Bulgaria, but we read in Euractiv this morning that the Bulgarian parliament could unblock its veto today in time for the Council to save itself the embarrassment of having to say no to those two countries once again.

Austria wanted the EU to grant candidacy status to Bosnia, but was promised that the Council would deal with this issue on another occasion.

23 June 2022

Ionesco would have been proud

The theatre of the absurd has a long European tradition. But even the famous dramatists in this genre would have struggled to come up with anything quite as absurd as the story of Germany and gas sanctions.

The priority at the beginning of the war was clearly to keep the gas flowing. So the German government and the EU agreed to sanction coal and oil, and then flouted their own sanctions by paying Gazprom in roubles. As a result, Vladimir Putin is now so awash in cash that he can afford to use gas sanctions against the EU.

Norbert Röttgen, the former chairman of the Bundestag’s foreign affairs committee, made the point that it would have been better to have embargoed gas immediately. The situation Germany finds itself in today was not only foreseeable. It was foreseen. He asks why has Robert Habeck, the economics minister, did not make preparations when the war started, and avoided immediately taking measures to reduce gas consumption. Habeck kept on saying that a gas embargo would lead to mass unemployment and recession. Did he think that Vladimir Putin would not hear this? As so often in politics, we are once again in a situation in which complacency gives rises to panic. We are more vulnerable now than if we had imposed the gas sanctions ourselves, on our own terms. Another story in our ongoing series of complacency giving rise to panic.

22 June 2022

The long road to Nato enlargement

The talks between Turkey, Finland and Sweden to clear the way for their Nato accession ended inconclusively in Brussels yesterday. Don’t hold your breath, Turkey won’t be pressured to nod through the accession at the Nato summit next week. Their negotiators referred to Greece’s resistance against Macedonia’s accession that lasted ten years and happened only after they changed their official name and constitutional references to North Macedonia. It is a good reminder that those hold-ups can last, even if the rest of the community finds it impossible to understand the nature of the conflict. Though the situation is different today with the war in Ukraine at Europe’s doorsteps, Turkey will be insisting that both nations are to address Turkey’s security concerns and take effective steps to combat terrorism.

The matter is more of an issue for Sweden than Finland. Both countries support the Syrian Kurdish People’s Protection Units (YPG), which Turkey accuses of having direct links to the PKK, a terrorist group that has been waging an armed campaign against the Turkish state since 1984. But Sweden has more clout in this. They have a larger Kurdish community and more political ties than Finland. Turkey is furious that Swedish government still receives senior figures from the Kurdish-led autonomous administration in Northeast Syria, as well as military commanders.  Turkey wants Sweden to cut all ties and shut down their representative office in Sweden. Turkey is also demanding that Sweden and Finland lift arms embargoes imposed on Turkey for its military incursions into Syria to battle Kurdish fighters.

How can they move forward? Sanna Marin, Finland’s prime minister, has expressed concern that there is a risk of the situation freezing. This may well be what it is about to happen. Turkish demands run counter to the value-based tenets of the two Scandinavian democracies. There is no way they can give into Turkish demands on face value. The Swedes say a beefed-up anti-terror law will address many of Turkey’s concerns when it comes into force on July 1, Al Monitor reports. But it not convince the Turkish delegation. They want a real sacrifice.

Turkey’s tough negotiation stance is also to be understood in the wider geopolitical game. Turkey is still holding out to mediate with Russia and hopes to be the big Nato player in the Middle East. The price for Turkey’s nod will probably have to be settled not only with Sweden and Finland but elsewhere in Nato too. If the US deal over F-16 fighters fails, could Eurofighter Typhoons be a sweetener the Europeans ship in?

Given the rivalry between Turkey and Greece, anything less than 10 years to allow Nato accession to proceed would be a success. Until then, they are haggling over the price.

21 June 2022

Beware of blockades

What we know from international law is that blockades constitute an act of war. What international law does not tell us with the same clarity is whether a particular action falls into this category. If Russia blocks Ukrainian wheat exports, this would in our naive view constitute a blockade because this is literally what is happening: shipments are being blocked. Economic sanctions that cut vital supplies to an island, an enclave or an exclave fall into the same category. What we do know is that blockades are bloody dangerous. The Middle East has seen many blockades in the last 50 years. The German blockade of Leningrad was a famous European example, as was the Soviet blockade of Berlin.

