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Der Kingmaker, the debt ceiling and Lithium in coalition

Policy preview: ending the debt ceiling?
The US’ debt ceiling is among the most despised institutions of US politics, from the perspective of the Democratic Party. The ceiling formally institutes a limit on how much the US government can borrow – but in practice it has never done so, having been consistently raised since its introduction just over 100 years ag, even in the 1990’s when then-president Bill Clinton managed to run a rare surplus.

The ceiling is once again in the news after the Republican Party refused to support raising it in a procedural vote on 27 September. The ceiling was of course consistently raised under former president Trump, when Republicans controlled the Senate, and it was formally suspended for two years in August 2019. While this may well have avoided its politicisation during the COVID-19 pandemic, the vast government spending rapidly required by the initial response to the virus highlighted the potential risks in retaining such a limit.

Democrats argue that the Republican Party politicises the limit every time that it is out of power, pointing to the government shutdowns that resulted from refusals to raise the limit when Barack Obama was president and former Republican House Speaker Newt Gingrich’s 1995 move to separate the increase from the annual budgetary process. But at the same time the Democrats have been wary of publicly calling for its elimination, which could be perceived by voters as embracing fiscal irresponsibility.

Treasury Secretary Janet Yellen has warned that failure to raise the ceiling could lead to a formal default, declaring this would push the US back into recession. Federal Reserve Chair Jerome Powell – who former president Donald Trump nominated to replace Yellen in that post – has made the same point.

Republican Senate Majority leader Mitch McConnell has used the latest standoff to say that the buck stops with the Democratic Party this time, given the party’s control of both houses of Congress and the presidency. He is correct in that the Democrats can use the budget reconciliation process – which would override the Republican ability to filibuster such a vote – to eliminate the debt ceiling. Yet the Democrats are seemingly unwilling to open the 2022 budget resolution to do so, which could galvanise opposition to increased spending from centrist Democratic Senators Joe Manchin and Kirsten Cinema, already engaged in a standoff with their own party over a US$3.5 trillion social policy and US$1 trillion infrastructure bill.

The Democratic Party may therefore have an interest in allowing a brief crisis over the debt ceiling even as they control all branches of government. Previous shutdowns have failed to significantly affect domestic political trends. McConnell’s relationship with Trump and the less fiscally cautious wing of the party that has been so ascendant since his 2016 election victory is strained, with Trump reportedly seeking to stoke a leadership challenge among Republican Senators. Despite McConnell’s declarations, the intricacies of Senate parliamentary process are not of interest to most American voters.

Strange as it may seem, if Democrats are hoping to lay the blame for any fallout at McConnell’s feat, in hopes it will engender an environment in which they can finally push through the debt ceiling’s abolition in 2022.

“Democrats have every tool they need to raise the debt limit. It is their sole responsibility”. Senate Minority Leader Mitch McConnell

Power play: Der Kingmaker
Germans went to the polls on Sunday, and the election appears to already have a likely winner. The leader of the Social Democratic Party (SDP), Olaf Scholz, is look set to be the next Chancellor. However, the two smaller parties he will need to support his governing coalition will have to find a lot of compromise.

The SDP won the most seats in the election in a disappointing night for the Angela Merkel’s governing Christian Democratic Union (CDU).

The party sitting closest politically to the two largest parties, the SDP and the CDU, and thus natural coalition partners in the next government is the FDP, whose leader Lindner has been described as a ‘kingmaker’ who must choose the next leader of the Republic.

However, a coalition made up of the CDU, FDP and Greens, is politically implausible. The CDU suffered a heavy defeat on Sunday, losing a quarter of its support compared to the last election in 2017. Their leader is already facing calls to resign from within his own party, and is no longer a serious contender for the Chancellery.

The most likely outcome is a ‘traffic-light’ coalition between the Greens, the SDP, and the FDP. The SDP will need to form a coalition with these parties in order to form a government. But while the Greens favour statist intervention, the FDP is more aligned to a laissez-fair economic doctrine, preaching faith in markets to solve the climate crisis.

So while Lindner may no longer the ‘kingmaker’ – with little tangible choice over who will be the next Chancellor – more significant may be areas where the Greens and the FDP can find common ground. Whereas the Greens and SDP largely align on economic policy, the FDP support significant tax cuts and adherence to the debt brake. Division over climate issues such as the future of the car sector, Nord Stream 2 gas pipeline, and how to best protect households from the impact of climate policies, may prove to be sticking points.

