Continental drift: Europe’s challenges

Hello and welcome to The Intelligence from The Economist. In New York, I'm Jon Fassman.

And in London, I'm Jason Palmer. Every weekday, and marking 1,000 episodes so far today, we provide a fresh perspective on the events shaping your world.

No country produces more of the world's chocolate than the Ivory Coast. But growing cacao isn't easy or lucrative for the farmers. Our correspondent visits an Ivorian village to learn about a battle brewing over how to improve cacao farmers' lives.

And there's a lot going on with street names. They can reflect the values of an age and the ideologies of a nation, even if you don't notice them. We take a wander around the city of London to consider street names present and long since past.

First up, though, to many people, Europe looks to have its act together in helping to support Ukraine and resisting Russian aggression. The continent has shown unity, grit, and a principled willingness to shoulder huge costs. But a brutal economic squeeze is coming in the year ahead. —one that will test Europe's resilience even further. And that's a worry for its friends around the world, particularly for America.

Europe has both a short-term crisis and a long-term crisis.

Henry Kerr is our economics editor.

The short-term crisis is dealing without Russian gas, or at least with much less Russian gas, and getting through that energy shortage that it faces this winter and next. The long-term crisis is a crisis of investment, of fears that Europe will lose out on investment in the age of green energy and electric vehicle production. Well, let's talk about the short-term crisis first.

We've talked on the show recently about the spike in energy prices and the changes in people's lives that spike might cause. What about the broader economic consequences of rising energy costs?

Well, higher energy prices in Europe are very likely to put the eurozone into recession. It's probably already in recession. You have German industry in particular struggling to produce with higher energy prices. And then of course, you have the hit to household consumption. Now, a lot of European consumers are being somewhat protected by European governments, which are subsidising prices or supporting their incomes, but they're still paying higher prices than they were. And so that affects amount of money they have to spend on other things. There's that direct effect on the productive side of the economy, and then there's the effect on consumers' wallets too.

Now, Henry, you mentioned earlier that one of the longer-term risks to Europe's economy stems from the transition to green energy. I assume that's at least in part because of the economically populist tack that the Biden administration has taken. Can you unpack that a bit for us?

Yes, absolutely. So you're right. While it's had to deal with this energy crisis, Europe's also suddenly found itself in the position where the spillover effects of President Joe Biden's economic populism, the protectionism embedded in laws such as the Inflation Reduction Act, is tempting away investment from Europe into America. And that's obviously harmful to the European economy's long-term prospects. The example of this that has created the biggest diplomatic spat is the tax credit, the subsidy for consumers purchasing electric vehicles in the US. The rules written into the Inflation Reduction Act contain a lot of protectionism, which means the electric vehicle has to be assembled in North America, and also the battery components have to, by the end of the decade, be 100% produced in North America as well. So in order to sell to the American consumers, at least the ones who want to take advantage of the tax credit, which is obviously the vast majority, companies have to locate a lot more of their supply chain in the US. And there's an element of that which is zero-sum. It means that exporting cars from Europe to America isn't going to be as viable as it was. And so Europe's having to deal with the fact that this investment's being tempted away, and it's considering both how it tries to get America to change course, but also whether it needs to copy America and implement similar protectionist rules of its own.

So that's one response from Europe. Can you talk a bit more about how European businesses and governments are responding to this threat?

Sure. So a lot of European bosses have said that Europe's becoming a much less economical place in which to do business. So there's been a whole series of announcements or indications from firms that they are looking to expand production in North America. A good example of this is Northvolt, which is a prized Swedish battery startup, which announced that it was looking to expand production in America after the Inflation Reduction Act. Politicians have obviously taken notice of this. President Emmanuel Macron has been talking to a lot of European firms trying to persuade them not to relocate their investment overseas. We've had the head of the European Commission, Ursula von der Leyen, saying that perhaps Europe needs to reconsider its state aid rules that inhibit European governments from being protectionist in quite the same way. Germany's economy minister has said that America has been hoovering up investments. There's a sense that Europe is being left behind as other governments are less respectful of the rules-based trading system. And the French finance minister Bruno Le Maire told reporters on 22nd of November that Europe must not be the last of the Mohicans. Pour développer leurs capacités industrielles sur le sol américain.

Il ne faut pas que l'Europe soit le dernier des Mohicans.

