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07 February 2025

Small parties decide

In our lead story, we write about the disproportionate impact the small parties have on the outcome of the German elections – that’s where the coalition choice will be decided based on current polling evidence; we also note this is also part of a wider European trend; we also have stories on the impact of Russian oil sanctions; on the Bank of England’s loss of credibility; on the changing role of the French Socialists; and, below, on what will happen to the 2035 deadline.

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Today's free story

Plugging in

Efforts to water down the EU’s 2035 internal combustion engine ban are already underway, and gaining some traction. According to reporting from Der Spiegel, a possible compromise has been found. Plug-in hybrid cars and electric cars with combustion-powered range extenders could still be sold beyond 2035. The key intermediary between the EU institutions and the car industry has apparently been Eckart von Klaeden, a former minister in one of Angela Merkel’s governments. In classic revolving-door fashion, he now works for Mercedes-Benz.

We think it is at least plausible that this could come off. According to Der Spiegel’s reporting, progress on this within the EU institutions is already quite advanced. Links between Mercedes-Benz and the wider car industry are solid: Ola Källenius, Mercedes-Benz’s CEO, is also president of Acea, the European automakers’ association.

It would also, at least on the surface, make sense as a compromise. Both plug-in hybrids and range-extended electric cars can run without the use of petrol for most trips they take. But they also incorporate combustion engines for longer trips, the bread and butter of Europe’s big automakers. Plug-in hybrids use their petrol engines to power the car directly, whilst range-extenders use it to recharge the car’s batteries.

The logic there makes some sense. Both are an intermediate step to electric cars, and can alleviate some of the consumer concerns about range. The big Chinese automakers also trade in them. China’s definition of so-called new energy vehicles, and their statistics on their adoption, include plug-in hybrids. BYD, the largest of the bunch, sold 2.49m plug-in hybrids last year, compared to 1.76m battery electric cars.

We are not sure, however, that this will solve the European car industry’s woes. In the long term, we cannot see the much more mechanically complicated plug-in hybrids winning out over simpler electric cars as battery technology improves and manufacturing processes scale. The value-added is also still in the software, an area where European carmakers continue to lag behind. The Chinese firms can produce plug-in hybrids more cheaply too, further eroding our advantages.

What this does do, however, is potentially create more uncertainty in the industry. The point of having the target in the first place has been to create some long-term certainty about demand prospects for these new technologies. Messing with the targets undermines this objective. We are no fans of the EU’s various regulatory overreaches. But we also think that the 2035 ban is far from the most egregious one.

6 February 2025

AfT - Alternative for Tesla

E-car sales in Germany rose in January by over 50%, compared to January 2024, and yet Tesla’s sales declined by 60% in the same period. Its market share declined from 14% to 4%. This is as dramatic as the decline of German cars in China. Compared to four years ago, Tesla sales in Germany are down 59%, and there are similar declines recorded in France, though sales in the UK are holding up.

One factor is surely that the company is about to launch an update of its best-selling model, while competitors have just introduced their own updates.

But as Handelsblatt reports, the Tesla brand is starting to have a reputational problem as it is becoming increasingly associated with the AfD in Germany. Company directors, who in Germany seem to care greatly in what type of car they are seen when they drive into the executive parking areas, do not want to be caught dead in a Tesla. A dealer estimates that three out of ten second-hand car sales of Teslas are motivated by political reasons. Another interesting snippet of information is that Tesla’s reputation has increased with AfD voters. The trouble is that the AfD voters are not your classical electro-mobility type.

Some European media speculate whether the recent decline may have something to do with the boss taking his eyes of the ball and leaving the operational management of his companies to his underlings, while he is running the new government efficiency department.

We wondered a few years ago whether Musk did himself a favour by locating his main European Tesla plant in eastern Germany, not exactly a hotspot of car engineers and high productivity. With sales volumes and profit margins falling, the question may arise whether Tesla would be better off importing the cars into the EU.

An alternative strategy would be to build on Musk’s association with the AfD. As cars are turning into political fashion accessories, Tesla might double down on its image of an AfD car. If the AfD gets 22% of the votes, that’s a big market share going forward. Tesla has an image problem mostly with corporate buyers, not so much with private buyers, who care mostly about price and functionality.

