On the GAFA tax and the hostile reaction of the Americans

The reaction of other European countries in this new context of US reaction will be interesting. The new global and multi-polar equilibrium, that is emerging, forces Europeans to be more autonomous. It has already been observed that on the issue of 5G some European countries were not indifferent to Chinese offers, thus taking a distance from the Americans.
Europe must find and define its place in this new multi-polar balance. The GAFA tax and the American reaction can make it possible to define a dynamic specific to Europe with a distance from China and the US. The stakes are high for Europe to exist on a political scale.

European elections: changes but no revolution

Elections for the European Parliament mobilized more in the May 26 poll. The participation rate is at 50.8%, the highest since 1994. For France also this change is strong with a participation of 50.1%, the highest since 1994.

We can see on the graph the change of pace This mobilization has been observed in most European countries.

Only 8 countries have a participation rate which is down compared to the 2014 elections. We note the very strong increase in participation in Central Europe.

In Poland, Hungary and Romania, this rate had never been so high.
In other words, the European question has rather mobilized in all European countries.

This vote has also resulted in greater diversity and this may be a consequence of this increased participation.
The conservative party (EPP) is no longer so dominant and the social democrats can no longer make an alliance with them for a broad coalition. The counterpart of this weakness of the parties that traditionally dominated the Parliament, is the circa forty seats won by the liberal centrists, the circa thirty won by the greens and the twentieth gleaned by the nationalist parties and extreme right. The radical left, however, loses about fifteen seats.
The question that was important on the eve of these elections was the balancing point between those who want to make the evolution of Europe within the existing rules and those who want to use rules when they fit them. The parliament remains very oriented towards the respect of the rules. The nationalist and far-right parties will represent just under 180 seats out of 751 and will not participate in any coalition.
There has not been a tidal wave towards nationalism and that is why the financial markets do not experience any ups and downs. Salvini’s victory in Italy was long overdue, so it’s no surprise, just like Orban’s victory in Hungary.
There may, however, be local stories like in Greece where the Democratic Party has supplanted Prime Minister Tsipras’ s party while legislative elections will be held soon.
On this point, moreover, the impact of the elections to the European Parliament is still very small at the national level. Each time we imagine strong changes but this vote remains European with little impact on national policies.
It will nevertheless be interesting to look at the British situation closely since if Farage wins the elections, pro-brexit are not the majority. That’s why the situation across the Channel will become complex after May’s resignation on June 7th. It will be necessary to find a new political balance to designate a prime minister who will negotiate the Brexit and that will be necessarily very complex (see here (in French) on the resignation of Theresa May)

The question now is that of the election of the European Commission.
There is a double change here. The first is that the grand coalition will not take place. There will necessarily be greens and liberal centrists. The balance will be different from that observed for a long time.
The other point is that the German candidate is no longer as strong as expected because of the low score of the CDU / CSU in Germany (but also maybe because of the Selmayrgate that weakens Germany within the Commission). Angela Merkel will not necessarily have the capacity to impose Manfred Weber. The game will be played between this German candidate, Michel Barnier, Frans Timmermans and Margrethe Vestager.
For the Euro zone, the choice of the President of the European Commission can not be neutral because in a few weeks, the new president of the ECB, will be named. A few months ago, Angela Merkel said she did not support Jens Weidmann at the head of the ECB preferring the Commission’s presidency to that of the central bank. If Manfred Weber is not the future president, then the Weidmann card could be played. This is already an attitude we have seen for some time. The candidacy of the President of the Bundesbank is once again on newspapers’ front page.
I do not think it would be a positive for the Euro Area if he replaced Draghi’ after his departure. He does not have a cooperative attitude within the countries of the zone. He was opposed to the OMT, hostile to a policy that was too accommodating (which may not have been enough) and to a possible fiscal stimulus in the event of a negative shock to activity. To the German influence on fiscal austerity it is not necessary to add monetary austerity if we want the Euro zone to continue functioning.

This arbitration will be important and that’s what will excite us in the coming weeks.

What is at stake in the European elections? My weekly column

European elections are generally deemed to have little impact on national affairs and so are always seen as secondary, and a far cry from presidential elections.

Voter turnout is usually low, and this is the case across the board, not just in France. The chart below shows voter turnout rates in France and the European Union since the first European elections in 1979, and we can see that the two trends display the same profile: France is no different. Voters were relatively enthusiastic when they first went to the polls in 1979 with turnout of more than 60%, but the past three elections have seen similar figures of just above 40%.

In France, there is generally little similarity between presidential and European elections, as the winning parties in the French presidential elections are rarely the victors of the European elections. The French president’s party has won the European elections only twice since 1979: in 1979, the UDF party (Union for French Democracy) won when Valérie Giscard d’Estaing was in power, while in 2009, the UMP (Union for a Popular Movement) won when Nicolas Sarkozy was at the helm.

When François Mitterrand, Jacques Chirac and François Hollande were in power, their parties did not win the European elections. During Mitterrand’s presidency, the Socialist Party came in second each time, while during Chirac’s time as president, the UMP came in second in 2004 but at the 1999 elections, RPR (Rally for the Republic) dissident Charles Pasqua came in second. Later in 2014, the Socialist Party was third behind the National Front and the UMP. In other words, the results of the European elections do not necessarily mirror the domestic political landscape, and the results seen since 1979 have not had any effect on domestic politics.

But what are the specific features of the European elections this time around?

1 – The first point is that this is the first time that an EU member state will vote for MEPs while at the same time being in the process of leaving the bloc.

2 – The second aspect is that this election is taking place in an unusual economic and political context. Growth is weaker than in the past across almost all EU countries, while inequality is worsening, and populist tendencies are on the rise.

