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15 January 2021

Hawks are descending

Our main story on this busy news day has been the ECB's minutes - which are unexpectedly hawkish in tone. We also have stories on what is going wrong in Dutch politics; and in Italian politics; and in French politics. We also write about the CDU's political timetable; the US digital tax sanctions; and Nordstream 2 construction delays.

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Today's free story

Back to square 1 for Macron?

The French government proclaimed a 6pm curfew to prevent the spread of the latest virus mutations. While this may be necessary, the longer the confinement, the more pessimistic and risk-averse people become. After the first lockdown people were much more positive, but fears about their future and health risks are spreading with consecutive lockdowns and curfews. The nation embarked with Emmanuel Macron in 2017 on a great adventure to transform the country. Transformation did indeed happen, but not as planned and not primarily through politics, but insurrection (gilets jaunes) and a virus that forced the country under lockdown. Once the pandemic recedes, should Macron return to his role as reformer?

A relevant Isop poll for Les Echos casts doubt on this. It shows that the French agree with Macron's mandate to transform the country, but see little evidence of real change since he came to power three years ago. A strong and courageous reformer is much less appreciated today. Instead there is an increased desire for reforms to be fair and balanced, as well as transparent and well-communicated to the public. 

The pandemic and the lockdowns clearly changed voters' priorities. The liberate and protect slogan of 2017 lost its gusto for liberalisation, while the desire for protection increased. Transformation and change are still terms with a positive connotation for 70% of those polled, but 68% also say that the multiple reforms of Macron's first years had a negative impact on them, in particular amongst the elderly and low income classes. The most desired protective measures are: relocation of companies, border controls, reduced inequality and fighting against Islamist radicals. 

France as a country for start-ups no longer seems appealing. Fewer French are in favour of a digitalised France, at 34%, down from 50% in 2017. And the desire for less Europe increased to 49%, up from 44% in 2017. 

There is a clear cut between high-income and low-income households. The lower the income or level of education, the more hostile they are towards a reform that does not protect. This fracture in society means that the two camps push in opposite directions: those who want to see more reforms and those who want to roll back the state to its role as protector. How to proceed from here? It all depends on what Macron can do before 2022.

14 January 2021

Getting nervous about crypto

Central bankers and economists hate private crypto-currencies because they constitute a threat to the fiat money system, to which many of them owe their jobs and influence. Many of the bitcoin groupies hate the fiat money system because they regard it as part of a deep-state conspiracy. They also hate economic arguments. The debate on crypto thus consists mostly of people screaming at each other.

We belong to the he-said-she-said crowd, watching this cockfight from a safe distance. Our specific interest in this debate is the impact of digital currencies - private and public - on the stability and cohesion of the monetary union. The ECB is not only the lender of last resort. It is the only well-functioning institution in the eurozone. If central banks become less effective because of technological innovation, then surely this will be a problem for a monetary union that relies on the ECB for its oxygen.

We noted a comment from Christine Lagarde yesterday, calling for regulation of bitcoin. She called bitcoin a speculative asset that had given rise to some funny business as she called it, including money laundering. She said the regulation would have to take place at a global level.

Remember the Tobin tax - the idea of a global financial transactions tax to tame the world of shadow banking? Even the EU could not agree on a financial transactions tax so far, not even among a smaller group of countries who adopted the enhanced co-operation procedure to get this done. Global crypto regulation is a much taller order. It is usually a sign of desperation when you call for global regulation. We just don't think we will succeed to enlist the help of China or Singapore to help the ECB maintain its money monopoly.

The Times had an interesting article contrasting the EU's approach with the UK's. The Treasury has opened a consultation on the regulation of crypto assets and stablecoins. Like the EU, the UK, too, is concerned about money laundering. But John Glen, economic secretary to the UK Treasury, also said the UK wanted to make most of the opportunities posed by these innovations. The UK's approach is thus not the same as Lagarde's. What this is telling us is that if there is no common position on crypto assets in Europe, there can be no common global regulation either. 

