The Democratic Twilight

One of the striking images of recent current affairs is the leaders of France, Germany and Italy in a train compartment on their way to Kiev. Trains have played an important part in the history of European wars. For instance, armistices for the first and second world wars were signed in carriages and the professionalisation of the German army officer class in the lead up to the first world war was driven by the need to rationalise complicated train timetables (it’s a long story).

Emmanuel Macron’s trip to Kiev offered him a much-needed chance to clarify his stance on the war, though his return to Paris was less happy as he subsequently lost his absolute majority in parliament. My sense is that the rise of the far left and right in France is less damaging in the near term for Macron – he will likely gain support from the right ‘Les Republicans’, to the long-term benefit of Edouard Philippe perhaps. What is more interesting in my view, is the way the war in Ukraine, democracy generally and specifically in France, are all linked.

As a general point, democracy is in difficulty. According to the Economist Intelligence Unit, only 13% of the world’s countries are full democracies. What is more worrying is the erosion of democracy in core democratic countries – such as the lack of convincing opposition to Boris Johnson’s bulldozing of British institutions and the rule of law, and the carefree way in which many Americans greeted the findings of the January 6th inquiry.

French democracy is in a much better place than its two Atlantic neighbours –together with Ireland all four countries are important in that they make up the crucible of modern liberal democracy – but it is still troubled. In this context, France is an interesting case study for several reasons.

The first is that politically, largely thanks to the policy energy of Macron, it is the most important country in Europe. On the train ride to Ukraine Mario Draghi referred to Macron as the ‘president of Europe’. So, where France goes, Europe goes too.

Second, the French political system is fast evolving – the two dominant parties of the last forty years have been smashed by Macron’s ‘revolution from within the system’ and now he is surrounded on either side by two system outsiders (they have been around for so long they are really insiders), who champion the discontented and who to different degrees, are friends of Russia. As such, the French system has moved from left to right, to inside v outsider, or more aptly ‘upstairs v downstairs’, though Le Pen and Melanchon are also possibly both richer than Macron, the ‘president of the rich’!

France is also interesting in that while the outsized role of the state has managed to soften the blows of successive crises – eurozone, COVID and now inflation – it has also created a broad view that the state is the solution to all ills. At this juncture, this cannot continue because with government spending at or above 55% of GDP, France has no fiscal space left.

With regard to French democracy, this may produce some forced, interesting innovations – such as a greater consideration of citizen assemblies and more autonomy for regions. Expect to hear more about these and other related ‘clever’ ideas from me on democracy, though my great worry is that they fall on deaf ears, and that something disturbing needs to happen in order that people realise the challenge ahead.

So, consider this. What is Russian wins the war in Ukraine. In this respect, winning the war does not require Russia takes Kiev, but rather it takes and obliterates the southern and eastern perimeter of Ukraine, sues for peace and then retreats on the basis that sanctions are lifted. Other events follow, Navalny mysteriously dies, Russia provides grain to friendly countries and the Russian military and business classes are purged of anyone who is not ‘hard line’.

Pessimistically some countries, from the UAE, Turkey, India and Germany (Scholz’ foreign policy advisor betrayed as much) seek to build relations with Russia, which remains a pivotal commodity power. The example, to other countries (recall 54% of the world’s population live in hybrid democracies or authoritarian regimes), is that the West and its value system is weakened, ‘strong manism’ is emboldened and the idea of ‘managed democracy’ becomes the prevalent form of government across the world – leading to, amongst other things, brain drains, capital flight and diminished productivity. Hong Kong is a great example.

That is a depressing scenario but it underlines the point that whilst the two large English speaking democracies undergo their own internal political turmoil and institutional decay (Roe v. Wade the latest example), that Europe is the focus of an existential struggle around democratic values. In this struggle, Ukraine, Serbia, Moldova, Hungary, Georgia and Belarus are all frontier states – and will all have to choose sides, and arguably should be made to choose sides.

I am not sure European leaders fully grasp this. When they do there is a significant project ahead – more carefully listening to and incorporating the views of the Baltic states and even Poland (France needs to listen hard), while treating increasingly non-democracies like Hungary even more harshly. Countries like France need to lead by example, changing political funding laws and media ownership. At a European level, there is a need to listen to people and build their needs into the practical workings of European liberal democracy, rather than framing theoretical posturing on enlightenment.

Have a great week ahead,


Westminster Troubled

Regular readers may be a little bored with me repeating my ‘Interregnum’ thesis every week, but as a framework it appears to work on a growing basis. The thesis is that in this post-globalization phase in world affairs, the boons of globalization are being quickly reversed – low inflation, low rates and geopolitical peace have given way to record high inflation, lightning rate increases and a brutal war in Europe. Another facet is the vandalisation of the pillars and sacred cows of the old globalized world order – from trade agreements to diplomatic ties and niceties.

