29 March 2023
Insurrection by French towns
In our lead story this morning, we write about an important shift in the French protest movement - it is now concentrated on the French towns; we also have stories about how Germany's stance on e-fuel is now backfiring in the debate on nuclear; on the ECB's future liquidity policies; on whether we should blame the CDS on what happened at Deutsche Bank; on Greek coalition options; and, below, on how lack of migration affects Italy's labour market.
Today's free story
Italy's real migration crisis
The debate over migration which takes place in Italian politics and media is by now a familiar one. It is one that is often squarely focused on asylum and refugee policies, and humanitarianism. In this entire discourse, migrants, refugees and asylum-seekers are variously described as a responsibility, obligation, burden, or threat. Whether you are pro- or anti, the message is the same: these people, and their presence in Italy, is negative.
But in a country which faces a sizeable contraction in its labour force due to a combination of emigration and an ageing population, this is perhaps not the migration debate Italy should be having. Increasingly, sector by sector, evidence is piling up to show that there are, as is elsewhere in Europe, serious pockets of labour shortage in the Italian economy, which will be increasingly difficult to fill with Italian workers.
One pertinent example is in domestic work. According to a report last week from Il Sole 24 Ore, Italy faces a shortfall of around 23,000 domestic workers and carers per year. These workers are mostly foreign, but regular migration routes for them were shut in 2011.
Domestic work and care is obviously a sector that will grow in size and importance as Italy’s population continues to age. Addressing care in particular is also an important component of addressing the chronic problems Italy faces with labour force participation. If care provisions are short in supply, this will push more Italians out of the labour force, or into precarious work, so they can look after elderly relatives.
The Italian government will look to expand routes for legal migration with a new law that will boost the number of foreign workers Italy takes in each year. The country also has a series of long-standing incentives to try and convince Italians abroad to come back home, though we wonder if these sometimes lead to perverse outcomes. But the approach which the Italian government takes to labour migration strikes us as highly prescriptive, rather than a dynamic one based on what the labour market needs.
The growing need for migrants to fill labour shortages is not unique to Italy. Germany dramatically overhauled their migration system, and France is girding up for what will probably be a very intense debate over immigration reform. The UK’s immigration system is also in flux, as the country tries to figure out whether it’s even possible to move away from an economic model built on foreign workers.
But what strikes us is how different these debates are to Italy’s, though an internal UK government argument over whether to class hairdressers and florists as shortage occupations was quite Italy-like. Elsewhere, there is a bit of give-and-take, recognising that a flexible migration regime is in many instances necessary to boost economic performance. German, French, and British media all discuss Canada, the poster child for a high-immigration society, ad nauseum. This is not something you will hear Italian newspaper columnists or mainstream politicians say much about.
28 March 2023
The pension reform in France has seen it all: a drawn-out battle with trade unions, chaos in the National Assembly, and violence in the streets. Since Emmanuel Macron triggered Art. 49.3 to pass the pension reform without a vote in parliament, there is not one day without some clashes between violent protesters and the police. Today, another general mobilisation will test how far this showdown can go.
Transport will be severely interrupted, while rubbish continues to pile up in Paris as bin collectors and workers at an incineration plant close to Paris stopped working. About 15% of petrol stations are now without fuel due to strikes at refineries. A vast contingent of police has been mobilised today, with a show of force likely to be tested by black-hooded protesters. According to the interior minister, there were about 1500 of those ready to use violence last week. Marianne looked at their profile and found that while those black-hooded protesters were classically precarious intellectuals, they also increasingly include young working-class people. What will happen today will be a precursor to how protests evolve.
So here we are, a necessary reform that all of a sudden has turned explosive, all reason and proportionality lost.
