BGA Cable: Europe

Italy: Stuck in time

The Italian general election produced the widely feared political stalemate as M5S surged ahead taking 32% of the public vote. The centre-right coalition gained only 36% of the vote with Lega coming well ahead of Berlusconi’s Forza Italia. On the left, the ruling PD fell to under 20% burying the hopes for a grand coalition. If added together, anti-establishment parties took more than 50% of votes cast, not counting the 30% of the electorate that didn’t show up. This the strongest anti-establishment result in Europe to date, yet, it is highly uncertain whether the “will of the people” shall prevail and any of these parties will be able to form a government. Negotiations are expected to last for months and very little is likely to happen in the meantime. That may not be all bad news, at least in the short-term, for an economy that is experiencing the tail-wind of global growth. The Italian Treasury is well funded into 2018 having termed out its issuance under the umbrella of QE.

While the Italian anti-establishment parties had toned down their anti-EU rhetoric in the run-up to the election, the result will nevertheless create unease in Brussels and other European capitals. The refugee question took centre stage in the Italian election at a time where arrivals were low and its importance is likely to grow further from here as the weather in the Mediterranean improves and arrivals rise again after the winter. Likewise, the Commission and the French will find it harder to get support from suspicious donor countries for the planned EUR reform package, notably deposit insurance and a revised stability & growth pact. The scope for further reforms in Italy is drastically reduced by the election result and more likely than not any new Italian government will want to increase its spending and ask for more bank bail-outs.

Germany: Merkel buying time 

The SPD member referendum yielded a 66% approval for a renewed “Grand Coalition” with the CDU / CSU in Germany and Angela Merkel will be sworn in as Chancellor on March 14 2018. We expect both parties to continue their internal “renewal” debate, however: The new SDP power woman Andrea Nahles will need to spend much time to bridge the ideologically left and the pragmatic centrist wing of the party. Angela Merkel is under pressure from the conservative and pro-business wing of her party to sharpen the party profile. While the appointment of her high-profile critic, Jens Spahn, as minister for health and Annegret Kramp-Karrenbauer as new CDU party general secretary have stabilized the situation somewhat the debate about Merkel’s succession has been opened.

As both parties struggle to identify themselves with the centrist policies of their respective leaderships they are each languishing in the polls – while there are several crunch votes coming up, notably the regional elections in Bavaria and Hesse this fall and then the European election in early 2019. In the coming months, the AfD will be a growing thorn to the right of the CDU and in particular for the CSU in Bavaria, while the SPD continues its struggle against the Greens and the Left party.

Against that backdrop, the coalition seems to be lacking any popular flagship policies that could turn around the mood anytime soon. On the contrary, complicated policy files such as immigration, defence, euro area reform, energy policy, trade & tax reform bear plenty of downside with public opinion.  While the CDU may be quietly working towards a post-Merkel regime, these transitions rarely run smoothly and have proved to be hard to control.


Dieselgate: Time’s running out

German courts ruled this week that municipalities have the right to ban diesel cars from highly polluted inner cities. In retrospect, the verdict is not much of a surprise as the EU has long mandated lower emissions standards and the courts simply affirmed the view that EU law has to be followed and national law has to reflect this. In that context, municipalities may now resort to diesel bans if necessary, something the federal government has long opposed and, thus, left a legal void that now needs to be filled.

While the court attached several bells & whistles to its decision, notably the principle of proportionality, anti-car lobbies will not hold back their fire and pressure large cities to implement restrictions on diesels as soon as possible. Hamburg even wants to start as early as next month.

The court verdict means that policy makers and the car industry (not to mention their leasing subsidiaries’ exposure to residual values) now face the unrestrained anger of at least 10mn owners of potentially worthless diesel cars, many of which are used for commuting, often over very long distances thanks to generous tax breaks.

