(Picture by Associated Press, from www.ilsole24ore.com)
by Brunello Rosa
10 December 2018
The victory by Annegret Kramp–Karrenbauer (AKK, for short) in the contest to replace Angela Merkel as CDU party leader ensures a level of short-term continuity in Germany’s political affairs. It is, however, unlikely to settle Germany’s political situation once and for all. As we discuss in depth in our travel notes from Berlin, AKK was most closely aligned to Angela Merkel of the three contenders for the party leadership, but also the least charismatic and the least able to promote the shift to the right that the party needs to carry out in order to regain the popular support and votes that have gone to the AfD in the last few years.
The other two contenders for the CDU leadership, Friedrich Merz and Jens Spahn, drove the agenda of the party conference and are likely to shape the CDU’s political trajectory in coming years, for a number of reasons. First of all, AKK defeated Merz in the second round of the election only by a very tight margin, 51.75% to 48.25%. The fact that Wolfgang Schäuble decided to support Merz in his bid for the candidacy and reportedly did not applaud Merkel’s final speech as CDU leader shows that the party is profoundly divided on the question of which direction to follow. Second, AKK will have to re-affirm and consolidate her power over the next few months, which will feature a number of important elections: European parliament (on May 26th, 2019), Brandenburg and Saxony (September 1st, 2019) and Thuringia (October 27th, 2019). The two defeated candidates might even hope for a poor CDU showing in these elections, to demonstrate that the party needs a radically new course of action (led by them, of course) to regain lost votes and centrality in German politics.
Third, the tide of history currently appears to favour right-wing candidates (such as Merz and Spahn) able to appeal to the anti-immigrant sentiment now prevalent among the German and European population. And fourth, the anti-European forces within the EU as well as outside the EU (in America and Asia) will give AKK a hard time in the coming years, and will continue to push for the dis-integration of the EU.
Angela Merkel can rightly claim a political victory with AKK’s election, following upon a number of political defeats. Merkel can now plan for her exit from German politics in less haste. She has bought a few more months to decide whether she want to bid for a big EU job, in order to make sure the European project does not crumble following her political departure. The fact that the European People’s Party (EPP) has chosen Manfred Weber as Spitzenkandidat for the EU Commission presidency means that Germany and the EPP more widely have already started to plan for a post-integration future, a future in which the EPP will have to deal with the populist parties now proliferating throughout Europe (as we discuss in our recent travel notes from Italy).
But time is running out. As the “Gilettes Jaunes” protests in France show, anti-élite, anti-establishment and inherently anti-European anti-Western sentiment is on the rise even in the country with the most explicitly pro-European leader in Europe, i.e. French President Macron. There is a risk that, if this anti-European sentiment ends prevailing, then even if Macron and Merkel/AKK were to come out with the best plan to complete the European Union and the Eurozone, that plan would still be rejected by the respective populations of European countries, thereby de facto starting the process of European dis-integration, whether the establishment likes it or not.
All the above is not just a list of interesting political considerations. As we discuss in our recent market update, geopolitical events and the political economy of nations (such as those we discuss in our “geopolitical corner” column) now have a direct impact on markets’ prices. So, while AKK’s victory might provide a sigh of relief for market participants in the short run, it cannot prevent them from entering a rollercoaster ride in the next few months.
by Alex Waters
7 December 2018
by Brunello Rosa
5 December 2018
by Rémi Bourgeot
4 December 2018
(Picture by AFP, from RTL)
11 December 2018
“Elites talk about the end of the world (global warming) while we talk about the end of the month.” -Gilets Jaunes (Yellow Vest) Protestor
Introduction: The last expert standing
While global elites forlornly wander the earth--plaintively wondering why they are no longer held in high regard--there is a simple, real-world answer that has nothing to do with how stupid, racist, insular, or ill-educated the common man is. Rather than blaming the victim, Davos Man would do better to look at a cause closer to home: His recent, execrable record.
Very few ‘normal’ people have forgotten there were no weapons of mass destruction as was promised by military and intelligence experts in Iraq. Instead, there was merely a catastrophic war of choice that killed thousands of westerners (and far more Iraqis), cost over $1 trillion and left (by destroying Iraq) arch-enemy Iran the dominant power in the Gulf. In addition, these very same experts urged the West to become embroiled in Afghanistan, which 17 years on now amounts to America’s longest war, with no sign of ‘victory’ in sight. So much for the foreign and security community’s ‘expertise.’
If, anything, the financial ledger is even worse for Western ‘experts.’ Following the Lehman crisis which stoked the global Great Recession, millions of normal people lost their life savings, while our governments were called on to save banks and bankers who had run the global economy into a ditch. These very same banks and bankers made millions when times were good, but merited a taxpayer-sponsored bailout when times were bad.
Most normal people know that being a Thatcherite when times are good and a Socialist when they are bad is more than an intellectually incoherent position; it is nakedly self-serving. Also, average people know that literally (with one exception) no one went to jail for all this chicanery. So the question isn’t why elites are so distrusted following their calamitous real-world record. It’s why any of us has any patience left for them at all.