 

 

5 February 2025

Black swans and Trump

In her oped for Les Echos, former French ambassador Sylvie Bermann sees the transactional nature of Donald Trump’s foreign policy as the result of a series of extremely unlikely events. Those extremely unlikely events are called black swans in statistics. And these black swans are beginning to outnumber the white swans, the likely events. Given this mismatch it is no longer possible to predict what the future might bring.

Ever since Brexit in 2016, unpredicted crises have been piling up. First there was the pandemic that brought the world to a quasi-standstill, then Russia’s invasion of Ukraine, an energy crisis, Hamas's 7 October attack and Israel’s war in Gaza.

The Europeans still think that they are the norm and provide the model for engagement in this world. But those black swan events and transactional politics will upend this model.

Unpredictability becomes a pond to fish in for unpredictable leaders like Trump. Take Trump’s idea to take over Gaza. How will Europeans respond to this? Statements that this is illegal have lost their power in a world where international law becomes dispensable so easily. Piece by piece, the multilateral order that we grew so accustomed to is hollowed out, while the most powerful in this world set the tone for our future.

The idea of taking over Gaza comes after Trump expressed his desire to buy Greenland. Security reasons are cited. He also threatened to take back the Panama canal, allegedly because its port is run by China. And he threatened to annex Canada as the 51st state to the US.

His threats may never come true but they fundamentally change the nature of foreign policy. By exaggerating the threat, Trump forces his opponent to come to the negotiation table with a better deal for the US.

The Danes were quick to show their willingness to negotiate with Trump over Greenland. NATO did the same to appease the bellicose inclinations of Donald Trump. Panama has already announced that it will end its Silk Road agreement with China early. Canada and Mexico have agreed to strengthen border controls in exchange for a pause for his tariffs. Ukraine may offer its rare earths to ensure foreign aid continues to flow. This list will go on.

Trump does not care whether he targets an ally or not, thus breaking with diplomatic codes. Annexing territories over security reasons also puts force over rule of law. It gives the impression of exonerating Putin in Ukraine and Israel in Gaza. It is the return to the Monroe doctrine, according to Bermann, with its sphere of influence. The US loses its appeal as a leading democracy in this world. This will be also fuelling populist movements in Europe. On this path of power, will Europe finally know how to get its act together? What do they have to offer other than their disunity?

4 February 2025

Who is Bart De Wever

Two hours after being sworn in as prime minister, Bart de Wever already plunged into the deep pool of EU politics. At the informal summit meeting in Brussels entirely dedicated to European defence, de Wever knew hardly anybody. Several of his counterparts asked him bluntly: who are you?

The N-VA, de Wever’s party in Flanders is part of the ECR group in the European parliament. But they are not the classic Eurosceptics. At one point, they even considered joining the liberal Renew group. De Wever had to explain to the press that they are not anti-EU, but want the EU to focus more on central tasks and on competitiveness.

The N-VA does not sit well on the hard-right spectrum, where the international media sometimes put them. It is a nationalist party, yes, but its tone has nothing in common with the polarising discourse of other nationalist parties in Europe. The party refers to it as inclusive nationalism. The N-VA also embraces conservative values, like many parties of the right. They define a cultural identity in Flanders and have toughened their migration policies over the years. Their main theme is reforming national institutions and granting more autonomy to the regions of Wallonia and Flanders.

The N-VA has been in government in Flanders many times, and now de Wever is prime minister of the federal government. De Wever managed to win the national elections in Flanders despite the polls favouring the far-right populist party Vlaams Belang. He now will have to prove that his inclusive nationalism can produce real change and that his method works better than any radical recipe far-right parties may have.

3 February 2025

Teflon Meloni

Many of us would like to think politics and popularity follow a pretty linear relationship. You promise things, people like them, you get them done, and people like you more. You fail to do this, and you don’t. In practice, of course, it is more complicated than that. For some people, just as success can look like failure, so too can failure look like success.

We can see one example of this in Italy. For the third time since October, an Italian court has ordered a group of migrants transferred for processing to Albania under an agreement between the two governments to be sent to Italy instead. The group which the court just ordered returned was the first to be sent there since November, from when the facility has been empty. As has previously been the case, the justices bumped things up to the ECJ for confirmation of the legality of Italy’s returns plans for rejected asylum-seekers. 

