Daily Briefing

Germany braces for Trump’s secondary Iran sanctions

iran protest 1800×1200
Here we go again. Source: Reuters.

As of today, American sanctions against Iran are back in force. Pulling out of the Iran nuclear deal, however imperfect it may be, was a big mistake by Donald Trump. But the European co-signatories of the accord remain determined to save it, as Heiko Maas, Germany’s foreign minister, and his French, British and EU counterparts, averred yesterday.

The big question is whether they can save it, given America’s huge economic clout. That’s because Trump also wants to slap “secondary sanctions” on European firms that keep doing business with Iran. In response, the Europeans have tightened laws to “block” these US measures against European companies. It’s the latest example of how our world has turned topsy-turvy, as the transatlantic “allies” mobilize their lawyers to go to war against each other.

The even bigger question Europeans are asking is this: Has anybody on Trump’s team thought through the scenarios? The point of the Iran deal was to keep nuclear weapons out of the mullahs’ hands a while longer, while looking for ways to mitigate all the other problems. But the Ayatollahs, fearing regime change, may now become unpredictable, like the American president. Guillaume Xavier-Bender at the German Marshall Fund fears that “the current lack of clarity and consistency in a US strategy towards Iran… could inadvertently lead to direct, cataclysmic confrontation.”

***

I still remember when I first heard, in an off-the-record briefing at Germany’s foreign ministry in early 2015, that migrant movements had shifted from the Italian route to the Turkish-Greek-Balkan route. I didn’t immediately see the significance of the change, so I ignored it. My mistake. A few months later, the refugee crisis arrived in Austria and Germany, shaping European politics to this day and for a long time to come.

So we should pay attention to the latest shift. The biggest landing point for migrants is now Spain. It has registered 21,800 men, women and children so far this year, twice as many as a year earlier at this point, and more than either Italy or Greece.

Part of the reason is that Spain is pursuing a humane migrant policy that seems out of step with the populist turn in European politics and more along the lines of Merkel’s stance in 2015. Merkel in fact “saved the honor of Europe”, Spain’s foreign minister, Josep Borrell, just told Handelsblatt. By contrast, Borrell calls the anti-migrant policies by Italy’s new interior minister, the right-wing Matteo Salvini, “brutal” and inimical to “the European idea,” not to mention damaging to Spain.

Borrell proposes that a small group of like-minded countries — starting with Germany, France and Spain — take the lead in finding a humane and European response. One idea: The EU could make deals with African countries that for every migrant Europe sends back, it takes another who will get an education in Europe for a few years before returning to help his home country. Manu and Angie, what say ye?

***

Last week, I pondered what the flattening yield curve of US bonds might mean. (Usually, it suggests that a recession is on the way.) Here are two other weird things about US government-bond yields: 1) They are lower (below 3 percent) than you would expect in the current policy environment (around 4 percent, according to Jamie Dimon, boss of JPMorgan). 2) They are higher relative to EU and German yields than you would expect: The spread between 10-year bonds in the US and Germany is more than 2.5 percentage points, wider than at any time since the 1990s.

That explains why funds are flowing out of euros and into dollars: some speculators are borrowing in euros at almost zero percent in order to invest in dollars at almost 3 percent. But can these spreads keep diverging? Speculators are now lining up on either side of the bet: diverging versus converging. That’s a lot of money about to be spent. Things could get dangerous — or at least interesting.

***

Remember Enron? That American energy company became a byword for fraud and sleaze. One problem was that its auditors, Arthur Andersen, had been asleep at the wheel. Capitalism needs people who keep other people from cooking the books. That’s why the EU made a law that, since 2016, forces companies to switch their auditors every so often. And that means that there is a big shuffle starting to happen among the “Big 4” accounting firms and their largest German clients, the 30 blue chips in the DAX.

The time scales in some of these relationships seem absurd. Allianz, Germany’s largest insurer, had been using KPMG to check its books since 1890 (!) before switching to PwC in 2018. Now, banks and insurers have to replace their auditors every 10 years.

So far, only five DAX companies have already fired one auditor and hired another. So in the coming years about a dozen more need to follow, including big names such as Deutsche Bank, Fresenius, Henkel, Lufthansa and Volkswagen. A few others, such as Siemens, have been able to use a loophole: If an auditor — in this case EY — has been on board for less than 10 years, the contract can be extended for another decade.

One logical implication is this: The audit firm that has the most DAX firms, KPMG, stands to lose business overall. The members of the Big 4 with fewer DAX clients, EY and Deloitte, stand to gain. However, smaller accounting firms not in the Big  4 probably still have no way of breaking into the league. And the length of time that auditors can keep their clients is still pretty darned long — certainly long enough to get inappropriately cosy.

To subscribe to this newsletter or our other two, sign up here.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!