For an opinionated but factual background on the effect of stablecoins, we recommend an article by Frances Coppola, who explains their complex relationship with cryptocurrencies. The most important stablecoin is USDT. The idea behind a stablecoin is to guarantee the value of the cryptocurrencies in dollar terms and to hedge volatility risk. USDT does not have a 1:1 dollar backing. It is not the equivalent of a currency board. Much of the enthusiasm behind Bitcoin relies on the idea that the issuer of USDT, a company called Tether, can maintain the dollar peg. Her conclusion is that USDT makes it easier for people to trade cryptocurrencies - an intrinsically scarce asset subject to excess demand. But USDT may end up exacerbating the price decline in the event of a bitcoin crash. 

13 January 2021

The CAI's corporate benefits

Dominic Raab, the British foreign secretary, unveiled new measures designed to ensure no British companies allow the use of forced Uighur labour from Xinjiang in their supply chain yesterday. In the EU, Airbus and Deutsche Telekom are set to benefit from leaders’ willingness to look the other way.  

Raab’s announcement came as news was breaking that Germany and France had secured side deals for two important multinationals during negotiations for the yet-to-be-published EU-China comprehensive agreement on investment (CAI). Wirtschaftswoche broke the story, reporting that within five years, Deutsche Telekom will receive a license to provide mobile services in China. In return, telecoms operator China Mobile will be permitted to enter the German market.

We agree with Thorsten Benner, director of the Global Public Policy Institute, who described it as the side deal from hell since it will expose German critical infrastructure even further. As we’ve previously noted, the reciprocal benefits are also unclear. Under the CAI, EU telecoms investment in China will be capped at less than 50%. Deutsche Telekom will have to enter a joint venture with a Chinese firm to operate in China. The Commission reports that China has committed to ending technology transfer under the CAI. We are extremely sceptical.

Details on the Airbus deal were less concrete. Wirtschaftswoche wrote that China wants to benefit from technology transfer from Airbus, which has been operating a factory in Tianjin since 2009. It wants to become a global player in aviation manufacturing by getting more involved in Airbus production and supply, with the goal of selling its own aircraft in the global market.

We don’t see how France stands to benefit in this case, but we would point to $35bn of contracts Airbus signed with China in 2019 to supply 300 aircraft. It took years for Macron to finalise the deal, and we imagine he is keen to protect it. Chinese customers accounted for nearly 20% of Airbus deliveries last year. But its deliveries of completed planes fell by 34% in 2020, while global orders are down 65% this year.

Also yesterday, Franck Riester, France’s junior minister for trade, was forced to admit that the EU will not wait for Beijing to adopt a ban on forced labour before ratifying the CAI. It will instead establish a calendar for Beijing's reforms. In Germany, meanwhile, Bild reported that China had benefitted from €283m of German development spending by successfully bidding on international projects that align with its belt and road initiative.

As we have been arguing, mercantilism is not a strategy, and corporate interests should not dictate foreign policy. The CAI is incompatible with EU values. It is a bad deal in every sense. 

12 January 2021

Angela Merkel is right

If we had been asked to conceive of the two most counter-productive responses to last week's mob attack on Congress, it would be to impeach Donald Trump for the sole purpose of trying to prevent him from running for president in 2024, and removing him from social media. If American liberals feel that censorship is the only way they can defeat Trump, they are in more trouble than even we thought they were.

We don't often agree with Angela Merkel, but she made two pertinent observations recently about US politics: the first is that there is no such thing as a stable majority in American politics that supports multilateralism and transatlanticism. Trump mobilised 75m voters. Trumpism isn't dead. We also agree with her observation yesterday that the freedom of speech should not be censored by a private company. The fact that Twitter's decision will probably end up as the biggest corporate own goal since classic coke, is immaterial. Liberal democracies need to be careful in how they apply censorship. We are not going to defeat populists by cutting them off their airwaves - or our favourite news channels for that matter.

