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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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Return of the World Trade Organisation, Europe’s lithium litmus test and offshore national security

Policy Preview: Return of the World Trade Organisation (WTO)
US President-elect Joe Biden will seek to rebuild the global trade infrastructure that Donald Trump has sought to dismantle – starting with the World Trade Organisation. Not too long ago, the body was the core international trade institution, but the Trump Administration effectively neutered its ability to hear disputes by refusing to support the appointment of new judges to its appellate body. Three are required to hear disputes, but currently just one is in office. Just before the election, the White House also blocked the appointment of Ngozi Okonjo-Iweala, a former Nigerian finance minister and World Bank economist, as the WTO’s director general.

Expect the Biden Administration to back Okonjo-Iweala’s appointment within weeks of the 20 January 2021 inauguration. It will also begin negotiations with the bloc’s other member – including China – about the appointment of new appellate judges. This will not be straightforward – Democrats and Republicans alike have long voiced concern over the WTO court’s handling of dumping issues as well as the slow nature of the process. The Obama Administration also blocked new appointments to the court in the second term as a result.

Biden has made it clear that he does not envisage new trade agreements as a priority – and as discussed in the previous Hawthorn Horizons, Republicans may still deny him the opportunity to pursue such pacts if expedited trade authority is not renewed before its June 2021 expiration. However, the past four years have highlighted the fragility the Western-led international institutions built up over the last seventy years are, particularly when they are under threat from within the West itself.

Reforming the WTO is likely a non-starter, the same challenges with expedited trade authority would still apply and Beijing’s ability to exert leverage over the other 162 members regarding the terms of any new deal is far greater than when it joined the bloc in 2001. But the Biden Administration will act on his comments to support the ‘rules based international order,’ and strengthening the WTO will prove essential to this agenda.

Ironically, Trump’s own tariff actions may have given the Biden Administration the leverage to also secure appointments it considers more favourable. If the appellate courts are reinstated, even the most US-friendly arbitrators would likely eventually find that these tariffs violate WTO rules. But China and other countries are keener to have them lifted than the Biden Administration will be. Removing these tariffs in exchange for appointing friendly appellate judges, restoring the WTO’s dispute-resolution function, is a bargain that Biden’s team will see as making sense for all sides.

Dollars and sense: Europe’s lithium litmus test
The European Union has for nearly a decade operated a ‘critical raw materials strategy’ aimed at shoring up access to and developing sources of key commodities. It has long been seen as ineffectual and now faces arguably its greatest challenge yet, following the inclusion this year of lithium for the first time. The increase in secure supply needed is drastic, EU Commissioner Maros Sefcovic in September decaled that the bloc “would need up to 18 times more lithium by 2030 and up to 60 times more by 2050”.

Lithium is the key to the battery and energy storage industries, hence the expectation for a rampant increase in demand. However, it has not been found in commercially-viable quantities within the EU anywhere other than Portugal’s Barroso mountains. Two mining concessions have been granted, one to UK-listed Savannah Resources and to Portugal’s own Lusorecursos. Yet the project has faced significant resistance from local residents and various Portuguese NGOs. They have also sought to block still-in-development plans to build lithium refineries in the region, necessary to enable the metal’s use in batteries.

Portugal’s government has repeatedly stated that it intends to get the approval of the lithium mines finalised, and Prime Minister Antonio Costa has endorsed the EU’s agenda wholeheartedly. However, after Costa’s Socialists won the 2019 election, securing 106 of the lower house’s 230 seats, they did not continue the support pact they previously struck with the Communists and Left Bloc.. Instead, these two far-left groups provide the government with support on a bill-by-bill basis. It is also occasionally backed by the environmentalist PAN and Green parties, which hold another five seats combined. To continue the development of the country’s lithium prospects, Costa will not be able to rely on these allies, who all oppose lithium extraction. And while the main opposition centre-right Social Democrats (PSD) do support lithium extraction, the extent of this does not extend to a willingness to support Costa.

Costa’s government is already facing challenges – it passed its 2021 budget on 26 November only after the Communists agreed to abstain; all other parties voted against, even after Costa agreed a new environmental review process, including for lithium projects, earlier in the week. Yet there is little chance the left will seek to a new confidence vote over the next six months, given Portugal’s assumption of the EU presidency in January. Costa’s priorities will be enacting reforms to the bloc’s fiscal and economic union that have dominated the past year, and the left will be unwilling to give these up. The EU’s critical resource strategy may remain ineffective in and of itself, but the fortuitous timing of the rotating presidency will give it a much-needed boost. Expect Lisbon to finalise a new law sharing revenues with municipalities and for ground on key projects to be broken by the end of 2021.

Power play: offshore national security
The 11 November publication of the UK’s National Security and Investment Bill (NSIB) laid out the processes by which the government will review inbound foreign investment, and the requirements for UK firms in certain sectors to notify the state about proposed foreign takeovers. Its passage through parliament is all-but assured, and it is expected to become law early next year. The new powers it grants the government will almost entirely be invested in the Secretary of State for Business, Environment and Industrial Strategy (BEIS), currently Alok Sharma. Unlike the US’ Committee on Foreign Investment (CFIUS), which provides a recommendation to the president who then makes the final decision, the NSIB in its present form grants this power to the Secretary of State, not the prime minister.

But even before the introduction of the NSIB, the government signalled its intention to take a more proactive stance on such interventions. In December 2019 then-Secretary Andrea Leadsom announced a review of the Chinese-owned Gardner Aerospace Holding’s attempt to purchase aerospace components manufacturer Impcross. Leadsom also reviewed US private equity firm Advent’s purchase of another defence firm, Cobham, though it was relatively swiftly approved. Gardner on the other hand abandoned its takeover in September, in response to the government scrutiny.

In other words, the new process and requirements for foreign takeovers contained in the NSIB are its most significant components.

The legislation does require such interventions consider acquirer risk, but also for firms in sensitive industries to pre-emptively disclose potential takeovers. Furthermore, the structure of the takeover has to be considered by the Secretary of State in any review.

In the debate over the bill, Sharma noted that “those who seek to do us harm have found novel ways to bypass our current regime by either structuring a deal in such a manner that it is difficult to identify the ultimate owner of the investment, or by funnelling investment through a UK or ally investment fund”. There is a growing recognition of the importance of the structure of any takeover, not just in the UK. The legislation underlining the US’ 2021 defence budget, the National Defense Authorization Act (NDAA), is set to pass in the coming weeks and sources close to the process have said it too will include expanded reviews for the offshore control of companies seeking to invest in the US.

Once NSIB becomes law, Sharma’s approach will set the precedent for how the legislation is applied. A loyal supporter of Prime Minister Boris Johnson, his approach will not stray far from the government’s messaging, yet the NSIB does grant the power for Sharma to review changes in ownership even before majority control is established, as well as after the fact. The extent to which he applies these powers over offshore ownership may have a great influence over sectors far beyond defence.

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