Growth is more sluggish, which means that there is less scope to redistribute income than before, with the economy generating a smaller surplus for distribution among citizens.

This trend is further heightened by changes on the labor market, with greater polarization and the ensuing hit for intermediate jobs for staff with few or unsuited qualifications. This situation is the result of innovation that has changed the production process on the one hand, as well as the swift development of unskilled work in the services sector on the other. These jobs have become very individualized and in a break from the past, they no longer create a feeling of belonging to a specific class.

3 – The issue of income does not provide sufficient explanation, and added to this problem of income and wage inequality we are also seeing inequality in access to public services, inequality in access to healthcare, education and training, as well as geographical inequalities i.e. real estate prices are lower the further you go from city centers, and this leads to greater isolation and much higher transportation costs. This is why an increase in purchasing power is probably one key condition for swiftly restoring social order, but still an insufficient answer.

We cannot rule out the possibility that this instability experienced primarily by the middle classes – where income is close to or below the median – leads to changes in behavior, and this may have fueled the rise of populism in western Europe.

The political risk of these elections is that we could see more untraditional votes than in the past, although not necessarily in France, where the National Front already attracted almost 25% of votes in 2014, but in Europe as a whole. So it is possible that populist and extreme parties may increase their ties to fight against both incumbents and the elites who have not managed to reduce inequality in the long term.

4 – There is something of a shortage of ideas on Europe. The EU fulfils its primary purpose that it was set up to achieve, by keeping peace in the region. Yet it lacks momentum and fails to offer any real answers to address a seemingly paralyzed context. In other words, Europe is no longer at the heart of change in today’s world. Europe is never mentioned in the conflict between China and the US, yet the battle of wills between these two countries will shape the world of tomorrow: Europe is absent from this equation and does not seem able to do anything about it.

Europe is vital in this world context as it fosters a degree of political stability and also affords some power to all its member countries. Each country individually would have no real presence and no power to influence the future course of events, so this ability to have an influence makes Europe a necessity. Each member state is very aware of this, yet they do not have the clout to change the course of the future.

5 – Bar any major surprise, the European elections will have little effect on the financial markets, but it will be important to analyze the political balance that emerges between pro-Europeans and euro-sceptics like Orban in Hungary. This could shape the future majority in the European Parliament and the ensuing shape of the European Commission. The result will reveal Europe’s ability to comply with and further develop the rules it has set.

All eyes will be on Italy, as the coalition currently in power could be further weakened by the European election results. The Five Star movement saw its influence wane recently and the government it forms with the League could quickly be undermined. The League is doing very well in opinion polls, and the Democratic Party (former Socialist party) is doing better than the Five Star Movement. The result in Italy will be the most closely monitored as it is probably the only one that will have a real impact on the domestic balance in the short term.

This post is available in pdf format My Weekly Column – 21 May

British procrastination – a postponement will not guarantee an agreement

Theresa May is in Berlin and Paris to request a new deadline. It’s a safe bet that she will get some time. The date discussed is December 31, 2019. It is a little less than what Donald Tusk was talking about, who was ready to go up to a year.

As no one knows the possible consequences of a lack of agreement, no leader will take the risk of being the one who could trigger the possible apocalypse.

Business leaders are making arrangements to manage the possibility of a Brexit but none wants a disruption that would have a negative impact on their business.

This procrastination has a cost. This is true for the English who, if they had not stored heavily, would have been in a recession for the last two quarters. This is the case of the European Union too. Any meeting with employees, clients, bankers or industrialists gives pride of place to the concerns about Brexit. Let’s not doubt that this uncertainty affects behavior and also penalizes the growth of the EU. We are thus in a war of attrition, looking for who will exit first. This may be the worst solution because costs will accumulate on both sides of the Channel.

Because, let us be clear, an additional period does not mean an agreement on the British side on the scheduled date. British are in the EU for an extended period.

UK and the European Union

A comparison of two White Papers. The first in 1971 when the UK wanted to join the Common Market and the second, in 2018, for the Brexit. The first had a strong political momentum and a real ambition, the second lacks of a vision.

“The 1971 White Paper had the guts to say a very hard thing: if you renounce an imperial past but fail to embrace a European future you will find yourself nowhere much. The 2018 White Paper is merely a rough map of that nowhere.”

Fintan O’Toole: Brexit White Paper puts UK on road to nowhere
via The Irish Times

Italy in 8 points

The Italian question remains a concern for Europe, even after the nomination of a prime minister (to be confirmed by the Italian president), who is something of a lowest common denominator between the Five Star Movement and the League. Investors are breathing a sigh of relief, with the yield spread with Germany widening at a comparable pace than last week, as shown in the chart. However, many questions remain.german-it-spread.png

A number of points are worth raising:

1 – Italian malaise
Continue reading

US sanctions to be restrictive for European companies

Donald Trump’s announced sanctions on Iran are proving to be quite a headache for European companies that had re-expanded their business in the market since the July 2015 agreement.

It is vital here to draw a distinction between a potential political nuclear agreement between Iran and the other signatories of the previous 2015 accord (apart from the US) on the one hand and the issue of economic sanctions on the other, which would severely hamper Iran’s economic growth as foreign companies working with the country would be subject to hefty penalties from the US. Before 2015 we witnessed the extent of such penalties on banks that had tried to evade sanctions, and a number of banks had actually continued to steer clear of Iran, even after the 2015 agreement as they were not convinced it would last. In this respect, the timing of the ZTE affair is perfect. The Chinese company operating in the telecoms sector and specializing in 5G technology is highly dependent on US components to pursue its growth. After pleading guilty of shipping US components to Iran and North Korea in 2016, it is now facing legal action for failing to comply with measures it was supposed to take against managers involved in the affair. Continue reading