Terror on Bastille Day

For months we have been living on edge. We’ve had the Paris attacks, the Brussels bombings, the San Bernadino attack, the Orlando nightclub shooting, the Istanbul airport attacks. Numerous terrorist warnings had been made during the European Football Championship. In Brussels and I’m sure elsewhere, concerns had been aired, security had been stepped up; it was recommended not to attend large public gatherings.

Then Euro 2016 finished. Holidays were about to start. French President Hollande declared that the state of emergency, which had been enacted following the heinous Paris attacks in November 2015, would be lifted end of July. And then it happened. Again. In Nice, the Promenade des Anglais that had filled for the celebrations of Bastille Day on 14 July, turned into a living nightmare. More than 80 men, women and children killed. More than 200 people injured. Families torn apart, lives and limbs lost as Mohamed Lahouaiej-Bouhlel drove a truck through the crowds.

How does one begin to comprehend this act? The sheer shift from celebration to chaos, from enjoying to surviving the night. Similar to the Paris attacks, it was a strike during ones night-out where anybody could have been the target. It was a strike during Bastille Day where France celebrates its unity, its revolution, its declaration of the Rights of Man, its very liberté, egalité, fraternité. And similar to Orlando, it was committed by a single man. A single man that had not been particularly known by intelligence officials. A petty criminal who had no sign of radicalisation.

It’s the awful singularity that gives this horrendous night even more worrying thoughts. It’s what Thomas Friedman called the growing power of one. One person with a truck or an assault rifle. One person with a home-made suicide belt. One person with biochemical or radioactive material. One person with a virus that could spread to a pandemic. How do you protect against that one person? How can a state protect society against a single individual? And that without withering away the very freedoms of society.

And it’s the awful singularity that makes one also wonder, how many more attacks might yet be to come? There are undoubtedly a range of people out there – be they returned ISIS fighters, radicalised youth, or petty criminals looking for a purpose – that are daydreaming with raising havoc. Many might still be held back by some sort of social norms, inner angst, fear for life. But will this last? Or will the regularity of such horrendous acts slowly wither away these last barriers, embolden them, and transform their thoughts into action as they see others do.

And when these people aren’t known as radicalised terrorists, what gives them the underlying ideological drive to destroy? How do we understand the killers’ minds? A pattern seems to emerge of small-time criminals looking for a purpose and an audience. The Chicago Project on Security and Terrorism might be on to something when they write that it’s not Islamic radicalisation via ISIS itself that just induces these young men – who have not been particularly devout – to terror but the fact that ISIS appeals to these young men’s self-worth. Islamic State makes them heroes in a narrative at a time when they are most likely in a state where they see no larger purpose to pursue.

Last, the events further hammer away at society. They increase fear and hatred and racism and divisions. I’m concerned of how far-right Marine Le Pen might gain from such a situation with the French Presidential elections less than a year away. And I’m concerned how Donald Trump might become a more realistic option for the White House. In crises, people usually tend to look for stability, leaders with experience, something or someone they know. But this time it feels different. With the world in flames, establishment politicians are losing credibility and there seems to be a gravitation towards tough-talking, non-conformist leaders. Contexts and situations of course differ from country to country but what seemed a joke in the US presidential elections is turning into a frightening possibility. And the more crises the world experiences, the more Trump might benefit from his isolationist “batten-down-the-hatches”, build-a-wall approach, which stands in stark contrast to Hillary Clinton, the internationalist and former Secretary of State. The state of the world will undoubtedly be used against her by the Trumpians.

So much pain and so many questions left unanswered. Yet, as we mourn the losses at Nice and our thoughts are with the families torn apart, the spirit of Bastille Day – of unity, the rights of man, of liberté, egalité, fraternité – should continue to ring forth.

Is Italy Europe’s next (banking) crisis?

Since the outbreak of the global financial crisis in 2008, the European Union has made great strides in insulating its banking system. A banking union has been created and more than 40 legislative and non-legislative measures have been proposed, all to strengthen the banks, the euro and the financial architecture at large. Despite shortcomings and work ahead, progress has been made.

Now, Brexit has rocked this edifice. The ensuing market turmoil has put Europe’s banks in the spotlight. Barclays, RBS, Deutsche Bank, Société Générale, Unicredit, all saw their stock prices decline by 25% or more. Shortselling and extremely low interest rates that make lending less profitable, are putting pressure on the whole banking market.