These outcomes are still pending. The ECJ should deliver a ruling on 25 February. But, for the time being, the Italian government has paid for a very expensive empty series of blockhouses next to the Adriatic. This bears comparison with another famous empty European-funded holiday camp further south, in Rwanda.

But while the UK’s Rwanda scheme was a subject of ridicule, and a severe political issue for the last Conservative government, Meloni is weathering these issues much better. Fratelli d’Italia, her party, is still in a commanding position according to Politico’s poll of polls, at 30%. Her personal approval ratings have slipped a bit since taking office, but are still holding up reasonably well.

One possibility is that Meloni is still doing alright because despite the policy’s overall failure so far, Mediterranean crossings are down by a lot. But it was also true that Rishi Sunak’s government presided over a material drop in small boat crossings to the UK. That was thanks to some less well-heralded policy successes with Albania, funnily enough.

Instead, a more likely explanation is that Meloni runs a tight ship. She is clearly in control of her party, and that party is clearly in control of the government. This was not the case for Sunak, who was his own party’s third choice at best for the job. Maybe there is a lesson in there that being seen as in charge counts for a lot, even if in the short to medium-term.

31 January 2025

Who is copying now?

When OpenAI accused DeepSeek of using its propriety output to train their own open-source model, people had a field day on social media. Whoever sits in a glass house should better not throw stones they say. But behind the noise, there are some fundamental questions about intellectual property. What is original and what is not in the AI world?

Tech policy distinguishes two categories of litigation on copy rights related to AI: on copyright violation caused by generative AI, and on granting of copyright to a AI-generated work. There are many lawsuits against OpenAI from media organisations and artists over the use of their original work in ChatGPT output. The case of copyright on AI-produced work is rare by comparison. And this accusation against DeepSeek would be a defining landmark if it ever were to be fought out in the courts.

How can an AI that scraps texts from all over the internet, claim originality for its output? It is fed by the originality of many sources to create content. What does AI add? Where does its copyright start and where does it end? Does the fact that OpenAI has a propriety model mean they have a copyright over its output? Or is it limited to the service they offer? Where are all those artists and media companies in this chain of intellectual property rights? Does this mean that OpenAI owns copyrights on their output if it is transformed through AI? What if it misrepresents the original text and could lead to a bad reputation for its creator?

OpenAI often defends itself in those lawsuits by saying that the sources are public and therefore they can use them and that they do respect content behind paywalls. So DeepSeek output could also be used for their training purposes.

The other question is for the user of ChatGPT. If you use ChatGPT to write emails or programme your business model, then, theoretically, this would belong to ChatGPT if we were to follow their line of logic. Or could the users and companies then argue that ChatGPT is only an input, whereas their final tweaking is what makes it a distinguished copyright output in its own right? 

This sounds like arguing in circles, where those who copy are faster to improve than those who insist on originality throughout the creation process. The OpenAI versus DeepSeek case is essentially a question of how to make money with a learning model that relies on other people’s work.

30 January 2025

Ready for takeoff?

Readers who fly frequently into Heathrow airport may have wasted countless hours of their time stuck in a holding pattern over the beautiful, scenic environs of greater Slough. Europe’s busiest airport by passenger volume only has two runways, leading to congestion and blockage. Paris’s Charles de Gaulle airport has four. Amsterdam’s Schiphol has six. Politicians have been debating the relative merits and demerits of building a third runway for about as long as we can remember, certainly as long as some of us have been alive.

Rachel Reeves wants to unblock this process. Yesterday, the most politically risky statement she made is that she, and the government, support building a third runway. The airport will then submit a proposal for it this summer, kicking off a years-long process. She will also have to pick fights with people in her own party, including Sadiq Khan, the mayor of London, who said he would challenge the process.

The third runway by itself will not turn around the UK’s economic fortunes. We all know that, and so does Reeves. The point is that this is an act of political signalling, both to outside investors and internal opponents of development in the UK. It is to say that the government will not be scared of facing down political opposition to get new infrastructure projects off the ground, rather than appeasing not-in-my-backyard interests or the infamous so-called treasury view.