Et nous devons défendre nos intérêts industriels européens avec plus de fermeté, plus de force et plus de rapidité. America is obviously implementing subsidies partly in its attempt to ensure that what it sees as strategic industries are located in America and not in China, or at least that America doesn't become dependent on China for, say, batteries in a way that could make America vulnerable in the long term. You know, the lesson of Russia's invasion of Ukraine is that you do not want to become too dependent on a potential adversary for something that's really important for energy. So were it the case that America's battery supply chain depended a lot on China, that could obviously be a point of leverage for China in any future conflict. But of course, it's also important for America that Europe is strong. Europe is an important ally, a big bloc of democracies. So it's important that Europe is strong so that America has another partner in its rivalry with China and other autocracies. And the other part of that is that America is currently, of course, providing a great deal of aid to Ukraine to defend itself from Russian aggression. And in the long run, America would much prefer that Europe was self-sufficient with regard to security. And there have been long-running disputes between America and Europe about the amount that European NATO members spend on defence being insufficient. And so you're in a moment where there's two-way tension. Europe views America's policy as as protectionist, and America views Europe as somewhat dependent on it for security. And of course, both those charges are accurate, but the relationship not breaking down is very important to the big picture, which is about tensions with respect to China.

So how do we get out of this tense moment between America and Europe to achieve the desirable outcomes of a strong Europe and an America that's not dependent on China?

The chief aim of Bidenomics and of the Inflation Reduction Act is to stop China dominating these green industries. America doesn't have a strategic interest in siphoning off European investment. So the best thing it could do would be to make European firms eligible for those subsidies so that if you're a European firm selling a battery to an American carmaker, say, that car that is the final product of that process is still eligible for the subsidy. And that would build a green energy supply chain among allies rather than just within America's borders or within North America more broadly. So I think that will be the ideal, whether it's politically achievable or not is another question. But then on the European side, Europe clearly does have a duty to spend more on defence, and indeed to think about how it can build its own security architecture. It's a very large bloc of rich countries, and it should be able to guarantee its own security ultimately. So I think there is an obligation on both sides. I think in the long run, it's reasonable to expect Europe to get a grip on the security front. America has always been a guarantor of the rules-based system of global trade. So you'd think that shouldn't be an unreasonable request of it either to get rid of the subsidies, but it's clearly a big political lift.

All right, Henry, thanks so much for joining us today.

Thanks very much for having me on, John.

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So when I recently visited the Ivory Coast, I was met in a village in the center of the country with really one of the warmest greetings I've ever had.

Kinley Salmon is The Economist's West Africa correspondent.

In Tafiso, a women's savings and loan group, after a beautiful musical welcome, talked about how they've been clubbing together to help each other to fund their small businesses through pooling savings. And most of their husbands and partners were cocoa farmers, and that's because This is a cocoa farming part of the country, and because Ivory Coast is the world's biggest cocoa producer, it alone accounts for some 45% of global production. And next door in Ghana is about another 15% of that supply as well. But this agricultural bounty for the region isn't serving farmers quite as well as one might hope. In what way? Well, as I traveled around Ivory Coast, and particularly through some of these cocoa farms and the villages nearby, it became pretty clear there's still really a lot of poverty in those areas. More than half of Ivory Coast farmers live below the national poverty line, in fact. There's also real problems with child labor in the two countries. About 1.5 million children in cocoa farming areas are involved in dangerous child labor. And you also note as you travel the country that Much of it has been denuded of forest almost entirely, and part of that too is driven by cocoa farming, where farmers expand into forested areas or protected areas to try to eke out a little more living. But in many ways, poverty is at the root of all of these problems. Poor farmers are more likely to turn to their children rather than paying for adult labor, and they're also more likely to try and eke out a little more income by expanding into, into forested areas. And so Poverty in many ways is the base of this.

But this is a country that produces nearly half of the world's cocoa. Are they just not getting enough money in global markets for it?

Well, that's very much one of the things I wanted to try and understand on my trip. So I spoke to some local cocoa farmers, including Tanner. In the midst of a cocoa plantation, he lamented that life has been a little tough recently with prices rising for things like food, cement, and oil in the market. Most of Tanner's A lot of this produce eventually ends up with Nestlé, who in fact helped connect me with him. And they're of course aware of the challenges that farmers are having and are worried, of course, that some might leave cocoa farming altogether. I think it's fair to say they also worry about their chocolate being associated with this kind of grinding poverty as well. And so Nestlé has begun a pilot program making extra payments to some farmers. Puis les autres aussi sont en train de dire que ça, c'était bon, que nous aussi on veut faire aussi. And that's helping offset some of those price rises that Tano was talking about. But that money isn't coming for nothing. What Nestlé is hoping is that Tano would, for example, diversify his sources of income. And he's done that by starting to raise young chickens. That provides some money in itself, but Nestlé also gives him the equivalent of about $106 this year for his troubles of raising chickens. And that's all sort of very generous, but it's also quite bizarre. I mean, big commodity buyers don't normally pay their producers to spend time producing something that they will never buy, in this case chickens.

So why is Nestlé doing it this way?