But Italy in particular might be the catalyst for the next European banking crisis. Its banks are in the eye of the storm. They are sitting on roughly €360 billion (more than 20% of Italy’s GDP) of foul loans. Previous attempts by Prime Minister Renzi to solve this issue have failed. Experts estimate he needs €40 billion to cushion the banks against their losses. Renzi would like to inject public money but that would be illegal state aid under EU rules. The EU’s banking directive – as a consequence of the financial crisis – doesn’t allow a simple bail-out where taxpayers end up coughing up the cash for bank rescues. Instead, to protect taxpayers, it forces the banks’ investors to be bailed-in and take a hit.

This is a political nightmare for Renzi. Unlike in other countries, in Italy, these investors to be bailed-in aren’t just some kind of corporate giants who could stand a loss; they are ordinary Italian families. They own roughly 40% of bank debt. When the government applied these bail-in rules for a couple of small banks last November, widespread protests erupted. Already fear seems to be spreading in the market. A simple Google Trends analysis of the search term “Italian Banks” shows that, according to Google, there has been a breakout moment. July has seen a drastic increase of such searches.

This is the last thing Renzi needs. He’s already suffered a bloody nose in the local elections a month ago when he lost the mayoral contests in Rome and Turin to the 5 Star Movement, and now has to look towards his October national referendum on constitutional reform, on which he has staked his political future. Should this episode cost him the October referendum, Italy would be in a political crisis with no clear idea where it could lead. Undoubtedly, it would embolden the 5 Star Movement, particularly in its call for Italy to abandon the euro.

Italy’s banking issue is opening well-known wounds: it is again pitting the northern creditors against the southern debtors as well as banks against governments.

Chancellor Merkel has already said that the new rules for bank rescues have to be respected while Eurogroup President Dijsselbloem tried to downplay the issue this week saying that he sees no acute crisis with Italian banks. It’s understandable that Germany doesn’t want the EU’s banking union to fail its first test and have again more taxpayer money propping up banks; an issue that has led to widespread societal resentment against the financial sector and governments. Yet, to me Germany’s current dogmatism is a bit rich. Italy didn’t pursue any bailouts during the 2008 financial crisis while Germany whipped up a nearly €500 billion bank bailout programme. That’s of course a different context and the rules have changed since then, nonetheless it does leave a somewhat hypocritical aftertaste.

Germany’s Finance Minister Wolfgang Schäuble seems to have left the door open to some flexibility by not ruling anything out and is simultaneously temporizing. By arguing at this week’s Eurogroup meeting that one should wait for the results of a European bank stress-test, which will be published later this month, he’s buying more time. The question is, is he doing this to strengthen his bargaining position vis-a-vis Italy or because the results of the stress-test could give an objective assessment from which to legally take action? Or maybe both? Should the stress-test as expected come out negative for Italian banks, requiring them to raise more capital, it would clearly worsen the situation. It could lead to even higher losses, as was the case when the ECB sent a confidential warning to Monte dei Paschi di Siena a week ago. This would increase market pressure on Renzi and could put pressure on him to follow options prescribed by the Eurogroup/Schäuble with restructuring strings attached (and yes, restructuring of the Italian banking sector is necessary). But couldn’t such a strategy also backfire if there isn’t already an outline of an agreement fixed prior to the stress-test publication? Once the stress-test is published, couldn’t a market reaction be faster than political talks can come up with a solution if they haven’t by then come up with one? What if it prompts investors to stop lending and depositors to withdraw their money leading to a bank run? And wouldn’t a solution under such conditions possibly end up being more expensive than already coming up with a solution now under manageable circumstances?

Renzi has already started hitting back at German intransigence by pointing out the massive risk of Germany’s Deutsche Bank. At a joint press conference with Swedish Prime Minister Löfven he argued “if this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to hundred”. Deutsche Bank, with its €54 trillion derivatives book that’s five-times the entire economic output of the eurozone, certainly is a problem. It has failed the stress-test in the US and its share price has taken a beating. As a possible indicator of worries, over the last month, google searches for its share price in Germany have increased by 800%. Worse yet, all these financial players are of course interconnected. Should Italy’s banking crisis worsen it could put pressure on Italian government debt to which again a whole range of other players are exposed. French and German banks hold around €330 billion of Italian government bonds with Deutsche Bank alone having more than €11 billion on its books.