How can the government, and France, move forward from here? To offer a more conciliatory exit from this stand off, Elisabeth Borne has scheduled talks over three weeks, including with members of parliament, political parties, local authorities, and unions. Will trade unions accept the invitation? Laurent Berger, the leader of the largest and most moderate CFGT trade union, followed an unexpectedly hard line on the reform. Yes to talks, but only once the pension reform is put on hold for at least six months to allow for talks. In response, Macron thanked Berger for his sense of responsibility but stood firm by his line, insisting that he would meet them to talk about any other reforms except the pension reform. The two men still won’t meet that way.
The other troubles come from the assembly. Between a radicalised left behind the firebrand Jean-Luc Mélonchon and a right lost in their search for identity, there is the majority without a clear road map. Edouard Philippe warned that if the centre is not organising itself, the country will become ungovernable. The question goes way beyond the pension reform: with whom, how, over what and thanks to whom can the government build sufficient support to continue to govern? Who is able to create majorities? The idea of joining forces with Les Républicains is dead. Attracting single MPs from the left and the right in a variable geometry for individual texts, a tactic Elisabeth Borne is planning to apply, is not so easy if the whiff of dissolution of parliament is in the air and between the testing ambitions of some for the after-Macron era, writes Cecile Cornudet. Borne wants to start with nuclear and renewable energy, inviting the opposition to join in collaborating on a text that could pass the assembly.
There is no easy solution and the potential is there for it to get a lot worse.
27 March 2023
A lot of people underestimated the enormous social consequences of what would happen when inflation last year started to rise in societies with deregulated labour markets. During the 1970s, most wages and pensions rose in lockstep. That posed a problem for the central banks, but it did not distort relative incomes.
What we are seeing today are huge relative income shifts between those who are in a position to bid up their wages and profits, and those who are not. Inflation is therefore not only an economic phenomenon, but a political shock, too.
Today, various public sector trade unions are conducting what they euphemistically call a warning strike. Nothing moves in Germany today. They are striking in support of a demand for a double-digit percentage-point wage increase to compensate for the real loss of income of their members. Acute labour shortages put them in a strong position.
We have a lot of sympathy with a comment by Jasper von Altenbockum im FAZ, who argues that no matter how this ends, it will cause a political crisis. The problem is that governments have not planned for this. They still work on the old assumption that you meet your fiscal targets under the constitutional debt brake, increase defence spending, increase spending on the energy transition, avoid raising taxes, and fund this by squeezing labour. This is a coalition of three parties, each with different spending and taxation priorities. What they didn’t see is that unions will want to be compensated for real income shocks, and that this would blow their entire budget planning. The crisis is especially acute at the local and state level.
Altenbockum notes correctly that the €49 rail ticket, a one-way ticket between any two destinations on the German rail network, is typical of the contradictions. The government wants to make public transport more attractive, but does not accept that this would require more staff, or productivity-enhancing technologies. This inconsistency is evident in all aspects of German politics right now, like the energy transition, which has led to an increased use in coal.
24 March 2023
Beware Scholz bearing gifts - Italian edition
France might not be the only ones who are left feeling double-crossed by Germany’s last minute blockage of the 2035 end to the combustion engine. Italy, who backed the German move to block the proposal, could also come away from the discussions with a feeling of betrayal. Italy’s position is that it did not want an end to the combustion engine, but it backed a different solution to Germany’s. The Italians have more heavily invested in biofuels as their ideal decarbonised fuel source, compared to the German backing for synthetic e-fuels.
But Italy’s problem now is that biofuels did not seem to made it into any revised proposals. Whilst a draft of the amended proposal mentioned e-fuels, it did not mention biofuels. This prompted the Italian government to send a letter to the European Commission formally requesting that biofuels be in scope as well as e-fuels. They have not, so far, received a reply.
Germany and Italy are both the important swing votes in the EU Council on this issue. To block the legislation, at least four member states representing at least 35% of the EU’s population would have to vote against it, since this is an ordinary legislative matter. Assuming Poland and the Czech Republic, who have also both expressed doubts about the ban, vote against it, that would mean needing both Germany and Italy. Without either one, they would not reach either the population threshold or the member states one under the EU qualified majority counting rules.