The Kaliningrad exclave on the south-eastern corner of the Baltic Sea is Russian, but fully surrounded by Poland and Lithuania, both members of the EU and Nato. It is the area of Russia most vulnerable to a blockade. Lithuania has implemented the latest round of EU sanctions and stopped rail transports of certain goods, like steel, into the Kaliningrad oblast. Russia responded with unbridled fury. The Kremlin’s spokesman, clearly lost for words, called it a violation of everything.

We would pose the question of whether this particular decision has been coordinated with the EU and Nato. It’s seem that the answer is yes and no, respectively. Lithuania’s president, Gabrielus Landsbergis, said the decision was done with consultation with the European Commission, and followed Commission guidelines. We have no reason to disbelieve him. The first reactions from the Commissions seems to support that narrative.

Steel transports are fair game during an international dispute. The EU sanctions against Russia clearly do not qualify as a blockade. If anything, we have criticised them as ineffective. But enclaves are complicated. The question is whether we have a strategy in place to deal with possible Russian counter-measures directed at Lithuania and whether that strategy is consistent with our declared preference not to get dragged into a direct confrontation with Russia. We doubt that such a strategy exists.

20 June 2022

Let's blow up a pipeline

1967 was a fateful year for the German left. It had been in opposition for almost 20 years, since the start of the Federal Republic. In that year, the SPD joined the first grand coalition, and held important offices of state. That was the moment when the left split into those who relished power after more than one generation in the political wilderness, and those who sought to continue the fight against the bourgeois establishment.

The latter group organised itself in what was known at the time the extra-parliamentary opposition. Out of this grew the Baader-Meinhof terrorist group. The core members of the group had been well-known members of the left, mostly with an upper-middle class background. Ukrike Meinhoff had been a television journalist. In 1977, the wave of terror hit a peak when one of the terrorists, Susanne Albrecht, assassinated her uncle, the chairman of Dresdner Bank, and when the group abducted, and later assassinated, Hans-Martin Schleier, the head of the federation of German industry.

We are re-telling the story because we may be at the start of a similar development in the environmental movement. We recall Robert Habeck’s statement that the Green Party was not the political arm of that movement. And the German Green movements reserve most of their criticism these days for the Green party. The best known representative of the environmental movement in Germany is Luisa Neubauer, a young climate activist who has been heading the German arm of the Fridays for Future movement. While Greta Thunberg is fading from public consciousness, Neubauer is right up there, and is a regular guest at talk shows, in which she often clashes with members of the coalition. Hated by the old white men she constantly criticises, she has become a formidable presence in the German political scene. Now that the Greens are restarting coal production, they are creating fertile ground for an extra-parliamentary opposition.

Recently, Neubauer tweeted we are planning to blow up a pipeline. This is not a reference to Nord Stream, but an east African oil pipeline that does not even exist yet. And it’s not even her own idea, but a reference to a book by Swedish academic and climate activist, Andreas Malm, who wrote an instruction manual entitled “How to blow up a pipeline”.

Her own invocation of that expression spooked the German media. When they read the book, they got spooked even more. Its most important message was a battle cry for climate activists to burn and destroy all CO2-emitting machinery. It also invoked Meinhoff’s most famous statement: that it was time for a transition from opposition to resistance. Bild confronted Neubauer on whether she supported those statements, but she refused to comment.

What happened to the climate movement is that events intruded, namely the pandemic and the war in Ukraine, and their agenda has fallen down the priority list of governments. We see very little chance that western democratic systems will deliver on their climate change targets and policy promises. Thunberg has been talking for quite some time about the big gap between what governments, and especially European institutions, say and what they do. We have been making similar observations in our field. The environmental movement will be where the German left was in 1967, at the point where realpolitik of the Greens leads to a split into a Green establishment and an extra-parliamentary opposition, dedicated to resistance.