In the past week, another event has come along to confirm this framework – the attempt by Boris Johnson’s government to jettison the Northern Irish Protocol, an action that would effectively undercut the Good Friday Agreement.

Many of you who do not live in or near Ireland will be forgiven for not understanding the complexity of Irish history, and the particular intricacies of Northern Irish politics and how this has dovetailed into Brexit (for example the ‘backstop’ bamboozled most people including Tory politicians). I especially wish that more members of the Johnson government would spend more time trying to grasp the above and the implications of their careless approach to policy making.

The Good Friday Agreement (1998) which was painstakingly negotiated is one of the diplomatic triumphs of the globalized age, and its main actors received the Nobel Prize. Together with the steady building of a close relationship between Germany and France in recent decades, it is one of Europe’s outstanding diplomatic events, and one that is shared between Britain, Ireland and America.

Now, the Johnson government wants to scrap key elements of the Northern Irish Protocol, which sets out how the flow of goods into Northern Ireland and was designed to recognize the specific situation of Northern Ireland. As it stands, the Protocol in effect keeps it within the EU in that regard, with a ‘border’ across the Irish Sea acting to vet the flow of goods into Northern Ireland. The Protocol was part of the Brexit Agreement signed off by the Tory government, though now unpopular with Unionist leaders who felt that the Protocol was the beginning of a severing of ties between Northern Ireland and Britain.

The majority of members of the Northern Ireland Assembly do not want the Protocol removed or reordered (note for background over 60% of people in Northern Ireland voted against Brexit and those that voted for it now seem most perturbed by its side-effects), neither do the EU, US and Irish governments. Introducing a Bill to scrap the Protocol risks a breach of international law, gravely undermines the reputation of the UK as a reliable international partner and would potentially breach the Good Friday Agreement in that it would displace the role of the European Court of Human Rights in Northern Ireland (formally written into the GFA).

Impracticalities in the Protocol arrangement can and should be negotiated in good faith between the British and Irish governments (who now feel that Anglo-Irish relations are the worst in forty years) and the EU. Yet, the way in which the Johnson government has handled this effectively squanders the possibility of ‘good faith’ negotiations.

What is altogether more puzzling and alarming is why the Johnson government has deployed a strategy that will gain it relatively little (some kudos with Eurosceptics and Unionists) at such a great cost.

The leading explanation is that this is a mixture of a high risk survival strategy by Johnson, coupled with the usual disregard for the consequences of his actions (notably the prime minister’s ethics advisor has just resigned). As with Brexit the calculations of the internal dynamics of the Tory Party trump the welfare of many and the reputation of the UK. Another example is the cruel policy of sending asylum seekers to Rwanda.

A more troubling explanation is institutional decline. In common with other headline policy debates (such as that over international monetary policy and inflation) the latest move is a mistake that aims to cover a previous mistake(s) (Brexit and the way in which London negotiated it).

There is now growing evidence (most recently from economists at the LSE) that Brexit is hampering the UK economy (though Northern Ireland’s economy is thriving ‘within the EU’). This macro context, and the prosecution of policies such as the change to the Protocol, will relegate the UK well below the super powers of the multipolar world. A risk is that the large actors lose patience with it and disregard it, and that in time the same happens to sterling. A trade war with the EU would set this in motion and damage the City.

At a time when the rise and fall of nations is being accelerated by the end of globalization, Boris Johnson is gambling with his nation’s relevance. Around him, the UK is changing. Scotland may soon become independent. Northern Ireland itself is changing slowly but perceptibly (the strong vote for the progressive Alliance Party in the Assembly elections is an example), Brussels has switched its attention to other weighty matters, and the economic climate has darkened.

Following the half-hearted attempt to remove him recently, I suspect Boris’ days may be limited (September) once a credible challenger comes along from the Tory centre or the Labour party. If he does go, there will still remain the task of resetting British democracy (it is not alone in this respect), restoring standards in government and renewing the attractiveness of public service across the civil service in particular.

As a last promising word, a sign that parts of Britain have not lost hope nor contact with Europe, a French brigadier general, Jean Laurentin, took command of the British Army’s 1st Division!

Have a great week ahead,


Summer Surprises

Six months ago, I tried my hand at imagining how 2022 might transpire in markets, economies and politics. Whilst I am usually highly sceptical about forecasting (‘its role is to make astrology respectable’), my prognostics were sufficiently telling that I will now claim a certain wisdom.