Deutsche Bank knows how dire the situation is in Europe’s banking sector. That’s why its Chief Economist, David Folkerts-Landau, proposed on 9 July a €150 billion rescue fund to recapitalize European banks. This, however, is three times as much as the €40 billion needed by Italy’s banks and it seems Deutsche Bank is using the Italian banks as a pretext to launch a larger rescue fund that could buffer banks more generally and stabilize their bonds and shares by providing investors with more security. This plan has already been met with great opposition by various political parties.

So far it seems that only France’s Finance Minister, Michel Sapin, has shown flexibility towards Italy arguing that “it’s our duty to show solidarity…and apply the rules in an intelligent manner.” Indeed, there are exemptions in Europe’s state aid rules that could allow public money for Italian banks. For example, bail-ins could be avoided under exceptional circumstances, if they could have disproportionate results. And forcing losses on Italian household investors, could possibly fall under such a definition. This and other possibilities will undoubtedly be looked at, as the situation progresses.

Brexit isn’t solely responsible for Europe’s banking sector woes. But it triggered a shock that has exposed the significant underlying weakness that still remains in Europe’s banks, particularly for Italy. This is yet another European litmus test. If the EU and its Member States cannot come up with a sound solution, beyond the usual euro fudge of muddling through, markets could trigger a banking crisis with resulting political consequences that would further strengthen populists from Italy’s 5 Star Movement to France’s Le Pen.

The EU’s new Global Strategy – the EU’s next integration step forward?

Last week on 28 June, when Europe’s Heads of State and Government met in Brussels, they didn’t just deliberate on the UK’s historic decision to leave the EU. Far away from the limelight and press headlines was also the presentation of a new EU Global Strategy (EUGS) unveiled by the EU’s High Representative Federica Mogherini. Such a new foreign strategy was long overdue. The last one – the European Security Strategy (ESS) – dates back from 2003. Europe and the world have changed since then.

While the publication was supposedly purposefully held back in order to not give Brexiteers cannon fodder in the referendum given that the UK views efforts towards an EU foreign policy with great distrust, it’s arguable whether releasing it 4 days after the results of the referendum was any better. The combination of a Brexit-dominated European debate and the coming summer lull, could hinder a European public debate on this Global Strategy. This strategy, however, deserves reflection and discussion. It takes a reality check and provides thinking on the new strategic environment the EU finds itself in.

In my view, the document puts forth 4 particular strategic lines.

First, it tries to put European citizens at the centre and bridges internal and external dimensions. Doing a simple word frequency comparison the EUGS mentions “citizens” over 30 times while in the ESS the word only came up 3 times. The strategy endeavours to give European citizens confidence in the European project again. Mogherini notes in the very first sentence of her foreword that, especially after the UK vote to leave, the “purpose, even existence, of our Union is being questioned”. After the gruesome terrorist attacks in Paris and Brussels, the exposure of terrorist networks in Europe, the violation of the European security order in Ukraine and the horrors of war in Syria and Iraq leading desperate families to seek shelter abroad, European citizens are anxious about their security. What good is this Union for if it cannot provide basic security and answers to citizens’ fears?

The Global Strategy addresses this directly by placing a strong emphasis on the link between internal and external security, noting that security at home depends on peace beyond our borders. This theme has hit a nerve in European political circles; it is being taken up by many different actors. The Foreign Ministers of Germany and France in a joint paper have called for a European Security Compact that ensures “the security of our citizens confronted with growing external and internal threats”, and the former EU High Representative, Javier Solana, has proposed that Europe create a Defence Union, pooling defence policy efforts.

Second, under the heading “principled pragmatism” it strikes a balance between realpolitik and ideals/principles in foreign policy. Such a nuanced approach is attractive but the strategy doesn’t define it more deeply, which – IMHO – leaves some underlying internal contradictions unanswered. Where, under this heading, would principles begin and end? When would pragmatism overshadow principles? Or in practical terms: could an anti-ISIS alliance with Assad fall under this category? The concept is a difficult balancing act. On one hand, it provides the necessary flexibility to arrive at a number of foreign policy stances and options. On the other, without defining some sort of limiting parameters to how far that flexibility can stretch, might the concept not risk becoming meaningless? Reading the paper “A strong Europe in a world of uncertainties” by the Foreign Ministers Ayrault and Steinmeier, one wonders whether they haven’t poured cold water over the concept already. In their chapter on a European Security Compact, principles, ideals, values aren’t given attention. While the EUGS talks of principled pragmatism and moving “beyond the illusion that international politics can be a zero-sum game”, the Foreign Ministers write that “power politics are back on the world stage” and that the EU is a key power in its neighbourhood that will support an international order underpinned by “strategic stability based on a peaceful balance of interests”.

