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28 October 2021

EU vs Poland

Our main story is about the EU's now confirmed daily fines against Poland, and how the strategy could backfire; we also have stories on the political lessons from Britain's budget day; on the UK's robust economic performance; on the large number of job resignations in Italy; on whether falling unemployment could mark a turning point for Macron; and, below, on his support for French fishermen.

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Today's free story

What the fish..

Fish is a highly sensitive subject for Brexiteers, and for the French. Brexit changed the rules, and gave rise to a row that is now being battled out in public. The latest move comes from the French government, who have published a list of sanctions it will impose as of next week if its fishermen do not get their fishing licenses to continue fishing in British waters.

Under the new Brexit rules, French vessels can continue to fish in British waters if they have a history of fishing there. But they would need to have a UK-granted license for this.

France now claims that only half of the requested licenses have been granted, while the UK insists that it has granted 98%. These two numbers obviously refer to different things, but eventually the two numbers will be made relatable. We also may get an understanding of what the problem really is. Is the evidence about past activities from the vessels not enough? Are these delaying tactics with a political message behind them?

France has reported the issue to the European Commission and the other EU member states, in line with the provisions of the withdrawal agreement. They have yet to come forth with an opinion on the matter.

The French decided not to wait that long, to take matters into their hands, and press forward by threatening sanctions. Apart from banning vessels from reaching French ports, they also list delaying controls on boats and trucks, and if that is not enough, cutting off energy to Jersey.

The move will make it more difficult to negotiate a solution at a diplomatic level. It turns the fish row into political dynamite.

These are election times, and a crucial moment in EU history, as the departure of Angela Merkel leaves a leadership vacuum. Macron has assumed leadership by putting his foot down on fish. Will the others follow? We have our doubts. British mackerel is not to everyone’s taste.

27 October 2021

Zemmour - accelerating pacemaker

Eric Zemmour is determining the pace of the presidential race in France at the moment. With his polemic attacks and provocative appearances, Zemmour electrifies the debate like none of the other candidates. The dilemma for everyone else is to decide whether or not to react.

Marine Le Pen has no option but to counter Zemmour. It will be a fight to the bitter end for an electorate that had been in her camp quasi by default. Zemmour accuses Le Pen of not being able to win. She rebukes this by saying that he is not going to beat any of the other candidates. On every programmatic point he makes, Le Pen adds that she had said it first. And on the international scene, Le Pen makes sure everyone sees which league she is playing in, getting a courteous reception by Victor Orban.

The left is also united in dismissing Zemmour, being at the polar opposite end of what he stands for. Les Républicains are waking up to the idea that Zemmour is not simply going to disappear. There are two camps disputing whether to counter or accommodate his positions, familiar grounds given what they have been through since the Le Pen family showed up on the political scene.

What to do with Zemmour is the most difficult to answer for Emmanuel Macron, writes Nicholas Beytout. Macron is, like Zemmour, not a declared candidate yet. But, as president, Macron can also not simply campaign openly like Zemmour does. The result is that he makes sublime references, like in the Dreyfus museum, that not many get. This will not stop the ascent of Zemmour.

What makes us slightly optimistic, though, is that, as so often in French politics, a stellar rise is followed by a stellar fall from grace. as for when and how this will happen, we have no clue. It could be before the elections, but the turn in fate could also come after. How Zemmour will emerge from the fall may be even more decisive for long term politics in France than the mad race we are witnessing now.

26 October 2021

Erdogan wins

Turkey's diplomatic row came to a halt with a reassuring tweet that allowed Recep Tayyip Erdogan to step down from his order to declare ten Western diplomats persona non grata after they had called for a just and speedy resolution to Osman Kavala's case. The de-escalation statement, brokered by the US, and issued by all ten embassies, says that they comply with the Vienna convention on diplomatic relations' imperative to not interfere in a country’s internal affairs. 