The secret is to make ambiguous statements about a wide range of events, and some of them will stick. In this respect I prefigured Boris Johnson’s difficulties, the war in Ukraine (Bosnia was also a potential hotspot), Macron’s win and China closing down (

Looking ahead, it is stating the obvious that the shape of the next six months will be determined by the damage caused by the war in Ukraine and the policy response to high inflation though what is more interesting and challenging is to frame their secondary effects.

Perhaps the easiest factor to parse is the change in monetary policy from the Fed and other central banks, and the effect that this has had on technology and other growth stocks – at the depths of the sell-off in May, market stress indicators were recording levels only seen in major economic and financial crises (i.e. 2001, 2008, 2020).

In crude terms, the sharp change in monetary policy is a ‘policy mistake chasing a policy mistake’. Nakedly, overly-generous monetary and fiscal policy in 2020 and 2021 will now be corrected by a monetary policy overreach.

As such, my first ‘prediction’ to use that horrible term, for the rest of 2022 is that the market and economic dynamic will shift from financial market volatility to the contagious effects of this into credit markets. This is dangerous, and operating and financial leverage will rebound badly on companies exposed to them. For context, a worrying data release last week was that US credit card debt hit an all-time high.

In that respect I think credit spreads for risky companies and countries will rise and default rates will spike as we approach September. This may create enough stress on corporations and consumers that the rate hiking cycle comes to an end, though at a huge cost in terms of jobs and wealth.

Another tell tale sign is whether expectations of weaker demand bring the oil price down towards USD 75 per barrel, a shift that cosmetically would help to depress inflation. Energy prices, if we break down price indices, are the anchor of high inflation, and in this respect getting the oil price down is as much a test of America’s diplomatic power (over OPEC) as it is monetary policy.

This is just one factor that, as the ‘recession’ chorus grows in the media, will contribute to an increase in tension between politicians and monetary policymakers over inflation. In the USA the Federal Reserve has dampened the economic risks associated with the Trump presidency, whilst the aftereffect of this (high inflation) has dampened the approval ratings of President Biden.

As such, one offshoot is greater public tension between central bankers and politicians (who having blamed Putin for inflation will find other scapegoats), with a low probability event that Powell is not in his role by December, against a backdrop where with inflation and crime are the leading issues in the mid-term elections in the US. In Europe, Christine Lagarde and colleagues will find that markets test their credibility to the extreme.

This trend will map out across other countries, where climate damage and high food price inflation (and availability) will create political stress. Sri Lanka, Egypt, Ethiopia, and parts of Latin America are likely victims.

We have noted several times that it is noteworthy that governments that have experienced the political effects of inflation in the past (France with the gilet jaunes) have already done much to curb the impact of higher prices on their populations. Large country governments may try to become more involved in resolving supply chain blockages (German supermarkets have started rationing purchases) and countries like Venezuela might find that it is drawn back onto friendly terms with the US. Equally, another surprise may be that the US threatens to remove its security ‘umbrella’ from Saudi Arabia.

Perhaps the most long lasting effect of inflation is to undermine confidence in economic policy across the board, and to give the sense that ‘no-one is in charge’ and in turn this may undermine confidence in institutions (like central banks – the logical extension is that bitcoin should become a real store of value and not a Nasdaq tracker).

One important outlier in the inflation story, that in turn demonstrates how the military and financial worlds are interrelated, is the war in Ukraine. Whilst it has arrived at a tactical stalemate, the war still poses tail events – namely the prospect of a negotiated peace or of a Russian strike on Western troops in Poland for instance. Strategically, it is likely the end of the Putin regime as a credible power (to the extent that his use to China is to learn from his mistakes).

What will be interesting however is to see how much progress is made on the longer term strategic trends that have been unleashed by the war – notably the upgrading of Europe’s armies, the coherence of European foreign policy and how in particular it manages an emboldened Eastern coalition of the Baltic states, Czech Republic and Poland, and the speedy move towards renewables (and some dirty energy). We should also discover the true intentions of the US with respect to Russia – whether it supports a war of attrition to politically disarm Putin, or whether it opts to support a diplomatic solution.

Much of what I have said is quite gloomy, but that reflects the state of the world, in a context where globalization has come to an end (David Skilling of Landfall Strategy – we do strategic advisory work together for firms/governments/investors  – has another excellent note on this here).

A hopeful scenario is that by November many of the inflation/monetary policy imbalances are pared back (China’s economy is an important factor too) and that markets enter into a long period of calm. In turn this will bring to the fore many of the more exciting fields of innovation – medical technology, green tech and biomed for example. That would be something to look forward to but we have a choppy summer ahead first.