17 June 2022

What they say in Berlin

We don’t know what was discussed behind closed doors in Kiev yesterday. Die Welt has an interesting scenario, shocking for many readers of this briefing. We report on it not because we think it is likely. In fact, we think it is not. It is interesting because it reflects what at least some parts of the German political class wants to happen. Even unrealistic scenarios can be useful if they reveal preferences. This one, we believe, reflects the preferences of Olaf Scholz.

Under this scenario there will be a quid pro quo: fast-track EU membership for Ukraine and Moldova in return for a deal with Russia to be struck before the winter. The timing is crucial. The Germans want the gas to flow.

The Germans don’t expect a quick Ukrainian military victory. That’s the one part of the scenario we agree with. It is clear by now that the Europeans are not delivering the heavy weapons Ukraine would need to drive Russia back. They are delivering weapons though. German weapons deliveries will start this month, we are told. These weapons include howitzers, useful in defence against an advancing army. Based on this premise, the article drives to the logical conclusion than any deal struck in the summer or the autumn would have to include a de facto recognition of the military status-quo: of Russia’s occupation of the Donbas, as well as the parts of Kherson and Zaporizhzhia Oblasts that it occupies, north of Crimea.

As so often the case in diplomacy, there are more ways for a scenario to fail than to succeed. For starters, Russia would want to make peace as well. Now that Russia is scoring its first big military successes in the war, this seems not very plausible. It is not as though the country is crippled by western sanction. This is a fairy tale story we have never believed. The sanctions have produced an awful lot of disruption for Russian commerce, but have also given rise to large windfalls gains. There is a whole world out there that does not participate in western sanctions, which is only too happy to buy Russian oil, and supply Russia with components. We think it is highly probable that a state with the resources of Russia can procure semiconductors on the global market.

Another way for this deal to fail is that Russia would have to declare itself content with what goals its so-called special military operation has achieved. This is not something we should take for granted. Furthermore, Russia would insist on the lifting of all economic sanctions as a quid pro quo. That would not be a problem for the Germans. But we don’t think this element of the quid-pro-quo would have unanimous support among every member of the western alliance. Consider, for example, the UK and the Baltic countries. Would they agree to a lifting of sanctions without a withdrawal of Russian force from Ukraine first? It does not square with the war rhetoric and the cheerleading we have grown so accustomed to. It would constitute a recognition that Vladimir Putin has succeeded.

Perhaps the most important reason it might fail is because Ukraine may not accept it. Or Ukraine might agree to negotiations, but they would then fail. Another way for the scenario to fail is that the EU might not be able to deliver on fast-track membership. There is no unanimity on this issue in the European Council. Candidate status alone is a cheap price to pay for the EU. Remember what happened to Turkey?

The primary reason we are interested in this scenario is what it says about German thinking: or, at least the thinking of an influential part of the political class. German discussions about Ukraine have a different quality than those in other parts of the EU. The only aspect of the scenario we actually believe is that it represents the ideal outcome from a German perspective. As so often in political commentary, the lines what the writer wants to happen and what the writer expects to happen are blurred. But we do know for a fact that this scenario is consistent with the German government’s actions: reluctance to send heavy weapons, and a reluctance to insist on the complete removal of Russian troops.

The reason why Germany is so desperate for a deal is the fear of a Russian gas boycott in the winter. For the German economy, this would be a Lehman-Brothers style event. They do not have a plan B, despite what they say in public. A fast-track route of Ukrainian membership, plus a massive new investment programme, based on the recovery fund model, would be a price Germany would be happy to pay. We doubt, however, that it will be so easy.

16 June 2022

Other item in the news: Ukraine

We have now arrived at the point we feared we would be. Ukraine has gone way down the priority list in the news agendas. The Germans are horrified about the Russians reducing gas supplies. They are not prepared for this, no matter what they might say. Perhaps the most ridiculous news lead anywhere in the world was the report of the departure of Boris Johnson’s ethics adviser. In the US headlines are about the economic mess left by excessive fiscal stimulus of the Biden administration.