We agree with Reeves and the government that the poor state of infrastructure, and building, is a serious problem for the UK. Across numerous areas – rail projects, roads, and so-called social infrastructure like schools and hospitals – projects in the UK are more costly, and delays worse, than elsewhere in Europe. Even more severely, the country suffers from a severe housing shortage, and some of the highest housing costs in Europe as a result. According to a 2023 report from Centre for Cities, the UK has a shortfall of about 4.3m homes.

Where we disagree is in the diagnosis of the problem. It is not enough to say that the UK doesn’t build enough stuff, or that when it does it does so too expensively and in too much time. The question is why this is the case, and what it says about the wider British state, and political system. We should also ask why this hasn’t changes for decades, under successive governments from two political parties, and even one coalition.

We think, instead, there is a more fundamental problem with the British state itself. Across the board, what has set in is a culture of extreme short-termism. The way we hear politicians, political media, and the civil service itself talk about this brings to mind the joke from Australian political satire The Hollowmen that long-term planning is focusing not on today’s headlines, but next week’s. It requires more systematic change, and a government that is not scared of being unpopular. As this one has found out, being scared of unpopularity begets unpopularity.

29 January 2025

A German insurer goes bust

The bankruptcy of Berlin-based Element Insurance is puzzling for consumers. Bafin, the German financial supervisory authority, did not see it coming either. Bafin forced them into insolvency proceedings three weeks ago, after the startup gave notice in December that it had too much debt. Hannover Rück, Element’s reinsurance partner, then decided not to renew the partnership, which made their financial situation worse. Consumers may now have to check whether they are insured by Element, which is not obvious given that Element insurances are a kind of franchising concept where other insurers sell them under their own name.

Element is one of the few young digital companies that got a Bafin licence. It is a white label firm that designs insurance products which other insurers can then promote and sell under their own name. It is like a manufacturer of standardised products that can be accustomed to the specifics of the one selling those insurances. The sales are up to the partner insurer, while the risks and compensation payments stays with Element.

For Bafin this case offers important lessons on the Insurtech sector. Why did Element slip into insolvency? Was their offering too broad or not appropriately priced? Bafin has made a string of bad calls with fintech start-ups. The Wirecard scandal was to a large extent a regulatory failure.

Element offered insurance for bicycle, liabilities, residential building, accident, household content, car repair, and smartphones, as well as niche insurances for animals and others. If you do not have to spend money on sales staff, there is more space for creating new insurance products.

They had 80 employees and over 200,000 customers. They did not manage to get into profit despite good starting capital from investors such as the Berlin Dental Association.

The impact for the consumers may be less severe, however, and could be buffered by its partners.

The Bayerische Allgemeine insurer, for example, had launched comprehensive insurance for bicycles with Element. The Bayrische insurer acted as a mediator, an Element as a risk carrier. Around 5,000 contracts have been concluded over the past three years. The affected customers have been offered a new contract with the same services from the Bayrische, but for 50% higher costs, which they say reflects the risks better, according to Handelsblatt.

These anecdotes do not give us a full picture of what went wrong. We need to wait to see for a in-depth analysis.  But these little anecdotes suggest to us that Element may have been good at designing insurance products, and not so good at pricing risks.

28 January 2025

EU's half-hearted support for Syria

The EU adopted a roadmap for suspending sanctions on Syria. The political will is there, says Kaja Kallas, but are still some technical difficulties that may take weeks before the first restrictions can be lifted. This is the EU. It takes time to make decisions and even more time to implement them. It has been nearly two months since the Assad regime fell.

HTS leader Ahmad al-Sharaa has repeatedly pleaded with Western countries to lift the sanctions imposed on Assad's regime. Al-Sharaa said all the right words that Western countries like to hear. He is promising a committee of experts to work on a constitution over the next three years, with the aim of having the first elections in four years. Al-Sharaa also promised to dissolve all rebel groups, introduce a market economy, and end the military deal with Russia. These are gigantic tasks and will be backed up by financial and logistical support from Turkey and other external actors. A new equilibrium of power has yet to be found, and the road to there will be bumpy.