Have a great week ahead,


From Free to Forced

Tomorrow evening I fly to Dublin, which I am looking forward to (Cork would be better though). It’s the return journey that terrifies me. Dublin airport, owing to poor management, has subjected passengers to six hour long queues to board planes in the latest example of logistics chains gone awry because of labour shortages and general lack of foresight. In other parts of Europe, the UK and the US, travel is also proving problematic, such that many may think even more carefully about how and when they move around.

It is likely more daunting for people relocating to new countries. In general, the past four years have seen the climate for those wishing to migrate become harsh, the latest example being the Johnson government’s extension of its ‘asylum’ border to Rwanda.

Migration is one of the yet unanswered puzzles in the debate on globalization – other indicators point towards an end of globalization as we know it and a trend towards a more bordered world. Cross-border investment is becoming more regional and trade is too, the flow of ideas around the world is curtailed and within many countries it is polarised. At an institutional level, coordination between countries has become more problematic.

Yet, owing to the strictures of COVID (over 120,000 movement restrictions have been imposed around the world from the beginning of COVID to this February) we do not have a clear picture of what patterns in migration data look like – most data come with a significant lag. However, some estimates put the decrease in familial migration across borders at close to 35% and in general cross border migration in 2020/21 was at its lowest since 2003. Student migration (to the US and UK) has fallen by around 50%. More troubling was the fact that migrants in countries like Saudi Arabia were amongst the most exposed to COVID and to unemployment.

To that end, the role of migration as a factor that will confirm or reject the end of globalization is still hypothetical – but there are factors to watch for.

To start with most ‘visited’ countries for migrants, are the US, Germany and the UK in the developed world, and Saudi Arabia and Russia in emerging markets. Cities tend to be the locus for most immigrants – 25% of workers in German cities are ‘foreign born’. To that extent a reinvigoration of migrant flows should see more workers from Spain, Portugal, Algeria and Morocco come to Paris and Bordeaux, and more South Americans to Dallas and Miami for instance.

In particular, cities are poles of attraction for elites. A German scholar Max Schich has tracked centuries of data to show how Europe’s cultural elite have gravitated to and from key cities – Rome to Paris to Amsterdam and London. Today, perhaps the most interesting trends in this regard are the movement of entrepreneurs from California to Texas, and the role of Dubai as a locus for Russian and Indian business people.

There are some important faultlines, Brexit being a case in point where there has been a sharp drop in EU nationals working in the UK (147,000 left in 2020), with these replaced with migrants from non-EU countries like India, though net migration into the UK is at the lowest in over a decade. Hostility to migrants and refugees from policymakers is one of the uglier faces of the post Brexit political landscape in the UK, though it is not exclusively a British phenomenon. Eric Zemmour’s catcalls are an example.

In the context of globalization, a rough rule of thumb I have is that when the migrant (foreign born) population of a country reaches say 15% of the population, integration becomes a decisive factor. There are not many countries that manage to smoothly integrate more ‘foreign born’ than this (Switzerland is one) and it also seems to be a threshold that sparks a negative political reaction. The test for globalization then is whether developed countries have reached the political and economic limits of migration, to the extent that the flow of people into them becomes more controversial, or whether cities in particular can continue to welcome people from overseas.

Refugee flows from Ukraine will play a big role in this debate, and could to an extent crowd out flows from other countries (Iran, Syria for instance). As is now apparent, Russia’s invasion of Ukraine is producing economic side-effects that are making life in emerging countries more difficult (inflation in Turkey is 73%).

To that end, the issue is to what extent climate damage and food shortages lead to population displacement (from East Africa for instance) and coupled with political instability (Venezuela is the prime example where millions have been displaced). The wild card here is Latin America, where surveys (UN) show a huge amount of people across Latin America who express a willingness to migrate (focusing on the USA) because of corruption, high food prices and shortages and political instability.

The beginning of globalization unleashed flows of people (with remittances following in their wake) around the world, mostly to developed countries and their large cities. COVID, and a political-economic backlash have halted these flows, and the invasion of Ukraine has introduced an entirely new variable into the equation. Where people move to, where they are permitted to move to will shape the next phase of globalization.

My sense so far is that migration is becoming more bounded (notably from Africa to Europe), more regional and with a greater emphasis on cultural assimilation. We will likely enter a period where migration is more within countries and regions, less across borders – in that sense it is less ‘free’. At the same time, migration is becoming both more politicised (by Belarus and Russia) and more forced (by climate change and inflation).

Have a great week ahead,