There is, however, no particular reason now for Germany to back Italy’s biofuel bid. Unless Italy can find votes against from member states comprising 11% of the EU’s population, again assuming Poland and the Czech Republic still don’t back it, they cannot block any amendments.
The only thing Italy could do would be to say that unless biofuels are in scope, it would vote in favour of the original legislation. In that instance, Germany, Poland, and the Czech Republic would be around 5% of population away from a blocking minority. But we doubt that will happen, especially since Giorgia Meloni’s government staked out their position so early on.
What this will, of course, do is reduce trust in Germany further within the rest of the EU. The relationship with France is already in poor shape, partly because of the combustion engine U-turn but also because of divisions over nuclear energy and fiscal rules. Nordic countries are being alienated by the combustion engine move too.
23 March 2023
Flower of Scotland
If you listen to what people say in the Westminster village, you’d be forgiven for thinking that the UK was synonymous with England. The general attitude towards the UK’s other nations is a combination of confusion and apathy. Scotland is a place where you go for a couple of weeks for the Fringe, or a nice whisky tour. But politically, it’s mostly viewed as irrelevant. This view has always been inaccurate, but never more so than now, since one of the UK’s most interesting and consequential political developments is north of the border.
What’s happening in Scotland now is one of the rarest and most fascinating phenomena in politics: a party, the SNP specifically, imploding entirely from the inside out. Nicola Sturgeon’s resignation has triggered a fractious leadership contest between uninspiring candidates. This is probably one of the reasons why the SNP has lost around 30,000 members, something Peter Murrell, the party’s chief executive and Sturgeon’s husband, resigned over after the party tried to cover it up.
One of the most obvious implications of the SNP’s self-destruction is a blow for the cause of Scottish independence. While the SNP isn’t the only Scottish political party that backs independence, it has been the main political proponents of the cause for more than 50 years. Similar movements exist elsewhere in Europe, but it is hard to think of one that’s as intimately associated with one party as is the case in Scotland.
More importantly for the next elections, however, is what happens to the 59 Scottish seats in the Westminster parliament. At the moment, the SNP holds 45 of them. But on current form, it is hard to see that being the case after 2024.
On first appearances, the most obvious beneficiaries would be the Conservatives. They were the second-placed party in Scotland in 2019, both in terms of seats won and total vote percentage. In both, they came far behind the SNP, but in front of Labour, who only holds one Scottish seat.
But the Conservatives face two problems. One is that the SNP’s support base, if they will move anywhere else, has a stronger centre-left tendency. Gone are the days when the party had a more radical centrist bent, giving it the Tartan Tory nickname. The other is that the Scottish Conservatives’ leader, Douglas Ross, is very unpopular in Scotland. When the Conservatives won 13 Scottish Westminster seats in 2017, their best performance there since 1983, they did so with Ruth Davidson, a capable and charismatic figure in tune with Scottish public opinion, as leader in the Scottish Parliament. Now she is out of the picture.
Whether Labour can benefit from the SNP committing political suicide is another story altogether. But if they can, it will change the calculus around their political fortunes. One of the less-discussed shifts against Labour in UK politics was how the SNP destroyed them in a part of the UK where they could reliably bank a good 40-50 seats, sometimes even more. When you need 326 seats to form a majority, these are materially significant numbers.
22 March 2023
Le Pen's quiet ascent
Cui bono? This is the question to ask about the political consequences from the pension reform debacle in France. Amongst the political parties it is clearly Rassemblement National, Marine Le Pen's party. They stayed out of the limelight and away from violent confrontations, quietly benefitting from the fallout of those clashes. It is their electorate, the lower middle class, that stands to lose the most from the pension reform, according to a note from Terra Nova. Compared with the left, they remain the most respectable opponent of the pension reform. There is no chaos on the streets or shouting in the National Assembly. Compared with the conservatives, their MPs have stayed united behind Le Pen.