However, early signs suggest compromise is possible – the Greens and FDP already have entered negotiations between themselves to better enable them to present a united front. To give just one example, Lindner has called for a state investment fund, separate from the federal budget, borrowing and invest with higher returns. The Greens may well see this as the route to climate infrastructure investment without having to increase national debt to unacceptable levels.

Perhaps Lindner will not be kingmaker, with Scholz apparently already Chancellor-in-waiting. But the success of Germany’s next government will depend on how much compromise can be reached by the FDP and the Greens – and early signs are promising.

“For me, it is always important that I go through all the possible options for a decision”.

Chancellor Angela Merkel

Dollars and sense: Lithium in coalition
Germany’s Green Party is all but certain to enter its next government after the 26 October elections – having come in third, both the first-place Social Democrats (SPD) and the runner-up Christian Democratic Union (CDU) have they want to discuss forming a coalition with the party. Any realistic coalition other than a renewed CDU-SPD grand coalition, which both have said they wish to avoid, would require the Green’s participation. The Green’s environmental agenda has been embraced by both as well, but one major question facing any new coalition will be how they balance environmentalism and NIMBYism.

Pollsters reported that more Germans identified climate change as their primary concern going into the elections, rapidly overtaking COVID-19 as the summer progressed. The German auto industry has also undergone a rapid shift to supporting the electric transition for the sector as well, spurred on by Tesla’s development of a ‘gigafactory’ outside Berlin – something the outgoing grand coalition pushed for. The CDU’s chancellor candidate, Armin Laschet, even met with Elon Musk in mid-August, seeking to brandish his parties green credentials.

Incidentally, Laschet posed a question to Musk that said gets to the heart of Germany’s green agenda: “hydrogen, or electric?”. Musk laughed it off, endorsing the later (on which he has staked his company) wholeheartedly but that such a question could still be posed in German politics highlights the quiet discomfort many at its peak express with regards to a core aspect of the transition: the supply of lithium batteries.

Demand for lithium has grown exponentially over the past decade, but Europe has repeatedly failed to develop its own sources. Plans for lithium mining in Portugal collapsed in April, and while the UK has made some very early tentative progress towards exploiting its own lithium, post-Brexit competition and EU rule-of-origin and tariffs mean that integrating European auto manufacturing with UK battery production is unrealistic at present.

Despite the enthusiasm for the green agenda, the Green Party has been at the forefront of opposition to lithium mining. At the European level, the party has fiercely opposed the US$2.4 billion Rio Tinto led Jadar mine project in Serbia over concerns it will degrade the local biodiversity and agricultural fertility and in solidarity with local protests.

Whatever coalition is formed in Germany, it will have to deal with the reality that Berlin risks being left behind if Europe remains without a significant local lithium supply. Otherwise, its auto industry risks being left behind.

“We have to think of where the raw materials come from… but we want to further develop and expand electro-mobility here in Germany, particularly with the production of batteries”. Annalena Baerbock, co-leader of the Green Party

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Boundary review blues? A (r)evolutionary framework and Dutch days

Policy preview: boundary review blues
Britain is overdue for a parliamentary constituency boundary review. Two efforts to do so since 2010 were both ultimately abandoned, following opposition from both sides of the floor and amid the tumult of the 2016 Brexit vote and its aftermath. In 2021, however, the process is due to get off the ground, with potential major implications for the next general election.

The groundwork for the new boundaries has already been laid by the Parliamentary Constituencies Bill 2019-2021, which received Royal Assent last December. It abandoned previous plans to reduce the number of MPs from 650 to 600 and set the boundary review to be completed by mid-2023, on the basis of registered electorates from last December. Constituencies aim to be within 5 per cent of 73,393 voters, meaning that more than half of the current parliamentary constituencies will have to be redrawn.

This work is to be undertaken by the Boundary Commission, which is non-partisan. Nevertheless, the moves are certain to raise opposition from affected MPs and parties. These tensions may play out in relation to the centrifugal sentiment prevailing in parts of the UK, particularly Scotland, which is set to lose at least one, more likely two, of its 59 MPs. Wales may lose as many as eight of its current 40 seats (though the constituency of Ynys Mon / Anglesey was enshrined as a protected constituency in last year’s Parliamentary Constituencies Bill).

The redistribution of seats around urban-rural divides is likely to have the most significant impact on the political fortunes of the Conservative and Labour parties. While the continued trend towards urbanisation and growing population in London and other major cities may help Labour where new seats are created, population shifts in other areas may help the Conservatives. A number of so-called ‘Red Wall’ seats won by Prime Minister Boris Johnson in the 2019 election, in many cases bucking decades of consistent Labour victories, are areas that have seen population decline. While this means some seats may fall by the wayside entirely, the geographical footprint of the remaining constituencies is likely to expand, picking up rural and less-populated areas, where historically voters have been more Conservative-leaning.

