Category Archives: Europe

Europe, Politics

Why Spain’s New Coalition Will Struggle to Govern

This article has been republished with permission from our partner, Stratfor. The original version was first published in Stratfor’s WORLDVIEW and can be found here.

HIGHLIGHTS

  • Spain will be governed by an untested coalition that does not control a majority in parliament, which will render the policymaking process more complex and limit the new government’s effectiveness.
  • The Spanish economy is slowing, and a combination of risk factors (from ongoing trade disputes with the United States to unresolved secession disputes with Catalonia) will contribute to even slower growth in 2020.
  • Companies operating in Spain will deal with greater fiscal pressures and a government that will seek to backtrack on some of the labor market reforms that were introduced during the peak of the economic crisis in the early 2010s.

Spain has just appointed its first coalition government since the return of democracy in the late 1970s, but the new government will struggle to pass structural reforms at a time of growing political fragmentation and slowing economic growth. Prime Minister Pedro Sanchez, who won a vote of investiture in parliament on Jan. 7 and will lead a coalition between his center-left Socialist Party (PSOE) and the left-wing Unidas Podemos (UP), will have to deal with a worsening economic environment, a precarious labor market and secession pressure from Catalonia. Companies operating in Spain, for their part, will face higher taxes and the reversal of some of the market-friendly policies that were introduced during the peak of the economic crisis in the early 2010s.

The Big Picture

In recent years Spain’s political system has become more fragmented, general elections have become more frequent and structural reforms have become harder to implement. For the most part, the Spanish economy has been immune to political events, growing nonstop since 2014. But that immunity is ending, and Spain’s new coalition government takes office facing slowing growth, unresolved secession disputes in Catalonia and a precarious labor market.

See Europe section of the 2020 Annual Forecast

A Fragmented Political Landscape

Between the 1980s and early 2010s, Spain had single-party governments led by either the PSOE or the center-right People’s Party. But in recent years, a combination of factors ranging from the economic crisis to corruption scandals led to the emergence of new political parties on the left and the right. As a result, Spanish parliaments have become more fragmented, early elections have become more frequent, and governments have had a harder time implementing policy. This development explains why Sanchez is the first prime minister to lead a coalition government since the end of Gen. Francisco Franco’s dictatorship in the late 1970s.

In a further complication, PSOE and UP do not control the majority of seats in parliament, meaning members of the coalition will have to first agree on policy with each other, and then seek support in parliament on a case-by-case basis. This will open the door to disagreements between the coalition partners and create a complex legislative process wherein the government will need to make concessions to smaller parties in parliament to pass legislation. Policymaking will, therefore, become more complex, slower and subject to constant pitfalls.

This complex political landscape will subject companies operating in Spain to recurrent uncertainty, both about the survival of the government and about future policy. The Spanish Constitution makes it hard for the opposition to oust a government, rendering the chances of a successful no-confidence motion against Sanchez low. However, disputes between the PSOE and UP could lead to the dissolution of their alliance that almost certainly would lead to an early election. At the same time, parliament’s fragmentation may force the government to modify or abandon its policy proposals, making it difficult for businesses to make long-term predictions about the continuity of policy.

Businesses in Spain, particularly in sectors such as banking and energy, probably will face greater fiscal pressure since the new government is expected to try to raise taxes on high earners and large corporations. For example, the PSOE and UP have agreed to introduce a tax on financial services, which will affect Spain’s robust financial sector. PSOE and UP have also agreed to backtrack on some labor reforms introduced during the peak of the economic crisis in 2012 by making it harder for companies to dismiss workers, reducing the use of temporary contracts and giving priority to collective bargaining on salaries instead of company-specific negotiations. Without a parliamentary majority of its own, the PSOE-UP alliance will have to reach out to smaller parties to introduce reforms in taxation and the labor legislation. Center-left parties such as the Republican Left of Catalonia (ERC), Mas Pais and EH Bildu could endorse these reforms, but they will make demands of their own in exchange for their support.

A Slowing Economy

Spain’s economy has largely been immune to the country’s increasing political complexity and uncertainty, growing every year since 2014 thanks to a combination of business-friendly measures introduced by Madrid during the economic crisis and a generalized improvement in the eurozone economy during the late-2010s. But that immunity seems to be over. Most forecasts predict that Spain’s GDP growth will slow in 2020 and 2021. This slowdown is connected to multiple foreign and domestic factors.