Once the pension reform is enacted, there is a new electorate for them to explore. Le Pen's pitch to prospective voters is that she is the last chance to undo the pension reform if they elect her into power in 2027. The party is also looking to pick up the pieces from the implosion of Les Républicains. They even promised conservative MPs who backed the motion of confidence against the government not to put up a candidate in their constituency for the next legislative elections.
One of the biggest hurdles for Le Pen is competence. The party just launched a finishing school for their future elite cadre of MPs and administrators. But she herself too has to demonstrate that she has a grip on various dossiers, not just the ones that happen to be her favourite topics. It is one thing to oppose, but quite another to actually assume power. Le Pen seems to be fully aware of this. She rejected the idea of becoming prime minister in case the assembly is dissolved. She fears becoming a target of the very same anger she is now thriving on. The confidence vote has ended that scenario for now.
21 March 2023
Not enough e-fuels for cars
ARD German TV reports on a study by the Potsdam institute for climate impact research, which reveals the utter lack of reality in the German debate about e-fuels. Even in the best-case scenario, Germany will struggle to get enough e-fuels to meet its indispensable demand, from shipping, air transport and the chemical industry. These will all still require liquid hydrocarbons as their energy source. In other words, there won't be anything left for cars. The whole FDP debate about the exemption for e-fuelled power cars after 2035 is a smoke screen.
The politics of this is that the FDP is trying to arrest its political decline by appealing to rural voters, who are dependent on the motorcar for transport. A recent poll in Germany has shown that around two thirds of the population opposes the end of the fuel-driven car.
E-fuels are based on the extraction of hydrogen from water through a process called electrolysis. In a second stage the hydrogen then combines with carbon dioxide to produce hydrocarbons. The idea is to use green energy for the production of e-fuels, for use by ships and airplanes. The same goes for parts of the chemical industry. Together, they account for 40% of Germany's total demand for liquid hydrocarbons. The institute's simulation assumes the relatively optimistic assumption that air transport stays at current levels.
A far more likely scenario is that there won't be enough e-fuels around even to satisfy the indispensable demand. So far, only 60 production facilities are currently in the pipeline worldwide. Of those, only a small fraction are funded. Even if they all get funded, they will only produce a tiny fraction of what Germany itself demands. The idea that there is enough left for cars is completely unrealistic.
What this is telling us, beyond the petty FDP politics, is that the Germans are fighting tooth and nail to squeeze the last hydrocarbons into their cars, rather than focus on next generation technologies. All for the sake of a couple of percentage points in the polls.
It is the classic losers' strategy.
20 March 2023
AfD is rising and rising
Germany's electoral reform passed the Bundestag at the end of last week. It is a big deal. It removes a technical gateway that secures parliamentary representation for parties that fall under the representation threshold of 5%. The Left Party was in that situation in the last elections. The CSU could be next. The contours of how this can backfire are already becoming visible.
The political impact of the war in Ukraine is radicalisation. The big shifts that are happening right now is that the AfD is rising, and that the Left could regroup. Sahra Wagenknecht said she will decide before the end of the year whether to set up a new party in opposition to the Left Party. If she does, we would expect such a party to attract more than 5% of the votes, possibly quite a bit more. This means the radical fringe of German society would be fully represented, which would make it harder for the centrist parties to form coalitions.
The latest German polls already show how difficult this could be. The AfD has now overtaken the Greens in one poll. We have to see whether this is a trend, but we think it might be. It is the only party that is opposed to supporting Ukraine, a sentiment that is shared by around one third of the population. The FDP hovers in the 5-7% range. The CDU/CSU is strengthening slowly. It is now back to around 30%, on a steady progression from the last election, when it obtained 24% of the vote. If the Left Party, or a successor party of the left, were once again represented in the parliament, the current traffic light coalition would not have a majority under any of the polls. Without the Left Party, it’s a tie, too close to call. This is why the coalition badly wants this reform passed. But we think it underestimated the dynamic effects.