Third, the EUGS places a strong emphasis on the concept of “strategic autonomy”. Again, the document doesn’t adequately define what it means under this heading. Strategic autonomy has been used by a variety of actors to distance Europe’s ties to the United States and NATO arguing that Europe should act autonomously in world affairs. This would be a mistake. At a time when the United States, after its pivot to Asia, is recommitting itself to Europe’s security order with its European Reassurance Initiative (ERI) which will hold a budget of $3.4 billion for 2017, we’re calling for “strategic autonomy”? The EU is strongest when it works together with its American partners and Jan Techau from Carnegie Europe has put it succinctly writing that “the US will remain key to the EU’s role in the world for many years to come, and the paper’s blind spot on this crucial and uncomfortable part of the transatlantic relationship is not healthy”.

Fourth, the EU Global Strategy places great emphasis on the concept of state and societal resilience. It wants to strengthen the capacity of the EU and its neighbours to weather internal and external crises. In this context, the strategy also focuses on a range of sectors from energy and cyber security to strategic communications. This is a novel and important approach and ties in with Mogherini’s internal-external security nexus. However, it too falls into a similar conundrum as principled pragmatism. The EUGS argues on one hand, that “a resilient state is a secure state and security is key for prosperity and democracy” while rightly noting that the reverse is also true and that a resilient society featuring democracy lies at the heart of a resilient state. But which resilience will the EU provide? Sven Biscop from the Egmont Institute has put it well in his security policy brief arguing that “increasing the resilience of a state against external threats can easily lead to increasing the resilience of a repressive regime”. I have also stumbled over the wording in the EUGS that the EU will invest in the resilience of states and societies “stretching into Central Asia”. Is this an indication that the EU wants to become a player in that great game alongside Russia and China? I would believe that our levers in this region are rather limited.

These main lines provide a lot of food for thought to Europe’s foreign policy circles and they will have to be filled with further ideas and particularly actions. Because this is an area that the strategy so far falls short; the words aren’t matched with deeds, yet.

Under the heading “From Vision to Action” the document tends to make very little new proposals. It emphasises the lack of spending and coordination on defence and calls for the implementation of legislation that is already underway (such as the firearms directive). IMHO there were more interesting proposals from the paper by Foreign Minister Ayrault and Steinmeier than in Mogherini’s. They, for instance, suggested a European Semester on defence capabilities, a European civil protection corps, a standing maritime force, a once a year European Security Council meeting to discuss defence and internal and external security, and so on.

I would also level some other criticisms towards the EUGS. Ranging from the hijacking of development and certain foreign policy funds for defence purposes – such as the new proposal adopted on 6 July to allow funds of the EU’s only civilian conflict prevention instrument to be used for training and equipment of third-country armies – to the, in my view, ambivalence towards the transatlantic partnership, where the US has for example not been mentioned in connection with counter-terrorism work even though intelligence cooperation is crucial in this regard.

All in all, however, the EU Global Strategy is a breath of fresh air. It sets out new ways of approaching Europe’s foreign policy environment and it will serve as a basis for a new integration push in the defence area. Many actors are already highlighting the need for a more integrated European security and defence line and using EU governance options, such as the Permanent Structured Cooperation under Article 46 of the Treaty of the European Union, in that regard. The challenge now lies in identifying where further integration makes sense and how it can be taken forward. For this, more debate and consideration will be needed. Over the last year, Mogherini did a veritable road tour in the different Member States in preparation of the EU Global Strategy. Seems to me it’s time to hit the road again and now discuss her proposal and further integration steps in this field in the different capitals and foreign policy circles.