Enter young, polished, supremely self-assured Emmanuel Macron, who took the French political world by storm, coming from nowhere to be elected president in May 2017. In Macron, Davos Man at last could see the possibility of a revival of their technocratic, expert-driven form of government, the sort favoured by elites around the western world, and by Europe most especially.
Undoubtedly highly intelligent (and just as certain he is always ‘the smartest man in the room’), urbane, and worldly, President Macron promised not just to revive a France that for decades has steadily failed to reform itself, mattering less and less in the world, but to also—as the expert of experts—to rescue Europe from the absolute decline it seemed doomed to endure. Macron was quite simply the last expert standing.
Icarus flies high…
The young French President got off to an impressive start. Following the May 2017 elections, Macron moved very quickly to implement labour market reform, taking advantage of the disarray and chaos of the Gaullists and the Socialists, France’s two traditional parties, as well as the meltdown of far-right populist Marine Le Pen, and her National Rally Party.
This was an unheard-of legislative triumph. Throughout much of the history of the Fifth Republic, labour market reform has been the holy grail of French politics, seen as impossible to enact in a country that had grown used to a secure, comfortable way of life somehow shielded from the rigours of the global market. On more than one occasion, usually over drinks at some high-level conference, I have heard European elites sigh and gloomily say that France was simply unreformable. Labour Market reform, while absolutely necessary if France is ever to escape its specific economic doldrums, has become something more: A totemic symbol of the country’s lack of seriousness. In one mighty blow, the boy-wonder President had overcome this stigma.
Better still, Macron understood the larger game he was playing. As the ultimate expert, it is understandable why President Macron has been such an unabashed supporter of the European Union, the ultimate technocratic, expert-laden, elite-driven, project. The only way to turn the economically sclerotic, politically divided, militarily inconsequential project around was for France to reach a new understanding with an increasingly dominant Germany.
Macron’s proposed Grand Bargain for European Reform was to swap France’s newfound economic seriousness (which the Germans have longed pined for) in exchange for Germany’s commitment to deeper economic integration across the continent, with Berlin ultimately over time underwriting further euro integration in the form of backstopping new debt accrued by Eurozone countries, having a Eurozone Finance Minister, and even a common Treasury.
Given that Poland and Italy possess populist governments, Spain is in the midst of transitioning from a two-party to a four-party political system (and is preoccupied with Catalan separatism), and the UK is Brexit-obsessed, Macron was surely right to see that the Franco-German axis is, more than even usual, the only game in town if Eurozone reform is to become a reality.
…But too close to the sun
So far, so good. Macron had delivered the supposedly undeliverable in terms of French labour market reforms, and had devised the correct (and only viable) strategy to re-energise the European project. But having delivered his end of the bargain on economic seriousness, the French President confidently turned toward Chancellor Angela Merkel, by far the most powerful leader in Europe…. who looked at her shoes, characteristically doing nothing.
The suspicion grows that Macron’s success in enacting labour market reforms merely called a German bluff; Berlin was relying on France to perpetually put off economic reform as an excuse to avoid further Eurozone deepening, which Germany secretly never wanted to happen under any circumstances. All Macron’s brave labour market reforms did was to put the German chancellor in an embarrassing social situation, her country’s mendacity having been found out.
For the inconvenient truth is that for Macron’s Grand Bargain to work, Germany, easily the greatest economic power in Europe, would have to give up economic control (which is psychologically not something post-war Germany has ever been comfortable doing, to put it mildly) in return for Paris giving up further political control, not an easy thing for proud Gaullists to do, either.
Until Macron’s significant efforts to economically reform France came into being, the thesis that both sides would leave their comfort zones to enact a new Grand Bargain for Eurozone reform had never been tested, so it was alright to continue with comforting pieties about everyone’s everlasting commitment to the project. Macron the expert, having believed in the bargain, has kept his end of it, only to run into the vortex of Chancellor Merkel’s endless political cynicism.
Conclusion: The Gilets Jaunes come for the last Expert Standing
Betrayed by perfidious Germany, Macron has little to show across the continent for his herculean efforts over labour market reform. And although the reform is undoubtedly the right thing to do in terms of France’s future prosperity alone, to be seen to have all suffered all the pain for little gain is never a wise political posture, certainly not in decades-cossetted France. This, plus his expert-driven arrogance and aloofness, more than than anything explains the Gilets Jaunes (Yellow Vest) movement, that over the past four weekends of protests, has led to violence on the streets of Paris unseen in 50 years, 1250 being arrested, 400 injured and to billions of dollars in damage.
Initially centred on protesting another tax being imposed on France’s long-suffering middle- and working-class population in the countryside (this one a green tax on diesel and petrol decreed by the imperious Macron from on high), the Yellow Vest protest has morphed into a referendum on the president himself, whose once sky-high popularity rating has plummeted to a dismal 26%.