Erdogan might have rowed back from expelling the diplomats, but he clearly won this round. He turned this diplomatic spat into a personalised matter of national pride, contenting himself that the ambassadors had learned their lessons. Mustafa Sentop, the Turkish Parliament's speaker, said Turkey's constitution banned discussion of ongoing court cases including national politicians, and that the envoy’s statement was a clear and disrespectful interference. Even some members in the opposition agreed that the West went too far, while at the same time warning that Erdogan was using the spat to distract from real problems at home. But Erdogan, by finally not going through with the threat to escalate the diplomatic spat, prevented economic fallout that would have wreaked havoc on the already weakened Turkish economy. Everyone is relieved, life goes on, and Erdogan is back in charge. A bold and risky play with expectations that paid off for him.

There is already one clear victim of this diplomatic manoeuvring: the entrepreneur and philanthropist Osman Kavala himself. A call that was meant to help him after four years in prison without sentence nor evidence has turned into a showdown of international power wrestling and domestic point scoring.

We still do not know who initiated the call amongst the ambassadors. Some reports suggest it was the US. Others noted that the UK, Spain, and Italy were conspicuously absent. The ten ambassadors who signed the call were from the US, France, Germany, Netherlands, Canada, Denmark, Sweden, Finland, Norway and New Zealand. All of them did their mea culpa and tweeted or re-tweeted the statement that they would abide by the Vienna convention, and not interfere in domestic affairs. From the Western perspective, there is still a debate about whether the ambassadors overstepped the boundaries between external and internal affairs with their calls to apply ECHR rulings for Council of Europe members such as Turkey. Or whether it was the role of ambassadors or government officials to issue such a reminder. But these are sideshows now.

The West emerged from another episode of fire fighting diplomacy with Turkey. Erdogan won this round. Will Europe wise up enough to play the next?

25 October 2021

The next Navalny

It’s not big news at the moment, but the story of Mikheil Saakashvili, the former Georgian president, might be in the headlines more soon. Saakashvili returned to Georgia this month after eight years in exile. He was arrested on October 1, having been convicted of abuse of power in absentia in 2018, and has been on hunger strike ever since. Last week a medical team revealed that he is in extremely poor health, and that his starvation is exacerbating a rare blood condition. He received a blood transfusion on Friday, and his doctor has recommended hospitalisation. Close associates worry he will not survive. There are echoes of jailed Russian opposition leader Alexei Navalny here. 

Saakashvili first swept to power in the bloodless Rose Revolution of 2003. Grassroots protests over disputed parliamentary elections ballooned into regime change, and he was front and centre. He brought a pro-western agenda with him. 

Saakashvili served as president from 2004 to 2013, during which time Georgia experienced unprecedented economic growth and a marked reduction in corruption: he famously fired more than 10,000 traffic police officers in 2005. Relations with the EU also hit a high when Georgia joined the Eastern Partnership in 2009. 

But Saakashvili’s reform agenda drew the ire of Vladimir Putin. His tenure was marked by the Russo-Georgian war of 2008, which saw Russia occupy Abkhazia and South Ossetia, later recognising both as independent states. The war came just months after Georgia received assurances of eventual Nato membership at a summit in Bucharest.

As early as 2010, Saakashvili was facing accusations from opponents of concentrating power in his own office, and using riot police to crush opposition rallies. The Georgian Dream party, led by billionaire oligarch Bidzina Ivanishvili, brought UNM’s reign to an end in 2012, and Saakashvili himself was constitutionally barred from seeking a third term. UNM accepted the outcome, marking the country’s first peaceful transfer of power, and Saakashvili left Georgia in 2013. The charges brought against him afterwards were widely viewed as political. 

He had been living in Ukraine, where he obtained citizenship, supported the Euromaidan movement, served as governor of Odessa Oblast, and later headed the executive committee of the National Reform Council. His return to Georgia surprised many, and came in the midst of Georgia’s local elections, which will conclude on October 30. 