Trade disputes between the European Union and the United States will continue in 2020 and take their toll on Spain’s economy. The United States introduced higher tariffs on some Spanish exports such as olive oil and wine in 2019, and the White House could raise tariffs on additional products in 2020, especially if the European Union targets the United States with its own tariff hikes. This move would dent the Spanish economy because the United States is Spain’s main non-EU export destination (roughly 5 percent of Spanish exports go to the United States). In addition, Madrid’s plan to introduce a tax on digital companies (a decision the White House would oppose vehemently) could also prompt the U.S. administration to retaliate with additional tariff hikes.

At the same time, Brexit-related uncertainty will ease during the early months of 2020 but will return by the end of the year. The United Kingdom almost certainly will leave the European Union on Jan. 31 and will remain in the single market until Dec. 31. But should London and Brussels fail to reach a comprehensive trade deal by the end of 2020, and should London refuse to request an extension to remain in the single market, significant disruptions in trade would follow. The United Kingdom is Spain’s fifth-largest export destination (almost 7 percent of Spanish exports go to Britain), while millions of British tourists visit Spain every year. New barriers to trade (such as having to implement World Trade Organization tariffs if the United Kingdom and European Union fail to reach a trade deal by year’s end) would damage Spanish exports, while a weaker pound vis-a-vis the euro would lead to fewer British tourists in Spain — to name only two of the many consequences of weaker EU-U.K. economic ties.

The new Spanish government will also deal with domestic economic problems, particularly connected to the labor market. While Spain’s unemployment rate has been falling fast in recent years, it remains the second-highest in the European Union after Greece’s. Spain also has high rates of youth unemployment (around 30 percent) and a serious problem of long-term unemployment (people who have been out of work for more than a year find it much harder to find jobs than those unemployed for only a few months). Finally, Spain has the European Union’s highest rate of workers under temporary contracts: One employee in four is under a fixed-term contract, twice the EU average. This precarious labor market drags down domestic consumption and investment, which, in turn, undermines economic growth. The PSOE-UP alliance will seek to address these problems through reform in labor legislation, but it will need to persuade like-minded parties in parliament to join the effort, which will not be easy.

Unresolved Catalan Issues

The new Spanish government will also have to deal with Catalonia’s push for independence. The region will not secede from Spain any time soon, but the secession issue will continue to generate friction between Madrid and Barcelona and raise questions about the future of Spain’s territorial integrity.

Sanchez will benefit from the tense relationship between Catalonia’s main pro-independence forces, Together for Catalonia (JxC) and the ERC, which reduces the chances of a coordinated push for secession. JxC and ERC, which compete to be the region’s main political party, advocate different strategies to achieve independence. Some JxC members want to take unilateral measures to secede from Spain, while the ERC favors a more pragmatic strategy that includes dialogue with the central government in Madrid.

Their competition will increase in 2020 because Catalonia probably will hold an early regional election. This vote means that pro-independence parties will not be strong enough or united enough to seriously threaten Spain’s territorial integrity. Moreover, Sanchez’s promise to keep an open dialogue with Catalan secessionists and to improve ties between Madrid and Barcelona suggests that the central government will seek appeasement rather than confrontation to deal with the rebel region.

An important fact remains unchanged. Madrid will not authorize a legally-binding independence referendum in Catalonia, and the region’s pro-independence parties will not stop demanding it.

An important fact remains unchanged. Madrid will not authorize a legally-binding independence referendum in Catalonia, and the region’s pro-independence parties will not stop demanding it.

However, an important fact remains unchanged. Madrid will not authorize a legally-binding independence referendum in Catalonia, and the region’s pro-independence parties will not stop demanding it. The situation of the pro-independence leaders who were jailed after the unilateral declaration of independence in 2017 will also continue to create issues between Madrid and Barcelona.

PSOE and UP have promised to introduce a “fairer” mechanism to distribute state funds among Spain’s autonomous communities and to “reduce the ambiguity” in the policy attributions of the central state and the regional governments, both of which are meant to appease Catalonia. But they will struggle to win enough support in parliament to pass these reforms. As a result, tensions between Madrid and Barcelona probably will not be as extreme as they were in 2017 when Catalonia unilaterally declared independence, but long-term questions about the future of the region will not go away either.