Well, many big chocolate companies and cocoa buyers in general have corporate sustainability programs. These programs help farmers earn a little more. Some of them, in theory, help them avoid cutting down forest. They obviously also do quite a lot for public relations for these companies. And many of these companies really prefer to emphasize these kinds of sustainability programs as the real solution to farmer poverty and child labor and the issues of deforestation. Nestlé's new pilot program pays farmers like Tano not just for diversifying, but also for pruning their cocoa trees, which should help improve yields, and for sending their kids to school. It also pays them for planting shade trees in their plantations, which helps cocoa production as well. And if they do all 4 of those, they get a further bonus as well. So it's quite an elaborate program. At the moment, it only has 10,000 farmers. They plan to expand to 160,000 globally by 2030. And in reality, it's a conditional cash transfer program, something we normally see run by governments elsewhere in the world, but this time it's run by big business. And Nestlé, of course, is not alone. Other companies like Mondelez, who own Cadbury and Toblerone, you know, have announced their own corporate sustainability programs.

So it's chipping away then at some of the structural problems then in Ivory Coast. And as you say, I guess, is great for PR.

Yeah, I mean, that's right. Many big companies say this is a really good way to help farmers. But when I spoke with the head of the Coffee and Cocoa Council, that's the Ivorian regulator, Ibrahima Koné, He was less convinced. In fact, he told me in no uncertain terms that he thought the claim that this was the best way to help was just a lie. Obviously, chocolate companies and cocoa buyers would dispute that. But he argues that these corporate sustainability programs touch just a small part of the farmers in Ivory Coast and Ghana. And studies suggest that they certainly aren't reaching by any means all of those farmers. And there are also concerns about giving up on the state and waving in big companies to play government in a way to cocoa farmers.

Well, I suppose the question then is whether the governments of these countries have any better ideas than what the big companies are proposing.

Well, in 2018, Ghana and Ivory Coast joined forces and formed basically a cocoa cartel to demand better cocoa prices. This has been dubbed COPEC after the Organization of Petroleum Exporting Countries, the famous oil cartel. They say that they can help farmers escape poverty by demanding cocoa buyers pay a premium known as the living income differential, which is about $400 a ton of cocoa. To get a sense, that's about a 16% increase on today's prices. And given cocoa represents only 5 to 10% of the cost of a chocolate bar, it should only increase, you know, a bar's price, even if all that cost went to chocolate-munching consumers, by just a couple of cents. At the time, most big chocolate outfits, including Mars, Hershey, and Mondelez, heartily and publicly praised the plan as an important way to help farmers. But in practice, most buyers have one way or another avoided paying a higher price, partly because they've managed to negotiate down another part of the price, which is adjusted based on the country of origin. And that drop in that country of origin premium has rather offset this living income differential. They say they will pay, but according to him, they're not really telling the truth. Instead, last year, Ivory Coast, finding itself unable to sell with the premium it had for, in fact, sold its cocoa at a pretty heavy discount. Part of what seems to be happening is that big cocoa processors have tried to source more cocoa from outside of Ivory Coast and Ghana. And they've also drawn down on stocks to avoid purchasing so much new cocoa. It's worth saying, though, that even if they do manage to force up prices in the short run, in the long run, it can be pretty hard for cartels to sustain these higher prices because higher prices, of course, make farmers more keen to supply more cocoa. And more supply in turn puts pressure back downwards on those prices. So it's going to be a tricky line to tread.

So ultimately, the plan here to get more money into the hands of the farmers doesn't sound like it's working with whatever structures are put around it. If what we've been talking about isn't the solution, then what is?

Well, unfortunately, as is the case for many countries that rely on exporting unprocessed commodities, there are no really easy answers. But in many ways, in the Ivory Coast case, These schemes and these plans all ignore what one might call the chocolate elephant in the room. Pay! You are going to pay, pay, and you say that? I'm going to pay, I'll pay. It's the government, um, they're going to pay you $400 a ton. I met a man named Axel Bau. He stresses that whatever the solution, farmers need to be paid enough. And it limited precisely this point of the difficulties of growing wealthy from just selling raw commodities. And he's trying something different. He's one of relatively few Ivorian chocolatiers. He handed me a delicious chocolate-coated cashew nut to prove his impressive product. A cashew? Cashew coated with chocolate? I can confirm it was quite stunning. And he's certainly doing quite well selling his products. But most of the clients who visit his shop in Abidjan are in fact well-heeled foreigners. The chocolate-coated cashews, he told me, are particularly popular with the French military who have a base nearby. But the issue is that the local market is quite small, and rich markets like Europe are pretty distant for a product that melts. That's really a problem for those who want a big Ivorian chocolate industry. So there are few simple solutions to a problem like this. [APPLAUSE] In other countries, over time, people move out of agriculture, they move into jobs in the cities, in other sectors, completely different things potentially, such as tourism or manufacturing. And for Ivory Coast, that is probably still the only way to sort of really transform the economy, whereas fighting over kind of cocoa prices may help at the margin but isn't going to transform the country, unfortunately.