So why come back now? As Saakashvili wrote in a letter to EU leaders, Georgia has been backsliding democratically in recent years. From media crackdowns to voter intimidation and electoral fraud, there is a very real fear among Georgia’s pro-western forces that the country is slipping back into Russia’s orbit. This fear seemed to be confirmed a few weeks ago, when the government declined to apply for the second tranche of a €150m EU macro financial assistance package in order to avoid obligations to reform its judiciary. 

We think Saakashvili miscalculated when he decided to return. Though tens of thousands took to the streets to protest his arrest, regime change seems unlikely at present. Saakashvili lacks support from neighbours and European allies because no one dares risk antagonizing Russia. Too many are dependent on Russian gas, and Europe’s energy crisis will get worse before it gets better. Georgia itself is economically dependent on Russia, not only for energy: its exports there more than doubled between 2014 and 2019.

And things are even worse at the EU level. 

Keen to distract from the Sofagate scandal, Charles Michel made the bold and foolish decision to mediate between Georgian Dream and the opposition parties last spring. Believing he could score a quick and easy win, Michel convinced Georgian Dream to agree to strategic reforms and a provision setting a mysterious minimum threshold of 43% support in the local elections. Had the party failed to exceed the threshold, it would have triggered a snap election. Except Georgian Dream later withdrew from the agreement, leaving Michel with egg on his face. 

Though Saakashvili’s return pushed his party several percentage points higher in the elections, forcing runoffs in some areas, Georgian Dream ultimately took 46% of the vote. Saakashvili has since made a personal entreaty to Michel from prison to ask for help, while a group of former and current European officials signed a letter of support calling for his release last week. The EU remains silent.

This is unfortunate because working to secure Saakashvili’s release would make Michel a hero in Georgia and other Eastern Partnership countries, where the economic benefits of closer ties with the EU have not been keenly felt. It would mean undermining an oligarchic system heavily influenced by Moscow. Ivanishvili is a major shareholder in Gazprom, meaning that Georgian democracy, too, is controlled by Russian gas. It would also send the message that the EU is capable of intervening to uphold its own values and support one of its longstanding champions. 

Of course, regular readers of Eurointelligence will know that we do not expect the EU to do the right thing. The energy crisis is more pressing, and the EU cannot count on American support when confronting Russia. Like Navalny, Saakashvili might soon be forgotten. If he survives, that is.

22 October 2021

Estonia's crypto crackdown

Estonia’s Financial Intelligence Unit announced last week that it has now revoked 2000 virtual asset service provider licenses, Vasps, granted to crypto firms, the latest development in an ongoing crackdown that started in June 2020.

It kicked off when companies that had failed to launch operations within six months of licensure had their Vasps revoked – that wiped 500 off the board – and the FIU continued thinning the herd throughout 2020. By the end of the year, 70% of Vasps – 1808 in total – had been revoked, with FIU citing the growing risk of money laundering and terrorist financing.

The reasoning was a little different this time around. There were the usual concerns about money laundering, terrorist financing, scams and hacks, but Matis Mäeker, head of the FIU, also told Eesti Ekspress that the Estonian crypto industry contributes nothing significant to the country’s tax authorities, nor does it creates jobs. He called for stricter capital requirements for the industry, which could include a requirement to hold a minimum of €350,000 in cash or securities, compared to €12,000 at present.

More significantly, Mäeker called for a total reset of crypto regulations in the country, arguing the government should turn the regulation to zero and begin the licensing process from scratch.

The Estonian case is interesting because the country was once widely viewed as a crypto trailblazer, passing a series of laws aimed at encouraging development of crypto exchanges and initial coin offerings, or ICOs, in 2017. But as Cointelegraph reports, the regulatory landscape in Estonia has evolved since then, and the country’s Know Your Customer regulations are now more stringent than what is required under EU law.

This is a teachable moment, both for governments and the industry. It is becoming increasingly obvious that speed, agility, and reactivity will be essential to regulate such a fast-evolving industry. But revoking the licenses of an entire industry sends the wrong message and will damage investor confidence, as well as trust between the two sides.

