Guten Morgen! 

Welcome to another edition of the Krautshell! This week, Mats provides some hard-hitting analysis of the battle currently on display between Big Tech and Big Telco in Brussels along with some crucial context. In addition, our main articles zoom in on Germany’s economic woes (and why they may be more serious than many think), the uncertain prospects of Europe’s Ukraine policy as the continent heads for a turbulent winter, and a consequential EU court decision ruling Germany’s blanket data retention law illegal. Finally, enjoy Szilvia’s sneak peek ahead at the much-awaited parliamentary elections in Italy this Sunday, and what they could mean for Europe and the wider world.

As always, have a great weekend!

Anna                                Christian

Deutschland Down and Out?

Germany has been breaking all sorts of records this year, just not the good ones. Producer prices in August were up 45.8 percent on the same month last year, the highest jump in the history of the Federal Republic and significantly higher even than last month’s numbers (check out our chart below). Inflation is widely expected to move into record double digits, exacerbated by a 500 percent (!) percent increase in year-ahead power prices. Meanwhile, Germany posted its first trade deficit in thirty years, boding ill for an economy dependent on the export of manufactured goods. Add the impending disintegration of the domestic energy industry before the first signs of winter, and we have the beginnings of what the Economist is calling “Morgenthau’s Revenge”. 

One could argue that the German economy has weathered storms before, but the current confluence of events is unique outside of wartime. Unique is also the apparent inability of German decision-makers to either foresee or remedy the current debacle. It hasn’t come out of the blue: Western friends and partners have warned for years about Germany’s reckless dual dependency on Russia (for energy) and China (for goods), while the so-called Energy Transition has raised electricity prices to uncompetitive levels – even before the current price explosion. Meanwhile, the government’s reaction to the crisis has been all but counterproductive. With power supplies acutely threatened, Economics Minister Habeck continues pushing for a shutdown of Germany’s three remaining nuclear power plants in late December, at the same time exhorting citizens to use less electricity. In a further blow to households and industry, all consumers will from October be asked to pay a “gas surcharge” to bail out Germany’s largest energy companies, pushing key industries towards bankruptcy. As we say in Germany, “Die Hoffnung stirbt zuletzt” (hope dies last); but if German industry goes south this winter, it won’t take an economist to figure out why. 

Stress Test: Europe and Ukraine

Vladimir Putin’s announcement to mobilize 300,000 reservists could mean a number of things for Ukraine and western Europe, none of them good. Firstly, Russia’s attempt to subjugate its neighbor with limited forces has failed and pushing in more soldiers will likely make the conflict lengthier and bloodier. Secondly, Ukraine will need additional economic and military aid to sustain itself through what will be horrific winter months. And thirdly, the already shaky European consensus on policy vis-à-vis Russia will face its hardest test yet, as the EU confronts an energy crisis unlike anything it has experienced, threatening social and political instability on a massive scale. Between the devil and the deep blue sea, Europe will have to make a difficult choice.

While the United States has weathered the crisis remarkably well (“Putin’s Price Hike” here or there), Europe has no good options. Take the status quo: By underwriting Zelensky’s stated war aims of restoring Ukraine’s pre-2014 borders (including Crimea), Brussels is doing the right and moral thing. But maintaining this position will also mean that absent a Kremlin coup, the war could go on for months or years before either side achieves a decisive outcome. Can Europe’s political and economic fabric hold that long? Even today, member state politicians are under enormous pressure to address the effects of sanctions and embargos on their citizens – and winter is coming. Not only Hungary’s Orban has been calling for an alternative approach: Sanctions have been a divisive topic within the likely next government of Italy, and polls in selected EU countries (including Germany) are already registering a dip in support. This suggests that while the prospect of opening a dialogue with Putin may be politically toxic, such an approach could gain currency as Europe’s situation deteriorates. One can only hope it will not come to this, but as Americans know, democracy is a fickle thing, and Europe has twenty-seven. 

So Long Blanket Data Collection?