While it is practically true that the positive benefits of his labour market reform (and proposed pension and tax reforms) was always going to take time to seep down into the French economy, the simple fact is that the Yellow Vests are right in that—for all his Olympian grandeur—French economic growth presently remains a weak 1.6% of GDP, with unemployment stubbornly high at 9.2%, and there is no sign of the renaissance the boy-king so confidently promised.
But the last expert standing is also surely right about one big thing; without a dramatic and fundamental reform of his country, no future (and absolutely necessary) Grand Bargain between France and Germany is possible, and without it, Europe will merely continue its long but steady slide into real decline. Macron and France’s present travails are not just their own; Europe itself as a viable entity hangs in the balance.
This article was originally published on the Author's LinkedIn Page. John Hulsman's new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April 2018.
Week 10 - 16 December 2018
In the US, inflation is expected to soften (CPI November, c: 2.2% y-o-y; p: 2.5%) driven by lower food and energy prices (US CPI ex food and energy November, c: 2.2% y-o-y; p: 2.1%).
In the EZ, the ECB will maintain its policy stance unchanged (ECB policy rate, c: 0.0%; p: 0.0%). We discussed this in our recent ECB preview.
The US economy will remain strong. Labour market indicators show a resilient economy: last week, wage growth was unchanged (average hourly earnings November, a: 3.1% y-o-y; c: 3.1%; p: 3.1%) and the unemployment rate remained at a 49-year low (November, a: 3.7%; c: 3.7%; p: 3.7%). The number of new jobs fell below expectations (non-farm payrolls November, a: +155k m-o-m; c: +205k; p: 250k). PMIs indicate strength ahead (ISM manuf. Nov., a: 59.3; c: 58.0; p: 57.7). However, the markets continue to reduce their expectations about the likelihood of further hikes in 2019: last week, the probability of only one hike in 2019 rose from 25.4% to 33.4%.
In the EZ, political risks are likely to hamper economic performance. In a context of decreasing growth and deteriorating confidence—next week, in Germany, the main economic sentiment indicator is expected to decline further (ZEW November, c: -25.0; p: -24.1). Political risks continue to rise: a) in the UK, on December 11th, parliament will vote on the “Brexit deal” agreed with the EU; a rejection could trigger a political crisis and even elections, increasing political uncertainty in Europe; b) in Italy, next week the EC is supposed to receive a revised budget, but the Italian government—amid rumours about the resignation of the economy minister—is showing unwillingness to compromise. Germany’s Christian Democrats have chosen as their leader Annegret Kramp-Karrenbauer—a close ally of Angela Merkel—who is expected to provide continuity.
The US and China are unlikely to solve their trade dispute. The positive impact of the truce agreed at the G20 meeting last week was immediately undermined by: a) a series of tweets by President Trump threatening more duties on China if trade talks fall through; and b) Huawei’s CFO arrest, which has caused widespread resentment among Chinese authorities, reducing the likelihood of a prompt, successful resolution of the crisis.
Fixed income in the GCC will continue to overperform other regions. In the GCC, fixed income has withstood the impact of rising interest rates better than most regions in the world: year-to-date, the GCC USD Sukuk and credit indices are down by 0.2 and 0.7%, compared to -3.2% for the Global Investment Grade Debt index, -4.0% for Global Sukuk index, and -3.8% for EMs USD debt index.
GCC economies will show resilience… GCC leading indicators improved in November (Non-oil PMI Nov. KSA, a: 55.2; p: 53.8; UAE, a: 55.2; p: 53.8) as fiscal stimulus measures—e.g. KSA announced the reinstatement of public sector bonuses—are offsetting the decline in consumer confidence
… as oil prices are supported by output cuts. Opec and its allies agreed on cutting output by 1.2mb/d (of which 400k are provided by non-Opec). Cuts were marginally above market expectations, prompting a w-o-w increase of Brent oil prices of 5.0%, to 61.7 USD/b.
Tensions between the US and China rose after the CFO of the Chinese firm Huawei was arrested in Canada, over alleged violations of US sanctions on Iran. Stocks fell across the world (MSCI ACWI, -3.5%) with strong declines in DMs (MSCI DMs, -3.7%; S&P 500, -4.5%; Eurostoxx 50, -3.6%; MSCI EMs, -1.3%).
Volatility rose above its long-term average (VIX, +5.1 to 23.2; 52w avg.: 15.2; 10y avg.: 18.6). Rising uncertainty increased demand for bonds: a) sovereign bond yields fell, pushing 10y USTs below 3%, the lowest level since August, (US 10y yield, -16bps to 2.85%; Germany 10y yield, -6bps to 0.34%); and b) bond indices rose globally (S&P Global DMs index, +0.5%; EMs index, +0.7%). The USD fell—due to lower-than-expected payrolls—against a basket of currencies (DXY, -0.8%) and the EUR (EUR/USD, +0.5% to 1.138).
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