On the industry side, many stakeholders are pro-regulation, but legitimacy will entail paying taxes. Much like the Gafa big tech companies, the crypto industry has been reluctant to do so. And we see a bigger problem looming on the horizon, in the space where crypto and big tech converge.

Earlier this month Fabio Panetta, an ECB executive board member, warned that Gafa companies’ fast-growing financial services pose a threat to the banking sector because their size, large customer base and access to user data makes them more relevant to global players in the market. He also highlighted the rapid growth of crypto assets and stablecoins, and warned that if the two industries should converge – that is, if big tech begins issuing stablecoins – it would alter the functioning of global markets. According to Panetta:

“As the assets managed by stablecoins increase, banks’ funding conditions could become more expensive and volatile. For instance, competition for liquid resources would make these more scarce, and thus increase their price, forcing banks to turn to more expensive forms of short-term funding.”

Opposition to the crypto and DeFi industries is justifiable under the argument that it will starve governments and the banking system of the resources they need to function. But as we’ve been arguing, regulating the industry will prove difficult because it is decentralised. Estonia could be the canary in the coal mine. It will be interesting to see what the FIU does in the event companies with revoked licenses continue operating.

21 October 2021

How to meet China on the road?

Global Gateway is the EU’s latest answer to China’s One Belt, One Road strategy. The name itself does not sound promising. China captures the imagination with a reference to the once mighty silk route that connected east and west between the 2nd and 18th century. Global Gateway sounds like a landing strip of an airport. With all the huffing and puffing about greener transport, air traffic is actually what they came up with.

But the geopolitical challenge is clear: China gives out loans to build infrastructure projects in developing countries, making them financially dependent and pliable to Chinese economic interests, at the same time bringing in Chinese suppliers and norms to build those projects. This is foreign policy pursued through economics. The European Union, long time resistant to meddling those two domains, is finally waking up to this new reality.

European member states increased the pressure on the European Commission to rewrite their rule book and come up with something that integrates strategic interests in EU grant giving. It makes no sense for the EU to build a road from a copper mine, owned by the Chinese, to a port, owned by the Chinese, conceded Ursula von Der Leyen. The big rethink is also happening in some countries, including Germany. Their view on China has been changing, as it takes a more aggressive stance and refuses to accept any criticism, and as the US is stepping up its counter push against China.

With Belt and Road, China is selling a concept: investing in large infrastructure projects in developing countries using Chinese companies to build them, and getting a foot into the regulatory and financial ecosystem there. They sell it as a win-win to its partners, but in reality the big win is for China, as it installs itself and its values for the long term on their territory. No military action needed.

Europe had hoped to export its norms to those developing countries, but how can this stand up to China showing up there with lots of cash? Les Echos quoted figures that even reveal that this is all smoke and mirrors: Between 2013 and 2018 China gave out €460bn in credits and €36bn in direct subsidies. The European Union, taking national and community level together, gave €410bn in direct grants, not credits, over the same period. Yet, everyone is talking about China, not the EU.

Will there be a turn of fate in the near future? Some of those developing countries already start to see that not all that glitters is gold. Montenegro ended up with a huge pile of debt for a motorway that no one needs. US-China relations are also cooling down the appetite for more China in Europe.

But the EU needs to change not only its geopolitical role, but the way it makes decisions on infrastructure projects. This is where the big rethink has to happen. The European Commission's procedures will have to change. What infrastructure does the EU want to support? With what partners? What is the long term strategy behind it? The EU used to respond in a technocratic way. At some point, the geopolitical reality is permeating through to the ground level. The European Commission will have to decide the extent to which it wants to take on a more active role.

20 October 2021

Crypto: a way around sanctions?

Discussions about economic sanctions usually focus on the politics behind them, and its knock-on effects. What is usually not questioned is the implicit assumption that sanctions are indeed enforceable. As long as the US dollar was the leading currency, and all transactions had at some stage a dollar component that linked it to the US finance system, sanctions were indeed enforceable.