On Tuesday Europe’s top court, the Court of Justice of the European Union (CJEU), ruled that Germany’s general data retention law violates EU law. Germany’s law allowed blanket data collection to combat crimes and national security threats.  The CJEU clarified that the law can only be applied when there is a serious threat to national security, given that the indiscriminate surveillance of large groups of people represents a significant infringement on their constitutional rights. Any surveillance measures need to be targeted and meet the principle of proportionality. The ruling comes after years of heated debates surrounding the indiscriminate surveillance of the general population in Germany and the EU more generally (politicians were already discussing the topic in Germany and the EU level 20 years ago). Germany and other EU-member states have argued that collecting large amounts of data, for example from telecom operators, is necessary to prevent acts of terrorism and combat child pornography. Civil rights organizations, tech companies and more libertarian political parties have countered that the ends do not justify the means. 

The reactions to the ruling reflected this divide. German Justice Minister Buschmann from the Free Democratic Party announced that the blanket data collection provision would be quickly and definitively removed. As a replacement, he suggested a “Quick-Freeze” approach, which would allow the targeted collection of communication data with the approval from a judge. On the other hand, the social-democratic Interior Minister Nancy Faeser pushed to conduct as much data collection as possible within the constraints that the EU court had set.  

To what extent Germany will replace the data retention law remains to be seen. However, the ruling and the debate underline how significant data protection issues remain in the minds of European courts, policymakers, and the general public.

Source: Statistisches Bundesamt

by Mats

Clash of the Titans: Brussels’ Big Tech vs. Big Telco Battle Royale

Before the summer break, stories were circling around the Brussels and Berlin political bubbles that something monumental was on the horizon. A battle for the ages. The kind of battle that would make Godzilla vs. King Kong look a little something like this. The topic at hand is so contentious that, depending on who you ask, it has two different names: either “fair contribution, or an “internet traffic tax.” What is it? Why does it matter? And, most importantly, what’s next? Time to answer my own questions!

Who’s Footing the Bill?

That’s the question central to this whole debate. A good point to start at might be in 2014, when then Vice-President of the European Commission (EC) responsible for the Digital Agenda, Neelie Kroes, dropped the now-famous line “adapt or die” to the telecommunications companies. The crux of the problem back then was the same as it is now – we (the citizenry and private companies) want faster and faster internet connections but are not always ready to pay the higher prices associated with those advancements. Back then, telecoms companies suggested that a fair measure would be to block, slow down, or charge extra money based on how much bandwidth a user was consuming. The European Commission, claiming that more demand also means higher revenues for telcos, rejected this idea and protected the concept of “net neutrality” through the Open Internet Regulation. The topic was therefore put to bed for a few years, and internet service providers had to bite the bullet.

…Enter the Era of 5G

As more and more countries across Europe started setting up 5G networks, and, let’s be honest, cell phone use exploded, the telecommunications companies used the opportunity to rekindle the very same debate. The difference: while in 2014 regulators largely rejected telco industry arguments, it seems they are more receptive to compromise this time. The reason: the telecommunication companies’ earnings are not bad, but by no means impressive either. All the while GAFA are reporting record earnings. Given the ongoing war between the regulator and Big Tech, anything that takes Meta, Amazon, Google, and co. down a notch is a win in their books. All of these factors are how we got to a position where Internal Market Commissioner Thierry Breton publicly stated that he was working on a law to require Big Tech to share the infrastructure costs, to be unveiled by the end of 2022. 

So, What are the Main Arguments?

Big Tech and Big Telco are the two most well-represented industries in Brussels, mostly through their respective trade associations: the Telecommunications Network Operators’ Association (ETNO), and the Computer and Communications Industry Association (CCIA). Both entities have been working hard on stocking up their rhetoric, and for anyone who’s a policy wonk, the ongoing battle is a masterclass in lobbying. 

Starting with the Telcos, their research shows that the “top 6 tech giants have generated over 55% of all telecom networks’ traffic,” all while making “little or no economic contribution to the development of national telecom networks.” They also know how to pull at the Commission’s heartstrings; they’re playing the climate argument, stating that a “little” contribution from Big Tech would have wide-reaching positive externalities on the carbon footprint of the Industry. Finally, as the chairman and CEO of Spanish Telefónica pointed out, network bandwidth is not an unlimited good.