EU countries do not want to commit too much. Yesterday they agreed on suspending sanctions in a step-by-step approach with a built-in snapback mechanism that can reactivate restrictions if they find that the situation in Syria is taking a turn for the worse. The list of conditions includes the protection of all religious and ethnic minorities and the respect for human rights and women's rights. The EU would monitor these conditions and has to set the red lines of what they consider a breach. What to expect from a fragile country like Syria, which has gone through 13 years of civil war is going to be a challenge. There is a non-negligent risk that the EU will expect too much based on their own understanding and not on what is needed on the ground.

For the Syrian economy the easing of sanctions is a desperately needed life-line. Diplomats told Euronews that the first set of restrictions could be banking, energy and transport. It could deliver new trade and financial opportunities between the EU and Syria. It could bring in foreign reserves, and money from the diaspora. A market economy needs to run before rules can be set into place. Let’s hope that the EU does not put the cart before the horse. 

Not all sanctions will be eased. Sanctions on weapons, surveillance equipment, chemicals, and dual-use technology will remain intact. So does the blacklist with names and entities linked to the Assad regime. HTS is also still considered as a terrorist organisation, following a decision by the United Nations that the EU has transposed. There is still a long way ahead for Syria.

27 January 2025

Trump's seaside view on Gaza

The hopes that Donald Trump would bring peace to the Middle East were short-lived. Trump did not insist on Israel to honour its commitments with Lebanon under the ceasefire deal. And his comments on Palestinian refugees seem to suggest that he has some real estate plans for Gaza.

The first deadline for Israel to leave Lebanon came and went. Israel said it was not ready to leave. But the Lebanese were determined to get back to their homes and the Israeli army out of their villages in South Lebanon, even without protection from the Lebanese army. The Israeli military opened fire against them in some of the villages, and the day ended with 22 dead and over 120 injured. So Hezbollah got their pretext to argue that the country still needs a resistance force. Disarming them will get progressively more difficult the longer Israeli military forces stay on Lebanese soil. The Trump administration extended the cease-fire deal for another 22 days. It is not clear that Israel is ready to leave Lebanon next time, with no trust on both sides and no apparent US pressure.

Over the weekend Trump also suggested clearing out the giant demolition site in Gaza, and for Egypt and Jordan to take in the Palestinians. How many he did not say, but he talked about 1.5m who are without homes now. His language was that of a real estate developer rather than that of a politician. It is most likely a plan hatched up in Israel. It caught the imagination of Trump, who sees potential for this seaside location. His offer to the Palestinians is like a cliché promise, a life in peace, just that it would be as a refugee in a country that is not your own.

Trump’s turn is very bad news for Egypt and Jordan. Jordan is already a host of a large refugee population from Syria and Iraq and home to many Palestinians. They have been living there since the Nakba, the Arabic term for the exodus of Palestinian Arabs following Israel's victory in the first Arab-Israeli war, in 1948. Egypt has taken a hit from the Houthis' maritime blockage, because of the government's reliance on revenues from the Suez Canal. It has also been defending itself against plans to relocate Palestinians in Sinai since the beginning of the conflict.

More importantly, Palestinians in Gaza are unlikely to leave. They have nothing more to lose, ready to stay on their land, even in rubble, we hear them saying. Dying seems better to them than losing their land. Their resistance gives them a purpose.

So if Trump is indeed serious about this idea, how would he convince the Palestinians to leave their land? Why would Trump think that Egypt and Jordan would take in more refugees while the US, a large and wealthy country, does everything to get rid of its migrants? Would Trump offer Palestinians a right to live in the US? Trump may surprise us, but from what we know so far he is unlikely to offer anything remotely attractive to the Palestinians. So they might as well stay where they are.

Egypt and Jordan will also have to think strategically about their response. They both are dependent of US military equipment and funding, but are also crucial countries for the US's own military strategy in the Middle East. They may wait for the storm to pass and the plan to be dropped. They may come up with a Yes, but answer, linking the hosting of the refugees to guarantees for a return back to Gaza once it has been rebuilt or for funding their housing and no settlements in Gaza guarantees. But still the essential question remains: how many Palestinians may be convinced to leave their land to live in refugee camps in Egypt or Jordan? Most likely not enough for Israeli settlers to claim Palestinian land with seaside views.