Next to annoying their customers, Germany’s car makers (and others in Europe) are at risk of losing the edge over one of their key technologies and potentially face an expensive refitting exercise. Diesel sales are already declining as there is growing uncertainty among consumers over even the latest Euro 6 diesels that so far are exempt from bans, but only for a maximum of 4 years. While petrol cars may be a stop-gap solution, their much larger CO2 footprint is hardly a selling point. Thus, the car industry is in drastic need of change to regain consumer trust and come up with products, such as e-cars, that people want to buy. To make matters worse, these pressures are building up just at the time where the EU risks entering a trade war with the US, where car exports would be centre stage.

Unsurprisingly, the coalition agreement says very little about a problem that the federal government has ignored for far too long. To prevent chaos at the municipal level, the federal government now has little choice but to wade in with national regulation of diesels (“blue plaque”). That may avoid chaos but will do nothing to remove the stigma attached to diesels. Thus, it’s hardly a vote winner for the coalition as a whole and for the CSU in particular.

UK: Time to talk

Two months after reaching a tentative agreement over the exit treaty, the Brexit debate moved up a step this week after the EU published a draft text governing the exit and the transition period and addressing in detail future budget contributions, citizens’ rights and the Irish border. The latter continues to dominate the headlines as it allows the opposition to link the UK’s commitment to “no hard border” to the ongoing debate over the future trade regime with the EU.

Smelling that it could defeat the government over the planned trade bill, Labour seized the opportunity to outflank the Tories in Parliament by proposing a customs union, thus stepping directly on one of the government’s red lines. From an EU perspective, Labour’s proposal and the conditions attached to it are as unrealistic as any other idea coming out of the UK since Brexit, including those of the government. However, domestically, Labour’s shift sends the clear signal that there is no more chance that Parliament would ever agree to a hard Brexit on WTO terms.

The thesis will be put to the test in the upcoming regional elections, where Labour needs to prove that it can build on its success in last year’s parliamentary vote. That is by no means certain as Labour, like the Conservatives, has to tread carefully between its support among pro-EU urban elites and a blue-collar base that is fiercely anti-immigration and therefore against any close alignment with the EU.

Besieged from all sides, hard-line Brexiteers had not much choice but to stand-down and regroup for now. This opened the field for Theresa May to strike a much more pragmatic tone in her third major Brexit speech since the referendum, clearly designed to prepare the domestic ground for some painful concessions on EU regulations and laws that will continue to apply. On that basis, her key message to the Commission and the EU27 is that, almost a year after triggering article 50 and three weeks before the next EU summit, the UK is finally ready to negotiate. Given the stalemate in Parliament, Tory Brexiteers have little choice but to play along for now.

While the Commission is unlikely to be impressed by yet another variation of the cherry- picking tune, the UK’s admission that there will be less market access than under the single market will be most welcome in Brussels as may the UK’s overture to keep full alignment in the goods trade and participate in key regulatory agencies, such as the European medicines agency.  With time ticking down relentlessly, negotiators have a window and are under pressure to make progress ahead of the March Summit.

BGA Experts

Jan Kallmorgen

Jan Kallmorgen

CEO and Founder
Jan's Bio

Jan is BGA’s Founder and CEO combining a background in finance, foreign policy and international public affairs. He advises clients on complex investment situations and transactions and has a strong transatlantic focus.

He has worked at Goldman Sachs, the German Council on Foreign Relations, the European Group for Investor Protection, Bohnen Kallmorgen & Partner and the global public affairs firm Interel Group. Jan is also founder & chairman of the non-profit think tank Atlantic Initiative and a regular speaker at international conferences and universities. See him in action

Jan holds a Master’s in history and international relations from Freie Universität Berlin and from Georgetown University’s School of Foreign Service in Washington, DC. He is an alumnus of several transatlantic Young Leader programs.
Dierk Brandenburg

Dierk Brandenburg

Managing Partner
Dierk's Bio
Dierk is Managing Partner at BGA following a 25 year career in asset management, banking and financial regulation.  As senior analyst and director of research at Fidelity Investments for more than 13 years, Dierk led fixed income research for US and European financial sector and sovereign strategy.

Before Fidelity, he worked for Deutsche Bank in London and as Deputy Head of Credit Risk for the BIS in Basel, where he advised central banks and regulators on bank capital and risk management.

Dierk holds a PhD in public finance from the London School of Economics (LSE).



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