So, while companies operating in Catalonia will see some degree of stability in 2020, their doubts about the future of the region will remain unanswered. Political uncertainty so far has had a modest effect in Catalonia because the region’s economy has grown nonstop since 2014. However, Spain’s National Institute of Statistics recently reported that Catalonia’s regional GDP grew at a rate lagging the average for Spain as a whole in 2017 and 2018. In the meantime, thousands of companies have moved their legal seats out of Catalonia to other Spanish regions since Catalonia’s independence declaration in 2017. While the vast majority of these companies retained operations and workers in Catalonia, the change of legal seat highlights the concern that the independence process has created among businesses in the region.

While Sanchez’s appeasement strategy probably will lead to a decrease of frictions between Madrid and Barcelona, it will create the risk of a nationalist backlash among Spain’s conservative parties. The People’s Party already has announced that it will take to the streets to protest Sanchez’s decision to keep the dialogue with Catalan separatists open, and the right-wing Vox party could do the same.

At the same time, the European Court of Justice recently ruled that ERC leader Oriol Junqueras, who was elected to the European Parliament in May, enjoyed parliamentary immunity when he was sentenced to 13 years in prison in October for his participation in the illegal Catalan independence referendum in 2017. The final decision on whether Junqueras should be released from prison is in the hands of the Spanish Supreme Court, but the European court’s ruling in favor of a convicted Catalan separatist could exacerbate Euroskeptic sentiments in Spain, particularly among Vox voters. Even if Sanchez tries to calm frictions with Catalonia, the situation in the region will continue to be a central element in Spanish politics.

An important fact remains unchanged. Madrid will not authorize a legally-binding independence referendum in Catalonia, and the region’s pro-independence parties will not stop demanding it.

Stratfor LogoAs the world’s leading geopolitical intelligence platform, Stratfor brings global events into valuable perspective, empowering businesses, governments and individuals to more confidently navigate their way through an increasingly complex international environment. Stratfor is an official partner of the Affiliate Network.

www.stratfor.com

Europe, Foreign Policy

Mind the Gap: Geo-Strategy of Natural Gas

3 Comments

Reducing dependence on imported natural gas will be a key strategic effort for European security over the next 50 years. Steadily declining production from dwindling fields in the UK, Norway and the Netherlands means Europe will need to import ever larger volumes of gas. This gap will widen over the coming years particularly in the European Union. This is because most industrialized countries are experiencing a growing gas supply gap caused by coal and nuclear plant retirements in parallel with increasing demand for natural gas from India, China, and Africa.

As the world makes a transition from fossil-based to zero-carbon energy, it is moving towards a balance of solar and wind power plus natural gas. The International Energy Agency (IEA) believes that by 2025, solar, wind, and hydroelectric generation will account for as much as coal and gas. In order to keep warming under the 2°C threshold agreed at the 2009 Copenhagen climate meeting however, greenhouse gas emissions in 2050 will need to be 40% to 70% lower than they were in 2010. These changes, along with accelerated renewable energy growth, transport electrification, energy-saving and efficiency, and carbon neutral infrastructure would make it possible to achieve 90% of required emission reductions but the remaining 10% will continue to emit carbon. Although most industry commentators expect coal use to eventually decrease rapidly, natural gas will play a substantial role in the global energy mix for some time.

Global Reserves and European Imports

An overwhelming 83% of the world’s natural gas reserves are located in just 10 countries. Four of those countries – Russia, Iran, Qatar, and Turkmenistan – contain 58% of global reserves. The Russian economy in particular depends heavily on oil and gas, which provides ~40% of federal revenues and a tremendous incentive to use gas exports as a politically coercive foreign policy tool. Europe now imports about 43% of its natural gas through a Soviet era pipeline network crossing Belarus and Ukraine. The Blue Stream pipeline, installed under the Black Sea in 2003, allowed some diversification in Russian export capacity into Europe but by mid-2019 approximately 90% of European imports of Russian gas flowed via a combination of the Baltic Nord Stream 1 pipeline, completed at the end of 2012, and the Soviet era network that sometimes operated above its designed maximum flow capacity.