In this context we noted an interested article by Hans Kundnani, a fellow at Chatham House, who has come to similar conclusions about liberalism than we have. He draws a useful parallel with the UK in the 1930s: 

"If liberals want to save globalisation and a rules-based order, they need to think hard about how to reform it—and this probably involves dialling back integration. Something similar has been done before. The precedent for this is the way that liberals like John Maynard Keynes sought to moderate capitalism in order to save it in the 1930s. This ultimately means rediscovering the differences between the centre-left and the centre-right, not rejecting them as obsolete."

11 January 2021

Team Söder/Laschet vs Merz

FAZ is telling us this morning that the CDU establishment is rallying behind Armin Laschet as the next CDU chairman. This does not surprise us. He is the continuity guy, and the last thing the CDU headquarter likes is disruption. What has changed over the weekend is that Markus Söder, the Bavarian prime minister and CSU leader, has come out in support of Laschet. 

The CDU's virtual party congress will take place this Saturday when 1001 delegates cast an electronic vote between the three candidates. The two who come first will then go into a second round, which, according to German law, has to be decided by postal vote.

Söder's positioning is transparent. If elected, Laschet is less likely than Friedrich Merz to seek the chancellery. And despite his evident lack of public support, Laschet is very likely to score a higher share of the vote among the delegates than Norbert Röttgen. Laschet is Söder's ideal CDU chairman. 

We see the strategy, but we think this is too clever by half. For one, Jens Spahn has told friends that he wants to become chancellor. Spahn is Laschet's running mate. A perfectly plausible scenario would be for Laschet as CDU chairman to become chancellor for a relatively short term, to be followed by Spahn.

The other risk is that the CDU delegates may follow Helmut Kohl's dictum that it is best to combine the role of CDU leader and chancellor. The only split imaginable is between a CDU chairman and CSU chancellor candidate. But this is dangerous for the CDU. Söder would be the third CSU leader - after Franz-Josef Strauß and Edmund Stoiber - to be nominated chancellor-candidate, and the first one likely to succeed. With the state of the polls - the CDU/CSU steady at 35% - and the geometry of the political landscape in Berlin, the CDU/CSU candidate will almost certainly end up as chancellor. If Söder gets the nomination, he might well stick around. At 54, he is 14 years older than Spahn, but young enough to have a long political career ahead of him. Laschet will turn 60 next month.

What weighs against Laschet are two factors. He may be a moderate, but he is a supporter of coal. We are not sure that the Greens and a CDU headed by Laschet would find common ground on the key environmental policy areas on which the Greens are campaigning. Second, Laschet's astonishing unpopularity must be a factor in a big election year - with one federal election and six state elections. Of the 1001 delegates, 39% hold elected office - as local, state, federal or European parliamentarians. The others are ordinary party members. Laschet is also more popular among women than men, but only 34% of the delegates are women. 

Establishment support is important, but this will be an anonymous election. We think the AfD still constitutes a formidable factor despite its recent troubles. The AfD has been beset by inner party rivalries over whether or not to oust neo-Nazis. But as we are going into an election, we think the party will probably rally around its leader, Jörg Meuthen, who has been leading the campaign to oust neo-Nazis. We think that the approaching reality of a CDU/Green coalition would play into the hands of the AfD. Merz's pledge to CDU conservatives is that he is considered best placed to keep the AfD at bay.

11 January 2021

Social benefits scandal rattles Rutte

Yesterday GroenLinks, the Dutch green party, announced plans to bring forward a motion of no confidence in Mark Rutte’s cabinet if it does not resign. The Dutch prime minister’s centre-right VVD party leads a coalition that includes the Christian Democratic Appeal, CDA, Democrats 66, and Christian Union.

NOS reports that Jesse Klaver, GroenLinks leader, called for cabinet’s resignation in the wake of a social benefits scandal that saw thousands of parents falsely accused of defrauding the system and forced to repay their benefits. Last month a parliamentary inquiry committee released a harsh report that found the rule of law was violated during the scandal.