Although Johnson has also vowed to do away with the Fixed-Term Parliaments Act, his sizable majority means that it is more likely than not that the next election will only be held after the new seats come into effect.

Dollars and sense : A (r)evolutionary framework
In February, Zambia became the first country to request that it be allowed to restructure its debt under the so-called Common Framework. The nation’s fiscal and economic challenges are not new, and it had already fallen into default last November, setting the stage for a clash between its private creditors and China, by far Lusaka’s largest creditor, over how to make Zambia’s debt sustainable. The International Monetary Fund also started talks with the Zambian government last month, further complicating the picture. But it is the test of the Common Framework that will have the most far-reaching implications.

The Common Framework of the Group of 20 Nations is one of the various initiatives that governments have taken over the last year to help one another through the Covid-19 pandemic. The first major such effort – also organised through the G20, with the support of the IMF and World Bank – is the Debt Service Suspension Initiative (DSSI). This was launched last March and has seen debt repayments to the G20 creditors from 45 developing countries suspended, with a further 28 countries eligible for such relief.

The DSSI has been so significant because China has agreed to take part, although it had historically refused to cooperate with the informal grouping of mostly Western creditors known as the Paris Club. There has been significant concern in recent years over Beijing’s use of ‘debt trap diplomacy’ following its assumption of control of the Hambantota port in Sri Lanka, strategically located in the Indian Ocean, in 2017, but fears that the pandemic would see it seek to escalate such efforts have so far proven unfounded.

The Common Framework was announced at last November’s G20 Summit in Saudi Arabia and builds on the DSSI by establishing a unified set of rules for how sovereign nations’ debts such be restructured. Though the summit was held largely virtually due to the pandemic, supporters of the framework have insisted that support for it among G20 members is strong and unified. They will have to be for the framework to succeed. There has never before been lasting international agreement on sovereign debts, despite repeated attempts to set up a sovereign bankruptcy court. is Zambia presents a strong early test case for the Common Framework.

Private holders of Zambia’s bonds have telegraphed that they hold a blocking share of the debt, which could hinder any restructuring. They have demanded the terms of Chinese debt restructuring be disclosed before agreeing to any of their own. The Common Framework should enable this, although Beijing has demurred from publicly stating how its loans to Zambia are even constituted. If the Common Framework can even make moderate progress in bridging this gap, however, it may prove a key tool in government bankruptcies, particularly in the developing world, going forward.

Power play: Dutch days
Dutch voters go to the polls on 17 March, following the resignation of Prime Minister Mark Rutte’s government in January, prompted by the revelation that it wrongly accused thousands of families of welfare fraud. However, Rutte’s People’s Party for Freedom (VVD) has only built its lead in polls in subsequent weeks. 35% of voters appear poised to vote for the VVD, up from the 21.3% it received in 2017. Only Geert Wilders’ far-right Party for Freedom (PVV) is also above 20 per cent in the polls, and then just barely, but as with other previous Dutch elections, most other parties have ruled out considering a coalition with the PVV.

Rutte therefore appears set to head another government, almost 11 years after he first became prime minister. With German Chancellor Angela Merkel not standing for re-election as chancellor in Germany’s federal elections, expected on 26 September, Rutte is poised to become the elder statesman of the European Union.

If Rutte’s VVD performs as well as current polls predict, it will have its choice of coalition partners, but the most natural allies would be those with whom he formed the previous government and who have overseen the interim cabinet in the run-up to the current vote. These are the liberal D66. centre-right Christian Democratic Appeal (CDA) and centrist Christian Union. Some polls indicate the CDA will win enough votes to open up the possibility of a two-party coalition between the VVD and CDA. The centre-left and left are unlikely to play a major role at all, with the Dutch Labour Party (PvdA) a shadow of its former self, having never recovered from the global financial crisis and Eurozone crisis.

Heading a unified centre-right government would set the stage for a more conservative agenda, and if past evidence is any indication, Rutte would likely seek to carry this over into his unofficial role as Europe’s elder statesman (and formally on to the European Council, which guides the EU’s policy agenda). Rutte’s governments had traditionally been allies of the British in their opposition to the idea of ‘ever closer union’ while the UK was still an EU member. More recently, he led resistance to the ‘coronabonds’ mutualising EU debt amongst members, and if a government of only his centre-right allies, would further increase support for Dutch leadership of the ‘Frugal Four’ within the EU. With Merkel set to leave the scene, and Rutte set to secure his position, Europe’s leadership itself may soon be changing to a more cautious tack.

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