Collectively, these Russian operated/influenced pipelines and newly built LNG projects offer Moscow tremendous influence. In 2009, Russia used its Gazprom-owned pipelines to apply economic and political pressure on Europe and Ukraine. Although Europe weathered the crisis, Russia struck again in January 2015. This time, Norway compensated for the Nord Stream 1 export cut resulting in a USD $5.5 billion loss in Gazprom revenue and fines of $400 million. Europe was able to make a political point but Norwegian bailouts will not be feasible over the long term.

Main Russian Natural Gas Pipelines to Europe.
Main Russian Gas Pipelines to Europe. Nord Stream 1 & 2; Belarus Yamal_Europe, Trans-Ukraine Brotherhood/Soyuz (Urengoy-Ughzod), Blue Stream, Turk Stream, South Caucasus Pipeline (SCP); Trans-Turkey TANAP-TAP; Baku-Brindisi via Georgia-Turkey-Greece. Source: https://blogs.platts.com/2019/04/04/nord-stream-2-danish-permit/

Politics, not geography, guides the future of Europe’s energy supply. According to Gazprom’s “optimization program”, most of the pipelines and associated infrastructure crossing Ukraine will be decommissioned. Gazprom shut down three compressor stations in 2018, with plans to eventually close 4,160 Km of pipeline and 62 additional compressors, leaving the Ukrainian network with little more than 10% of its original capacity. At the same time, the construction of Nord Stream 2 will permanently double Russia’s transmission capability outside Ukraine making Kiev highly vulnerable to Russian coercion. It is not difficult to see that Russia is bypassing Ukraine in favor of direct access to European and particularly German markets. In addition, pipelines across the Black Sea and those further south, including some under construction or planned, are likely to solidify Russian standing in Turkey and the Middle East.

Minding the Natural Gas Supply Gap

Russia’s strategy starves Ukraine and Slovakia of much needed transit fees and some degree of political independence. The strategy could also leave Europe more directly dependent on Russia to fill the European gas gap. With EU/Norwegian domestic production estimated to fall to 150 billion cubic meters (Bcm) annually by 2030 and consumption rates estimated at up to 510 Bcm annually – a 2010 figure – about 80% (360 Bcm annually) of EU imports could be Russian controlled or influenced by 2025.

These numbers are not favourable for Europe, which intends to meet some of the predicted increase in demand with Liquid Natural Gas (LNG) imports mostly from Qatar, Algeria and Nigeria but even this will not protect them from Russian influence. Russia has plans to capture 15%-20% of the global LNG market that would make it extremely challenging for costlier American LNG to counter Russia’s Siberian exports. Part of these plans depend on expanding the three train Arctic Yamal LNG to four LNG trains that can transport 29 Bcm annually. The $27 billion project is owned by Novatek (50.1%), China National Petroleum Corporation (CNPC) (20%), Total (20%), and China’s Silk Road Fund (9.9%), financed primarily by Chinese banks. The first shipment to UK via Yamal LNG was 170,000 cubic meters (equivalent to 0.1 Bcm) delivered by the LNG vessel Christophe de Margerie Arc 7 in December 2017.

Even importing gas from beyond Russia’s sphere of influence will be difficult. Importing the equivalent of Nord Stream 2 pipeline would require about 8 to 12 LNG vessel trips per week and competition is fierce. Though Qatar lifted a 2005 moratorium on further LNG development in April 2017, major announcements this year indicate the North Field Expansion (NFE) project will expand production from 105 to 170 Bcm annually by 2024. These developments included new jack-up drilling rigs, four new LNG trains, and a shipbuilding campaign to deliver 60 new LNG carriers and suggest most of the expanded production is destined for Southeast Asia. Future strategic supplies from developing offshore fields in the eastern Mediterranean may supply Europe, but Turkmenistani gas is likely to go east to markets in Pakistan, India, and China.

Russian and Middle Eastern Natural Gas Supply to EuropeGeo-Strategic Imperative

With LNG seemingly unable to meet Europe’s gas gap, nine infrastructure projects Russia is currently developing can be viewed as an investment in Moscow’s influence in the EU. It is quite possible these nine projects could eventually provide something close to ~290 Bcm annually in export capacity for supply into Europe, with roughly 50 Bcm annually from the IGAT-9 and Kurdish Regional Government (KRG) Pipelines delivered to the SCP-TANAP-TAP Southern Gas Corridor (see map). Based upon past instances, Russia could “weaponize” this near monopoly over natural gas and use it to apply political pressure but this time with greater effect.