Klaver believes the entire cabinet should resign not only because of the scale of the affair, but because it was the result of years of dismantling the social welfare state. Resigning would not only demonstrate an admission of guilt, it would also signal that austerity policies will no longer continue in the Netherlands.  

VVD holds 32 seats at present. A peil.nl poll from yesterday show that it would win 33 if elections were held this week, down from 36 last month. Geert Wilders’ far-right PVV party would win 25, against the 20 it currently holds. The CDA would win 18, up four from last month.

Source: Peil.nl

CDA has been largely unscathed in the social benefits scandal and may still decide to vote against the government. That would make it easier for its new leader, Wopke Hoekstra, to campaign for the March elections. CDA has been polling better since Hoekstra, the Dutch finance minister, took the reins last month. Hoekstra might think he stands a chance at forming a government.

But CDA only holds 19 seats at present, and Hoekstra’s coalition would need at least 75. 

The largest opposition parties are the socialists and the Greens, each with 14 seats, and PvdA, the labour party, with nine seats. Labour and the socialists have joined GroenLinks in calling for the government to resign. But even with full opposition support, the CDA would still need another 27 seats to form a government. D66 and the CU hold just 24 between them. Tacit support from PVV would be enough to put a minority government in power, but Hoekstra has ruled out governing with the PVV.

There are six additional parties that currently hold 17 seats. Support from smaller parties would be enough to deliver a new coalition that excludes both the VVD and PVV. But one of those smaller parties is FvD, a populist far-right party. Another, JA21, was formed by former FvD members last month. It is already polling at three seats, while FvD would win four, up from two in 2017.

CDA does have an opportunity to form a new government. But with such a short period remaining until elections, the best it could hope for is a temporary coalition. The VVD is still polling higher than any other party. Withdrawing support now could complicate future coalition negotiations if VVD still comes out on top in March. 

11 January 2021

Greece running out of cash

In all this mayhem and fighting the spread of the virus, it is easy to forget that some EU countries entered the crisis already financially weakened. When lives are at risk, who wants to talk about money? With the EU recovery fund financial assistance is available. This is true in the medium term, but it does not solve short-term liquidity problems.

Greece has been under financial distress for the last decade. It exited the third EU bailout in 2018 with a liquidity cushion of €32bn to defend itself against shocks. The lockdown requires nearly all the allocated funds that were earmarked for the first quarter, €6.5bn out of €7.5bn budgeted. The Greek government had to tap into those cash buffers to pay salaries and pensions, as state revenues have declined without any other access to liquidity, writes Kathimerini. Their source in the ministry expressed concern about the latest extension of the lockdown, which will diminish the state's liquidity further in a year when Greece must pay its creditors €11.5bn.

11 January 2021

The fight against secondary sanctions

As we noted last week, China’s recent data protection legislation was modelled after the EU’s general data protection regulation. Now it appears China is aligning new rules to counter secondary sanctions with those of the EU.

Zichen Wang, a Chinese journalist and publisher of the newsletter Pekinology, brought an interesting story to our attention. It concerns the recent publication of new Chinese rules for countering secondary sanctions. 

China’s ministry of commerce, MOFCOM, published the new rules on Saturday. As Pekinology pointed out, only Bloomberg reported that the rules are remarkably similar to the EU’s blocking statute. This statute was established in 1996 after the US imposed secondary sanctions on countries doing business with Cuba, Iran and Libya. It nullifies any foreign court ruling based on foreign laws listed in its annex. It also allows affected companies to seek damages in court for losses caused by the extra-territorial application of specified foreign laws. The statute was updated in August 2018 when the US announced it would re-impose sanctions on Iran, following US withdrawal from the Iran nuclear deal.

Like the EU, China now requires businesses and individuals to report secondary sanctions. Both sets of rules threaten fines for operators who do not report them. And as Pekinology notes, China’s rules would apply to any foreign joint venture or wholly-owned company registered in China. Importantly, both rules target only secondary sanctions, not primary sanctions that would, for example, apply American law only to American companies. 