Brexit – The Great Societal Divide

The result of last week’s EU referendum in the UK wasn’t only a wake-up call to the European Union to get its act together. It was also an indication of great dividing lines running through society. Instead of bringing the UK closer together again, the vote has shown the extent of its fragmentation. The social fabric that is holding it together is under increasing strain. Never mind the obvious geographical divide with Scotland and Northern Ireland having voted to remain while Wales and England voted to leave. Three other particular divides are noticeable at first glance.

First, the generational divide. This was an election fought between age groups. While the 18 to 44 year olds voted overwhelmingly for remain, the 45 and up tended to vote to leave the European Union. This is particularly bitter for the young, especially those that weren’t old enough to vote, as they will have to live with the consequences for a long time to come. It also shows how changing demographics is affecting political decisions. In the future, political parties will vie increasingly for the votes of an older voter base. In the last German federal election in 2013, for example, almost 32% of the vote came from the age group 60 and up. This will also increase with time and can lead political parties to woo this particular electoral base with promises which could run counter to the interests of younger generations.

Second, a cultural divide. There is an increasing split between a kind of globalised, progressive, multicultural class – labelled the “Liberal Class” by Thomas Frank – and the regular blue-collar worker class. The former –a grouping that is internationalist with cross-border networks and experiences – thrives with globalisation while the latter is largely left behind. The world is increasingly complex. To understand and benefit from this complexity people use big data, global networks, global education and cross-sectoral understanding. As Joshua Cooper Ramo, Co-Chief Executive of Kissinger Associates, illustrates in his book The Seventh Sense – Power, Fortune and Survival in the Age of Networks, the secret to power now is understanding the new age of networks and how everything is connected. But this is not an option to the average worker. He, instead, feels ever more disenfranchised from global developments. It explains why university towns in the UK such as Oxford and Cambridge and cosmopolitan London voted overwhelmingly to remain in stark opposition to the shires in England. And why parts of Labour weren’t able to mobilise their own traditional supporter base for the Remain camp. This particular division, however, doesn’t just hold true to the UK. It’s a divide in a whole range of countries in the West. Be it from the US where Donald Trump has positioned himself as the antidote to a globalised out-of-touch elite, to France or Germany.

Third, as has been raised by many economists, there is increasing social inequality. All these divides of course overlap and they have most likely always existed in some form or another but what has changed is that they have become even wider, even more pronounced and even more virulent.

Society has become fragmented and this fragmentation has also been hardened by digital technologies. First, social interaction is decreasing. More and more products and services are provided online. It’s not necessary anymore to engage in social interaction to order something. Similarly, how often do you see people sitting at the same table looking at their mobile phones as opposed to engaging with each other? Secondly, social media has the potential to harden existing views, possibly decreasing dialogue and mutual understanding. When you go to Facebook, google and co. you get to see those articles and feeds that correspond to your previous browsing experience, clicks, likes, shares and views. One is in his own personal bubble, getting his or her views constantly reinforced rather than challenged. This hardens views and could undermine the willingness to understand where others are coming from. Perhaps it is one of the reason that pundits have recently been getting more and more social phenomena, such as the rise of Donald Trump, wrong. As they have not been in touch enough with real people on the ground but instead have been in their own digital cocoon.

Divides are also becoming more poisonous in other very obvious ways, such as “natives” versus “foreigners” and concerning the whole refugee debate. Racist rhetoric that over the years has started to thrive online has spilled into reality when politicians stand in front of a bus pointing a finger at a picture of desolate humans fleeing the atrocities of war and ISIS and blaming them for a countries’ woes. The most recent reporting about xenophobic attacks in the UK following the Brexit vote are particularly worrying, as are the increasing number of refugee shelters being burned in Germany.

The Brexit referendum has unveiled all the open, festering wounds in society. But before the country can address these it must find new leadership and resolve its relationship with the EU after the vote. Cameron has turned himself into a lame-duck prime minister, Corbyn is stubbornly clinging on to the Labour leadership, and with the exception of Nicola Sturgeon nobody is willing to as of yet take real action in finding a solution on how to move forward. The British political establishment seems to be in a state of shock. After the shock has passed, and it seems to be already passing, a new leadership will have to emerge that can not only address the UK’s relationship with Europe but also the relationships within its own society. And this – alas – is not just a task for the UK alone. It’s the responsibility for political leaders in many European countries. A new sense of social togetherness needs to be found. In the meantime, keep calm and carry on.