By Bas van Geffen, Senior Macro Strategist at Rabobank
On The Wrong Track
For no other reason than historical, the entire European Parliament migrates from Brussels to Strasbourg for one week each month. To orchestrate the move, the parliament charters entire trains. This practice has drawn criticism and ridicule at the best of times. Earlier this week, due to a switching error, dozens of Members of European Parliament heading for Strasbourg found themselves at Disneyland instead. The symbolism of the error invites numerous jokes, such as POLITICO recalling that the EP is regularly seen as a Mickey Mouse Parliament – though I would say that Mr. Mouse probably runs a tighter ship than Europe.
The events in the Middle East again put the finger on the EU’s weakest spot: foreign policy. Take, for instance, the internal row over Von der Leyen’s trip to Israel – with many diplomats accusing her of policy overreach when she delivered a speech that not all countries could support. And last week the EU had to reverse its decision to halt aid to Palestine within hours of its announcement after furore from national governments. Indeed, European policymakers have been at pains to formulate a response that everyone could stand behind.
European officials aboard the train underwent their delay with a sense of humor too, with one jokingly suggesting that Disney’s slogan – When magic comes to life – could soon become the European Parliament’s as well. All jokes aside, European politicians could use a bit of magic to realize their dreams of strategic autonomy and a greener economy.
Because outside the gates of the Magic Kingdom, reality sadly still looks very grim. The deadly explosion at the Al-Ahli hospital turned US President Biden’s objective to de-escalate tensions in the Middle East into a herculean task. Accusations and (fake) evidence of involvement of both sides circulated. Despite this uncertainty, various countries were quick to condemn the attack, with many (initially) putting the blame on Israel. A day later, various intelligence sources suggest that the explosion was more likely caused by a misfired missile from Islamic Jihad militants. President Biden told Israel’s Netanyahu that “it appears as though it was done by the other team, not you,” according to his Department of Defence. While this may have shifted the perspective of some countries, it probably hasn’t changed the opinion of leaders of other Middle Eastern countries.
At the same time, President Biden’s attempts to de-escalate the situation may have partly fallen on deaf ears in Israel as well. “Justice must be done,” Biden said. “But while you feel that rage, don’t be consumed by it,” noting that many Palestinians are innocent and simply caught in the middle of this conflict. Yet, that advice may not be sufficient to see the Israeli leaders back down from a ground operation. And, especially after the cause of the hospital explosion is still being questioned in the Arab world, any such escalation from Israeli side comes with the risk that other countries may get (more) involved in the conflict.
But Israel, of course, has support from the US. Biden reiterated this yesterday: “[You] have to continue to ensure that you have what you need to defend yourselves. And we’re going to make sure that occurs, as you know.” Bloomberg reported that the US President is considering a supplemental request of $100 billion(!), which “would include defense assistance for Israel and Ukraine alongside border security funding and aid to nations in the Indo-Pacific, including Taiwan”.
Returning back to inside the gates of Europe’s land of wonders, the outside situation is unfortunately already seeping in. Not only politicians are divided; so too is the population. Security personnel have been on high alert for conflicts between supporters of both sides. Yesterday, the palace of Versailles was evacuated for a third time in just days, and several French airports were evacuated after threats were made against them.
Meanwhile, park maintenance is ongoing, as governments are unhappy that popular rides are unavailable to many Europeans. To allow more people past the ‘you must be this tall to ride’-signs on popular attractions like the housing market – with a steadily increasing lower bound owing to the ECB’s policies – several governments have launched, or extended, support programmes. France’s Le Maire announced an expansion of the zero-interest loan (‘PTZ’) programme. The policy supports households looking to buy a house in areas where the property market is tight, by making available –under certain conditions– interest-free loans of up to €100,000 (with the state covering the interest payments instead). The finance minister said, “The increase in rates prevents many French people from accessing a mortgage loan. [...] We want as many households as possible to have access to housing loans.” Some middle class households will now also be entitled, and about 200 cities will be added to the list of eligible regions.
Le Maire estimates that this could cost the government around €850 million. A back of the envelope estimate suggests the government expects to help some 230,000 households. Yes, that is less than 1% of French households, but it could nonetheless pose a headache for the ECB. Other countries have taken similar measures to shield households from higher mortgage costs – take Spain and Italy. And the measures help those with lower incomes and first time buyers, which have relatively elastic demand curves. By contrast, those with existing mortgages – and a sufficiently long fixed rate period – are less sensitive to rising rates. And so, these measures, noble as their intentions are, could dull the impact of monetary policy at a time when the ECB is desperately trying to get people to behave more like Scrooge McDuck.
It also raises questions about the number of seats left on the (Fiscal) Space Mountain ride: Le Maire himself has said he would seek an additional €1 billion in spending cuts on top of the €16 billion in cost reductions unveiled in the draft 2024 budget last month, as governments are also starting to feel the impact of higher financing costs.