But the global financial system is about to change, and with it the predominance of the dollar as a currency for clearing international transactions will change too. Hostile states and even allies are already rowing back the use of the dollar in cross border transactions, and there are new threats to the effectiveness of sanctions: crypto currencies. These are the findings of a report that the US treasury commissioned, out of concern about the role of the dollar, but also due to the increased use of sanctions over the past two decades. The number of sanctions against governments, government officials, personalities and companies has increased tenfold within 20 years, to a total of 9400, according to the FAZ. Secondary sanctions increased from only 2 in 2018 to 104 by the end of Donald Trump’s presidency.

In the light of these findings, the US government is renewing its sanctions approach. If sanctions prompt criminals to use crypto instead, they no longer seem an effective tool of coercion in foreign policy. The new mantra under the Biden administration is to coordinate better with allies, and test sanctions according to whether they meet a strategic target, as well as whether they are precise enough and keep collateral damage to a minimum. Backing down on sanctions over Nord Stream 2 seems just the beginning of the end of an era.

19 October 2021

Will EU sanctions stop Belarus?

EU foreign ministers are looking to impose sanctions on Belarus for flying in refugees from the Middle East and sending them in buses to the borders of Lithuania, Latvia, and Poland. Migrants end up trapped between borders, instrumentalised by Belarus against the EU, while EU countries ramp up border defences that include illegal pushbacks in Poland. Bordering EU member states, backed by Germany, want to levy sanctions on airlines that fly migrants from refugee-hosting countries to Belarus, Politico reports. Ireland, which is leasing out most of those planes, wants those sanctions to be limited to new leasing only, arguing existing ones are contractually binding. Some airlines already stopped the practice of flying in migrants from Turkey and Iraq, while new airlines entered the market, according to the Lithuanian foreign minister.

Since August there have been reports of Iraqis, Syrians, Iranians, Afghans and Yemenis who were lured to fly to Minsk by Belarusian authorities to reach the EU's external border with Poland and Lithuania. Advertisements in Arabic on Tiktok and Telegram promise a promenade at the Belarus border, just a swim away from the EU. This sounds attractive compared to a hazardous journey through the Mediterranean Sea, with the prospect of ending up in an overcrowded camp. Since Sunday, citizens from Iran, Pakistan, Egypt, Jordan, and South Africa can to travel to five other Belarusian airports without a visa, writes Der Standard. They must have already had a visa for the Schengen area or an EU country before. This will increase the numbers as it makes it easier for many people to enter Belarus. That is as long as there are flights.

What awaits them is not what they prepared for. Stripped of their valuables, the migrants are sent through border fences by the Belarusian military. Polish forces push them back with nowhere to go. Poland now wants to build a wall, while Lithuania is increasing its border controls. Photos and videos show how desperate the situation is at the borders. Seven people have died so far, and more deaths will come as the temperatures are dropping. This is a humanitarian crisis at the borders of the EU.

This is not the refugee crisis like we had 2015. But, what is at stake is overcoming the inability to define a dignified common EU strategy towards Belarus.

18 October 2021

A Hungarian surprise

The second round of a historic primary contest among Hungary’s opposition has concluded with a result that nobody would have thought possible even a month ago. Péter Márki-Zay, an independent candidate, has handily beaten Klára Dobrev, with 56.7% of the vote.

Dobrev is the leader of one of Hungary’s largest opposition parties, the centre-left Democratic Coalition, and a vice-president in the European Parliament. Márki-Zay is mayor of a small city in Hungary’s southeast with a population of 44,000.

We have spent the last several weeks following the various twists and turns of the primary, after the first round vaulted Márki-Zay into the runoff in the first place. The big question, for Hungary and the EU, is whether he can beat Viktor Orbán at the elections in April 2022.