Finally, both laws provide remedies via domestic courts for companies that suffer losses from secondary sanctions. But this is where the two legal texts diverge. Unlike the EU, remedies in China can include support from relevant government departments based on specific circumstances. Necessary counter-measures based on actual circumstances and needs are also mentioned. Subsidies came to mind when we read this section.

We've previously argued that the US secondary-sanctions regime affecting European companies is very likely to remain in place under the Biden administration, for the simple reason that you cannot un-invent this very powerful instrument of modern diplomacy. We doubt whether Chinese alignment with EU legislation will be able to change that, particularly given a report from the Washington Post on Friday. It quoted a senior US national security council advisor saying the US will take a stronger position on China than previous Democratic administrations. It looks like the cold war is here to stay. 

11 January 2021

How to grow from here?

What are the main risks for economies in 2021? Over the coming months it will become clearer which companies will still be viable and can adapt in post-pandemic markets once government support dries up and new regulations take effect. At least in some sectors, customer preferences will shift.  

For the economic recovery, everyone is counting on vaccines. But for this to work, the roll-out would have to be fast and smooth, a sufficient number of people need to agree to be vaccinated, and the vaccination has to be effective against new strains. This is not a given. For trading companies this will embed significant risks. Divergence in vaccine roll-out across countries will affect supply chains.

Control Risks, a London based Consultancy, list on top of its risk map for 2021 a fragmented exit from lockdown. There will be countries who easily absorb the vaccine and return back to normality, while others face an obstacle course over availability of the vaccines, as well as effective distribution and public uptake. 

The relationship between companies and the state will change too. Not only are those who accepted public money now subject to constraints and public scrutiny. Governments are also likely to regulate more when it comes to commerce. The pandemic made it clear that the health sector is one of the strategic sectors for a nation to be protected against inbound investment. There will be more investment screening and possible sanctions. 

Public scrutiny over how well a company managed the pandemic will also become an issue in work relationships. Customers and shareholders may seek an alignment with their values as duty of care obligations widen for companies, not only with the pandemic but with climate change too. Productivity and profit may turn out to be performance measures of the past. The future success for companies will also rely more on holistic measures including relations with governments and the public in a fast changing world.

11 January 2021

Operation Bleach EU

It is interesting to read in the Sunday Telegraph that Boris Johnson ordered a team of 20 civil servants to remove references to EU law from UK legislation in order to make it more difficult for a future Labour administration to undo Brexit. This is not overtly about regulatory divergence but language. For example, current UK law uses the term state aid, which constitutes an EU-specific term, while the World Trade Organisation refers to subsidy systems. The fear in Downing Street is that UK judges might refer to the CJEU to seek clarification on terms that are EU-specific.

The bigger issue for us is whether this act of legislative cleansing constitutes a first step towards regulatory divergence. Language embeds legal definitions. Subsidy systems are not necessarily the same thing as state aid. Divergence on language is where divergence on substance starts. This is the reason why we recommended that pro-Remain supporters accept Theresa May's compromise deal, which would have tied the UK to the EU's single market and regulatory framework for a long period, during which it would have been at least feasible for the UK to return. Divergence does not make this impossible, but constitutes a hurdle that will be hard to surmount. It would prolong accession negotiations, possibly beyond the duration of a single government. A second referendum now would require three things to happen at the same time. Labour would need to be in power. The leadership would need to win the referendum. And it would need to win the subsequent elections. Recall that Brexit was preceded by an absolute Tory majority in 2015, followed by a referendum and two further election victories. Nothing is impossible in politics, but this is not a scenario you would be wise to bet on. 

Sir Keir Starmer, the Labour leader, said over the weekend that he would not campaign on Brexit, and that there was now no case for the UK to revert to EU membership. Since Labour needs to win back pro-Brexit constituencies in the north of England to regain power, this makes perfect sense to us. There are conspiracy theories that he might flip when in power. We don't think so. Whatever Sir Keir and other pro-Remain Labour MPs might feel personally, we see no chance of a pro-EU majority in the UK in the absence of a significant intruding event.