Meanwhile, Big Tech is playing an UNO reverse card on the Telco companies by saying that the high levels of data volume used by their customers are actually a blessing in disguise. Or, put simply, more demand for data means more revenues for telecommunication providers – especially because fixed costs continue to fall. Furthermore, the CCIA is trying to appeal directly to consumers, claiming that ETNO and co. are “double-dipping” by getting customers to pay for data, and then also internet traffic. Finally, (and I don’t think Big Tech sees the irony here…) a third argument is that this kind of internet usage tax would lead to an “abuse of market power by telcoms carriers.” You can’t make this s**t up. 

The House’s View: Grab the Popcorn

It seems it’s only a matter of time before the Commission unveils a proposal for a “fair contribution” piece of legislation. After seven EU member states (including Germany) sent a letter to the EC urging Breton and co. to “carefully examine all aspects” of this possible regulation before setting it in motion, it might still take a while though. As Breton already publicly stated his own position (in favor of “sharing the burden,”) it’s hard to imagine nothing will come out of this. 

Both sides have very compelling arguments, conceived of by very creative (and handsomely paid) lobbyists and lawyers. You can expect a very messy battle to win the favor of regulators, and honestly, I’m excited to see what these two industries still have up their sleeves.

As the name “House’s View” implies, I’ll end this piece by giving you my own take on the situation. First, the EC very rarely does not get its way. Apart from wanting to stick it to Big Tech, the “internet traffic tax” is something that also serves the EC’s own interests. Europe wants to build up its digital capabilities and accelerate the green transition, and this is a legal way to get someone else to partially pay for the party. I don’t expect a final version of this law to look anything like what is being discussed currently, but one way or another, Big Tech will likely have to pay up.

• Right-Wing Rise in Italy? Italy is set to vote on the composition of its parliament this Sunday. Polls suggest that the election will set the stage for the most right-wing Italian government since WW2. 
• Russian Mobilization Reactions: Putin’s announcement of enacting a partial mobilization were framed as a sign of weakness by European leaders, U.K. Defense Secretary Ben Wallace for example saying that Putin’s move represents the admission that his invasion had failed. 
• More Sanctions Ahead: The foreign ministers agreed to prepare new sanctions against Russia in response to Russia’s latest escalation.

Italy

One should consume Italian politics like their spaghetti. Don’t look for the beginning and the end, just try to keep the parts under control you want to get a grasp on. If you want to understand why there is so much buzz about the Italian elections this Sunday, you better focus on the essence of it all rather than drowning in the ever-changing party landscape.

Together with France, Germany and Poland, Italy is one of the four big member states dominating the EU. It is a member of the G7 and NATO. And for the first time since WWII a far-right party has the chance to play a leading role in this country. It does not help that Brothers of Italy leader Georgia Meloni tries to deny facist beliefs – members of her party have enough scandalous views for all.

Whether Meloni herself is a fascist or not – let’s not strangle ourselves with this piece of pasta. However, when reading this interview with historian Lutz Klinkhammer, I was shocked by the similarities between the non-processing of the historic guilt of fascist collaboration between Hungary and Italy. Both countries have had leaders allied with Hitler Germany who are not seen “as bad as Hitler” because they did not actively drive the deportation of Hungarian and Italian jews, sinti and roma, homosexuals or other politically stigmatised groups. Both leaders (Horty and Mussolini) have been forced out of power and followed by those seen as “real fascists” who are not considered Hungarians or Italians and thus neither of the two countries really ever dealt with their actions as a national guilt to be processed.

So maybe when watching this Italian election, we need to find the end of that freaking spaghetti to understand what (false) feeling of security and strength some Italian voters are whishing back in the actual situation of war, energy and economic insecurity. Hard times are coming for the European Commission and European democracies. But maybe the global weight of Italy will provide a level playing field where pragmatism and common sense can play a role.