In Ukraine, meanwhile, the war is not going well. Russia is consolidating its position in the Donbas, and the supply of heavy arms to Ukraine has dried up. Don’t count on Germans weapons supplies. They are now promised for July, but the priority of German policy will be to keep the gas flowing. They are not going to sacrifice their industrial model for the Donbas. When we heard President Joe Biden criticising President Vladimir Zelensky for not listening to him before Russia’s invasion, we wondered whether the US has the stamina for a long war at a time of domestic economic crisis.

Western support for Ukraine is unprecedented in scale. Without it, Russia may have been able to achieve its original war aim, of replacing the Zelensky administration with a puppet regime. This has not happened, and it won’t happen. That said, we struggle to see that Ukraine will be able to drive the Russians out of the Donbas without a further massive increase in western arms supplies and without further economic sanctions. We don’t see that either.

Western sanctions will not have a big impact on Russian GDP. We have been saying this from day one of the war because we understand the deep dysfunctionality of the EU. The deep reason is a collective action problem. Germany and France have pursued their own neo-Mercantilist foreign agenda at the expense of an EU-wide strategy. We are dependent on Russia for gas; on China as our main export market; on the kindness of the bond markets for the sustainability of the euro area, goes the reasoning.

One of the Russian central bank watchers noted the other day that Russia’s export data don’t seem to square with the import data of other countries. The May data for the Russian current account surplus seemed unbelievably low. Their suspicion is that the Russians are so embarrassed by the massive inflows of oil and gas revenues that they are downplaying the scale in order not to provoke further sanctions. We treat this as an unverified information. We are not passing it on because we think it is plausible. What is shocking is that we are even having such a discussion.

The western sanctions policies are not working because of a giant gas leak that runs through Germany. That will allow Putin to finance his war for as long as it takes.

We keep asking the rhetorical question: has Europe thought this through?

15 June 2022

What is it about island disputes?

A non-violent war has come to an end this week as Denmark and Canada settled their territorial claims to Hans island, a 1.25 square kilometre formation of rocks in the Arctic. The island has been known for its whisky war, where the military and politicians would drop in by helicopter to put up their national flag and leave behind a bottle of Canadian whisky or Danish schnapps. This frozen conflict has been going on for 49 years, stirring up some patriotic movements from time to time. Now, after four years of tripartite negotiations with Greenland, this conflict comes to an end. The two parliaments still have to agree, but this is taken as a given.

Territorial disputes over small barren islands are usually not about the island itself but about what they represent. They come with fishing and raw material mining rights, or they have a strategic position in the sea. We are talking about potential benefits, which in politics is enough to stir up claims, even if the costs of actually realising those claims are prohibitively high. A small rocky island can also channel tensions between otherwise peaceful neighbours. There can be benefits from keeping legal uncertainty over territorial claims. International maritime law works by precedent, so conceding a territory might have unintended consequences.

Denmark and Canada hope to set a precedent with their peaceful way of solving the conflict over this island in the Arctic. And a precedent may be needed. More islands are likely to emerge from the ice with climate change. This will give rise to more territorial claims. The Arctic is likely to become strategically more important for trade and defence. Also, the raw material price hikes, if they were to persist, could make exploitation in remote spots more attractive.

There are other famous island disputes in this world. The Mischief Reef in the South China Sea is a hotspot of tensions between the US and China. So are the Kuril Islands, over which Japan and Russia have not signed a peace treaty after WWII yet because of the dispute over those islands. Here in Europe, Turkey is disputing with Greece over territorial rights and maritime borders in the Aegean Sea, a constant source for military provocations and incendiary rhetoric. The list over unresolved disputes over islands is long and is likely to keep on growing.

14 June 2022

Don't panic about the UK bill just yet

There is good news and bad news about Liz Truss's announcement of a bill that would allow ministers to override the Northern Ireland Protocol.

Let’s start with the bad news first. The bill is unilateral. It essentially pitches one single market against another, allowing companies to chose which regulatory regime they wish to follow. The bill would scrap checks on most goods trades between Britain and Northern Ireland. A dual regulatory scheme with green and red lanes would distinguish whether goods are destined for Northern Ireland or for exports to the EU. Disputes would be settled by independent arbitration, not the European Court of Justice. The bill also gives UK ministers the power to alter rates of VAT in Northern Ireland, something not allowed under the current agreement. Truss insists that the bill is legal as it acts out of necessity to preserve peace in Northern Ireland.