Three factors will be crucial to Hungary’s united opposition, and their chances of success. The first is being able to stay together. Hungary’s electoral system, which Orbán put in place in 2012, allocates 106 of the Parliament’s 199 seats via first-past-the-post constituencies.

This has made it easy for Fidesz to win the two-thirds supermajorities it needs to amend the constitution at will, even with less than 50% of the vote in elections in 2014 and 2018. The united opposition and Fidesz are running neck-and-neck in the polls. So, any splits would seal their fate.

While a schism is still possible, Márki-Zay’s victory made it less likely. Dobrev attracted the ire of other opposition figures because of her links to a controversial former prime minister, Ferenc Gyurcsány. Some factions, like the liberal Momentum party, believed that Dobrev would have had no chance of victory at the helm. Márki-Zay winning averted their possible departure from the coalition.

The second is the opposition’s ability to mobilise supporters. This is essential for them given Orbán’s almost total control over the mainstream media in Hungary. The state-owned MTI news agency spent most of Sunday ignoring the primary. The opposition will almost definitely lose the air war, so they need to make up for it in the ground war.

Here, the picture from the primaries is more mixed. Since Márki-Zay does not come from an established party, he does not have much of a campaigning apparatus behind him personally. But the primary process itself could be a boon for him, driving opposition voter engagement. The question is whether they can sustain this enthusiasm for the next five months.

Finally, there is the economy. Orbán’s electoral success has been underwritten by economic growth. During his premiership, Hungary’s GDP per capita, in purchasing power parity terms, has gone from $21,700 to $33,000.

But this could change very quickly. Hungary is experiencing a nasty spate of inflation, which hit 5.5% in September despite tightening from the central bank. At its current trajectory, it could easily worsen. Even if this inflation is transitory, it could easily peak right before or during the election.

To prevail over Orbán, Márki-Zay is going to need both skill and luck. He has to find ways to keep his diverse coalition together, and energise grassroots supporters. And Orbán's reputation for delivering higher living standards will need to take a knock as well.

15 October 2021

Central banker, meet crypto!

We have been chronicling the Luddite tendency of central bankers with some concern, specifically when they hyperventilate about cryptocurrencies and cryptofinance. Our favourite line is Christine Lagarde’s characterisation of bitcoin as funny money. It ain’t funny.

We thought that Sir Jon Cunliff, deputy governor of the Bank of England, in charge of financial stability, got it right with the assertion that crypto is here to stay, and that it needs regulation. Crypto regulation is hugely complicated, as we have been writing before, because the crypto networks are physically impenetrable. Financial contracts in the Ethereum blockchain are technically enforced by algorithms, not by law courts. It is a world that is maximally incompatible with the world of central banking and financial regulation.

Sir Jon is a rare breed of central banker who is optimistic about crypto, because it promised genuine innovation. This is the transformation of financial services, essentially the prospect of a mass homicide of the unproductive middlemen that are so ubiquitous in the industry, like brokers, backroom operatives, and people who spend their time pontificating about financial regulations in quangos.

There is, of course, no way the world can regulate crypto in the way it regulates banks. But what it can do is regulate investments by large domiciled institutions. Sir Jon notes that unbacked crypto-assets make up 95% of the total, at present $2.3bn. Price movements of crypto assets are twelve times more volatile than the S&P 500. Phase one of the crypto craze has been occupied by techies. We are now entering a phase where traditional investors are showing interest. Banks are now to offer custodial services.

The nightmare scenario for regulators is the following where

...a severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.

We are less optimistic than he is on the extent to which the cryptomarkets can be regulated once they start to crowd out existing financial service and become the dominant part of the financial system. Crypto might end up not only eating up the financial middlemen, but also the financial regulator. We are not naive about concepts such as self-regulation, a known oxymoron. But algorithms can replicate and enforce legal contracts, so there is no reason to think that they should not be able to enforce regulation too. We are currently in a stage of development where only the rudimentary infrastructure is operational: the blockchain and some services. For this to develop into a mature financial market will require decades of financial innovation.