We should recall that the last elections were decided by voter movements during the last three months. It is not clear at all that the Germans prefer Friedrich Merz over Olaf Scholz. There is what the Germans call a chancellor-bonus that might benefit Scholz at the end. Nor does the CDU offer any feasible coalition options, other than another grand coalition.
17 March 2023
Cars 4 - a horror movie
The FDP saga has a fascinatingly morose quality to it. Of the many contradictions, this to us is the most striking: this is a party that pitched itself to the techie generation with promises of modernisation and digitalisation. And here they are, in a life-and-death fight for the survival of the fuel-driven motor car. Does it not occur to them that they be should perhaps be focusing on the next-generation mobility technologies like artificial intelligence and changes to road infrastructure to support it? The young tech generation is not as big on cars as FDP folks are.
FAZ had a depressing story this morning, according to which Volker Wissing, the German transport minister, has come up with a mindbogglingly devious technocratic proposal to break the deadlock after he himself blocked the final deal on the 2035 phase-out for fuel-driven cars. The hook Wissing used was a clause in the deal under which the European Commission would allow fuel-driven fleet cars to be registered after 2035 so long as they use e-fuels. The deal says the Commission would make a proposal, but hasn’t done so, and does not appear to be in a hurry either. Wissing tied his go-ahead to that happening first. He is now written to Frans Timmermans, the vice-president of the Commission, who, we suppose, must be rolling his eyes at those antics.
Wissing wants the Commission to issue a so-called delegated act, a procedure that is harder to unravel than ordinary legislation because voting it down in the EU Council requires a qualified majority against it. As FAZ points out, there are a number of obstacles to this route. The most important reason is legal: delegated acts can only be brought forward if there's a basis for it in the original legislation. If no such basis exists in the 2035 phase-out legislation, they would have to amend it to add one.
Wissing essentially wants the Commission to override the 2035 deal, so that Germany can produce the only cars it knows how to build at a large profit. The position of the Commission is that they can only announce a statement of intent at this point.
Our advice to the Commission is to keep calm, and see whether the Germans are ready to torpedo the entire deal. What is happening here is that the FDP needs its 15 minutes of fame, and that they picked, as usual, the wrong subject. The other is, of course, the stability pact reform.
What this story shows is that Germany is choosing the protectionist route, not the innovative one. That's the change of era that is happening.
16 March 2023
What's the Bundeswehr for?
All those who believe in Olaf Scholz's change-of-era fairytale should perhaps read the annual Bundestag report on the state of the armed forces. The author is a member of the SPD, Eva Högl, who has the rare quality of not mincing words. Of course, the German army is not ready to fight. This is not what it is there for. But it is also starting to struggle to meet its commitments to Nato. It has become a cesspit of anti-semitism and sexual violence. The biggest registered offence is the Hitler salute.
She noted that of the promised €100bn budget facility for repairs, not a single cent has arrived. This is how the smoke and mirrors of German, and increasingly European, budget planning works. It is mostly an announcement effect. We have reported on several occasions before that the Bundeswehr suffers from derelict equipment, like Puma infantry fighting vehicles and Eurofighter jets. A majority of the Leopard 2 tanks are also not in working order. But the biggest shortage of all is the same as in German industry more genrally: staff.
The author writes that it would take some €300bn to reform the Bundeswehr, money that Germany is unlikely to make available, given the competing political priorities, namely the expensive energy transition and Christian Lindner’s assertion to stay within the legal framework of the constitutional debt brake. All countries in Europe are facing acute fiscal constraints going forward. That was also painfully clear in the UK’s budget yesterday.
Concrete problems relate to procurement. An example is the planned purchase of a helmet from a US supplier, which has been in a testing phase for nine years. Army barracks are in a derelict state, often with no functioning toilets and plumbing, and, of course, no internet connection.
The Bundeswehr is clearly not an army designed to fight. In that respect, it is very much in accordance with German policy since the second world war. The change of era is at most in ambitions, but given the lack of a strategic plan, we don't buy it.
The report did not talk about Ukraine, but surely raises the question of how long Germany can keep up the support.