The good news is that there is still time for a compromise to be hammered out with the EU. The bill will have to pass the House of Commons and the Lords, which is expected to take at least a year. And the bill itself is not the hard version, in the sense that ministers would still have to set out regulations to bring the new rules into effect. This all buys time to find a solution. As we keep on saying, this is a high drama written by the Tories to keep Brexiteers happy. This is politics and the legal dispute is used to its effect.

How will this play out in Northern Ireland itself? The DUP welcomed the announcement, but only cautiously. They came up with seven criteria against which they will evaluate whether the measures are enough for them to return to power-sharing. We ourselves have to digest what is in the bill on a more granular level. But politics plays its role here too. The DUP has no desire to be part of a government in which Sinn Fein gets the job of first minister, and the protocol gives them a fig leaf to stay out. But a majority of members of the Northern Ireland Assembly, the region's devolved parliament, wrote to London expressing their strong objections to the bill, according to the Times.

If negotiations were to continue, exemptions and solutions could materialise if both sides were to find a way forward. A compromise between Truss’s green lanes and the EU’s express lanes should clearly be on the cards. The legal jurisdiction is more problematic but not impossible either, according to Tony Connelly.

What will the EU do? The Irish foreign minister warned Truss in their phone call against a breach of contract and mutual trust whilst creating more uncertainty. The EU may decide tomorrow whether or not to resume its infringement proceedings against Britain for breaching the terms of the Brexit agreement. But firm actions will be unlikely until the bill becomes law.

13 June 2022

Passerelle vs Escher's stairs

A passerelle is French for bridge: not a normal bridge, but more like a footbridge or a gangplank placed between two boats. It is the essential issue in the debate on constitutional reform in the EU. In the language of European constitutional debate, the passerelle constitutes a device that allows the European Council to shift towards qualified majority voting, one step at a time. This device exists already, but in a form that is entirely useless. It requires unanimity by everybody to get rid of unanimity. In addition, it is subject to the veto of national parliaments. The Dutch graphic artist M.C. Escher would have had his fun with the European Union, an endless source of inspiration for the absurd and the impossible. Here below is one of Escher's famous staircases, which we see as accurate renditions of the EU decision-making process right now.

English-language commentators have a tendency to dismiss the case for constitutional reform. They call themselves pragmatists. With the UK out, Denmark is the leader of that group. But as non-members of the euro area, Denmark and Sweden are ultimately not in position to block anything that would lead to their isolation. We believe that fixing that dysfunctional staircase, or footbridge, is absolutely essential, especially for its most dysfunctional part, the euro area. It is no accident that the countries most opposed to constitutional reform are also not in the euro area.

As Andrew Duff reminds us in his latest essay, the passerelle is the main issue. The goal of constitutional reform would be to lower the passerelle threshold. This sounds relatively modest, but would be highly effective. His proposal is to reform Art. 48(7) TEU, which lays out the current (impossible) requirements for the passerelle to be triggered. Duff makes three proposals: the first is to replace the unanimity requirement for a trigger of the passerelle towards super-QMV. This means that the motion would be approved if at least 20 member states accounting for 65% of the EU’s population approve. Second, the national parliaments can still object, but would have to do so collectively. Right now each one of them has a veto. Third, the passerelle would be opened to policy areas that are specifically excluded: the EU’s own resources, the EU’s budget, the general flexibility clause as laid out in Art. 352 TFEU and Art. 354 TFEU, and the rule of law mechanism. We are more sceptical on the desirability and usefulness of the rule of law procedure. We can see why it would be highly effective in a situation where no country has a national veto. 

The Council is due to decide at its next meeting June 23 and 24 whether to reopen the treaties and set up a constitutional convention. It would only take a simple majority to do this. But treaty change still requires unanimity. So the path towards the end of the national veto is still subject to the national veto. Escher would have had this fun with this.

This is the ratchet theory of European integration. Once a passerelle is triggered, it cannot be revoked. This would allow European integration to move forward one spike of the wheel at a time. This will take time and could, in the long run, produce fragmentation. But that, too, would be a feature, not a bug.