There is therefore a geo-strategic imperative to substantially reduce European natural gas consumption. Improving the balance between gas, solar, and wind energy will have important geopolitical benefits including reduced fossil fuel use and improved human health and security. Acceleration of the development rate of renewable energy technology is essential. Adopting a faster rate of transportation electrification, and government support to reduce gas consumption can mitigate the effects of Russian pressure but it will not solve the problem completely. Governments must also accelerate developments in nuclear fusion, carbon capture and storage technology, and possibly clean zero emission shale gas extraction. Diversification of energy sources and the reduction of consumption is a win-win for Europe and the only way to fully mind the gap and escape the pressure of natural gas dependency.

ChriCG 002s Golightly is an Independent Consulting Engineer specializing in offshore renewable energy, based in Brussels. Prior to 2010 he worked in the Oil & Gas industry.

Europe, Politics

Overcoming Democracy: Italy’s Online Experiment

1 Comment

A political earthquake struck Italy this summer as alliances shifted between bitter rivals in the country’s complicated multiparty system. Power plays, miscalculations and surprise deals made for juicy media headlines, but the most important lesson for the world may lie in the way one particular populist party allows technocrats to substitute technological farce for representative democracy. Though the crisis for government control made global headlines, the internal dynamics are somewhat difficult for outsiders to understand. In his 2015 book The Italians, author John Hopper observed that the turbulent surface of Italian politics may be by design. “[in Italian politics] issues remain arguable, and thus negotiable.” he wrote. “Imprecision is, on the whole, highly prized. Definition and categorization are, by contrast, suspect. For things to remain flexible, they need to be complicated or vague, and preferably both.”

In August, Matteo Salvini of the right-wing League Party created the most recent “turbulent surface” by making moves to bring down the coalition government in hopes he would then win a snap election. Despite his soaring popularity, an unlikely coalition led by the anti-establishment 5-Star Movement thwarted his attempt to gain control. 5-Star and its center-left former rival, the Democratic Party (PD), looked past their differences to freeze Salvini out completely. However temporary, sidelining Salvini and the League was a surprising outcome considering the rise of right-wing parties and leaders in Europe over the past few years. Many of these parties, including Salvini’s, have both overt or revealed links to Russia and its strongman president Vladimir Putin.

The “Non-Party” 5-Star Movement

Far from being a typical political party, the 5-Star Movement is a self-styled “anti-party” group that European journalist Darren Loucaides said “tapped deeply into one of the most powerful forces in Italian politics: disgust with Italian politics. Rather than offer an ideology or platform, Five Star offered a wholesale rebuke of the country’s entrenched, highly paid, careerist political class—left, right, and center.” A grassroots, populist movement, 5-Star emulated the profane style of its famous comedian co-founder, Bepe Grillo, calling some of its early events V-Days, a play on both the 2005 dystopian film “V for Vendetta” and a popular Italian vulgarity. Initially, the five stars in the group’s name referred to its policy priorities: sustainable transportation and development, public water, universal internet access, and environmentalism. Over the past 15 years however, that platform has expanded to include term limits, preventing those with criminal convictions from running for office, and now also a Universal Basic Income concept similar to the one making headlines in the 2020 US Presidential Race thanks to candidate Andrew Yang. Not so flatteringly, 5-Star has also been connected to anti-vaccination laws, the Brexit campaign, and American political operative Steve Bannon.

“When Grillo and Casaleggio founded the 5 Star Movement, few imagined they would reduce democratic freedom by doing so.”