Kinley, thanks very much for joining us. Thanks for having me. I have got myself out of the office with Catherine Nixie, one of our Britain correspondents. We've gone to Cannon Street in the City of London, the center of London, the Square Mile, the oldest part of London, and she's going to take me around and look at some old streets streets. Hi, Katherine. Hello, Jason.

We're just walking towards Queen Street, which joins into King Street in a typical British celebration of the monarchy and its roads. There's Threadneedle Street, which is one of many London streets commemorating the trades that used to be done there, and behind me is poultry. And then we're going to be turning right down Cheapside, which is where all the people who in Jane Austen get scorned come from. And then we're going to get to some of the oldest and now vanished streets in London with some of the more evocative names. Behind us is the ghost of another street. It used to refer to another profession, another old profession, perhaps the oldest profession. One of its more recent spellings was called Gropecount Street, but perhaps went by a rather earthier name a little earlier.

Where to next?

We're about to come into Sherbourne Lane, which sounds quite aristocratic until you realize that it is in fact a corruption of Middle English term. Originally it was shit-borewell lane. I'm not quite sure if that's the correct medieval pronunciation, but roughly is a medieval term for privy, or as you might say, shit house. It was probably public lavatories here, but its name has been contracted and cleaned up over the centuries, even if its smell has not. It's smell, no, has not, no. But it's a sort of touch of authenticity to this corner of London, I feel.

So, royals, trades, bodily functions. I think we've done a lot. I'm getting a little bit cold, and it's a little bit noisy out here. Let's go back. Perfect. Okay, we've retreated to the warmth of the studio just off John Adams Street in London, formerly Duke Street, I should say. In your reporting, Katherine, on Britain's street names, their naming, their renaming, naming, it does seem that professions crop up, be it prostitution or something else.

In medieval England, streets were often named after professions, after the butchers, the bakers, the candlewick makers. So it makes a lot of sense, in fact, that there are streets named after what is allegedly the world's oldest profession of prostitution. But many streets in England and in other countries have both a kind of deeper meaning and a more hidden meaning. So if you look at a list of England's street names, if you just read it through, you start to see patterns emerge. You start to see the Jesus Lanes, there's Queen Streets, the Trafalgar Squares, the Empire Roads. You start to see that there's this kind of cartography of idealism that overlies the apparently simple street names of Britain's streets. In some places, you can really see certain themes. So Rudyard Kipling named a whole series of streets in London, including Empire Way, and it's fairly obviously an imperial tone to that one. In South London, you can walk along Khyber Road and then go into Kabul Road. So all of that is what makes what Cambridge University is going to be doing next year interesting. And what is it proposing? So starting next year, Cambridge is going to name some of its new streets after Black alumni and abolitionists. And they're doing this in response to some of their own research, which found that they had benefited from the slave trade in various different ways.

But what effect will that really have then, if that's a nod to its own history? Will people even pay attention to those street names?

GHION.AI] So this is the interesting thing about street names. People think they don't notice them. If you ask people about street names, they just say, oh, just a name on an index. It's a thing I walk past in the street. I never think about it. But cultural geographers say that the fact that you're not noticing street signs is not a sign that they're not working. It is a sign that they're working really well. This is exactly why they are such a good way of spreading political messages. The politicians have used street names as a way of pushing ideologies all over Europe and indeed the world. And if you look at maps of Europe over the past 200 years, they change and change again depending on who is in power. So in Paris, the Place Royale after the French Revolution became Place République. In Germany, towards the start of the Second World War, you had Adolf-Hitler-Platzes spread and then vanished at the end of the war. In Cold War Berlin, you see particularly wonderful examples of this because streets would run towards the Berlin Wall with one name and emerge on the other side with another. Streets in Europe are kind of— they're part places, they're part palimpsests. They've just been written and rewritten and rewritten again over 4 decades.

So you describe a lot of places where a lot of changes were quite actively made. Have we seen that kind of thing in England before?

England doesn't tend to erase street names. It just puts new ones there alongside them. There is a sort of tipping point when England decides that actually something is either too rude or too unbearable, and it will rename it. But generally what sets Britain apart is lack of change. So many of its current street names date back to 1600. There was no revolution in Britain. There was no dramatic events around the Second World War in this country that would prompt the sudden renaming of its roads. So what you see is changes are made incrementally and in very slow ways that you barely notice, almost like the silt building up on an archaeological site. Just one layer goes on and another layer on top of it and slowly, slowly change happens, and that is what is going to be continuing to happen next year in Cambridge.

Thanks very much for joining us, Katherine.

Thank you for having me.

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