Though Grillo was the public face of the movement for years, the man that truly orchestrated its rise to power was an unknown Italian entrepreneur and political activist named Gianroberto Casaleggio. Casaleggio used Grillo’s fame, straightforward internet blogs, and the Meetup.com platform to create a “grand techno-utopian project…an online voting and debate portal.” Casaleggio hoped to make the elected Italian Parliament obsolete, putting the power to legislate in the hands of the Italian people through their computers and smart devices. As Louciades wrote in Wired, as early as 2001 Casaleggio surmised technology would fundamentally change governments and politics, creating greater transparency and political accountability to the will of the people. He envisioned “interactive leaders” that deal directly with the masses, bypassing the media and its role as an interpreter. In Casaleggio’s view, a natural consequence of cutting out the media middleman would be the “imminent demise of journalism.” Society would be able to see politics as it truly is, not the “virtual reality” the media creates. He did not mince words: “Overcoming representative democracy” he said, “is therefore inevitable.”

Philosophers and Technocrats

Casaleggio named his direct democracy platform after the eighteenth century Enlightenment author and philosopher Jean-Jacques Rousseau and set its launch date for April 13th, 2016. Unfortunately for Casaleggio, he died two days before its debut and would never know how Rousseau became central to the rise of the 5-Star Movement in Italian politics. Rousseau creates democracy without the use of intermediaries or the centuries-old political caste by allowing members to vote for candidates, create referendums on party decisions, propose and debate laws, and participate in fund-raising. As the internet and smart devices make the world ever more interconnected, the potential for these tools to facilitate direct democracy could mean drastic change for governance and politics. An idealist may believe that these systems, when integrated with blockchain or online-banking style security, could empower more voters and bring participation levels to new highs. A skeptic would counter that replacing representative democracy with internet-enabled direct democracy actually creates opportunities for coercion, cybercrime, and consolidation of political power in the hands of a few powerful technocrats.

Ironically, the 5-Star Movement has been roundly criticized for pioneering this technique though it directly contradicts their populist aims. When Grillo and Casaleggio founded the Movement, in part to cut the middlemen out of Italian politics, few imagined they would reduce democratic freedom by doing so. However, with power and information strictly controlled by a small group of technocrats at Milan-based Casaleggio Associates, 5-Star stands accused of silencing dissent. Italian author Silvia Mazzini compared Beppe Grillo to a populist dictator, ushering in new party members then threatening to ostracize or punish them if they do not support his ideas. Despite espousing a desire to empower the common citizen, Casaleggio Associates hand-picks candidates for the Rousseau elections without any transparency whatsoever. There are however, more obvious problems using Rousseau as a mechanism for direct democracy. In July 2019 there were only 100,000 active members on the platform, a tiny fraction of the 10.7 million Italians that voted for the 5-Star Movement in the 2018 general election. These are underwhelming numbers, even in a country where one out of four people still lack access to the internet.

The Future of Online Voting and Direct Democracy

Though access and participation are problematic, security is perhaps a bigger concern. Rousseau suffered several high profile cyber attacks in the run up to elections in 2017 and 2018. Hackers stole members’ information and even published phone numbers and passwords of party leaders in what was probably an attempt to intimidate voters and candidates. In response, the Italian data protection authority fined Casaleggio Associates for failing to fix several security flaws in their system. Italy is hardly the only nation experimenting with risky technology in the democratic process. The Harvard Kennedy School’s Belfer Center released a report that, among other things, concluded “mobile and internet voting technologies are not presently secure enough for large-scale applications. Nevertheless, nations like Ukraine are “moving forward with integrating blockchain-based online voting into their national election systems in efforts to increase security and prevent voter fraud.”

Italy is the first large western republic to utilize an internet-based technological platform that purports to expand democracy on a national scale. As other republics around the world grapple with new wave populism featuring interactive leaders that use social media to bypass traditional filters, the integrity of democratic voting processes becomes a paramount concern. Italy’s ongoing experiment with Rousseau demonstrates that the security vulnerabilities of online platforms and limitations on participation, access, and transparency inherent in these technologies can make some voters more equal than others. The world will do well to look deeper and decide if this is truly an expansion of democracy or actually, as Gianroberto Casaleggio predicted, “democracy overcome.”

Wilhelm JaredJared Wilhelm is a Foreign Area Officer and former Naval Aviator who lives in Italy. He is a member of the Military Writer’s Guild, was named a 2014 Olmsted Scholar, and is a graduate of the U.S. Naval Academy, U.S. Naval Postgraduate School, and the U.S. Naval War College. His views are his own and do not represent the views or position of any other entity. He has previously published numerous articles on democracy around the world, including Some More Equal than Others.