On est là Macron!

At the beginning of a recent journey to Ireland from Paris, the French taxi driver asked me how our new king was getting on (many of them think Ireland, Scotland and England are the same place). I immediately launched into the obligatory, angry lesson in Irish history for his benefit. When I calmed down, I told him that his majesty was doing fine, or least a lot better than the prime ministers who have served him.

I even mentioned that well over ten years ago I met Charles III, ahead of a momentous visit by the late Queen to Ireland. The Queen’s visit went very well, despite obvious security concerns, and it played an important part in reconciling Ireland and England. Since then, Charles III has visited Ireland a number of times. Given this experience, Charles could at least have crossed the Channel.

With the French state having marked the passing of Elizabeth in an elegant and warm way, Charles had nothing to fear for himself, save that an arrival into France might seem like stepping into a scene from Les Misérables (not so long ago London was a grumpier town than Paris). Piles of rubbish, fires and violent riots are the order of the day, all it seems, because Emmanuel Macron has in the eyes of the French people, been behaving like a king.

I have a lot of sympathy with Macron’s desire and need to drag the French pension system into the 21st century, and he has the heft of demographics and France’s weak financial state to back him up. That pension reform has become a battle ground, has much to do with other factors – deep frustration at an inflexible labour market, the use of article 49.3 to pass the pension reform law and the perception of Macron as ‘Jupiter’, an imperious, aloof ruler.  

I think he has missed a significant political trick in not making more of the fact that his government has managed to bring unemployment down to multi-decade lows, and there have also been some improvements to gender income inequality.

However, the pension reform debate has jaded Macron, which given his role as the indispensable European politician, is not good. It has also started to draw into focus what French politics will look like when he ‘retires’ and how his party will fare.

Given the role of France in the world, I have no doubt that a crisis or two will pop up where he can prove his mettle.

A bigger, ambitious project for him is how to improve French democracy. Granted his personal aura and the use of article 49.3, many French people would believe that he is not well suited to undertake this, but at the same time, there are very few French public figures who have the ideas and will to change the way its democracy functions. Indeed, it seems to me that, like many other countries, there are more French politicians who are content to make political capital through the vandalization of the democratic apparatus.

The task, given that there is such a gulf in trust between the French state and its citizens, may lie in giving more power to them. Citizens juries and citizens assemblies have been tried, but unlike other countries where these mechanisms have worked well, there is little appetite on the behalf of the state to implement the recommendations of the citizens assemblies. Macron has notably not done so.

For the moment, he should heed the words of Thomas Jefferson (a statue of whom is not far from the Assemblée) that ‘The spirit of resistance to government is so valuable on certain occasions, that I wish it to be always kept alive. It will often be exercised when wrong, but better so than not to be exercised at all. I like a little rebellion now and then. It is like a storm in the atmosphere’.

Macron and colleagues may also want to challenge their opponents to come up with realistic solutions to solving France’s financial weaknesses and to enlivening its democracy. So far there are all too few willing to do so, and the longer their silence endures, the greater the final crisis will be.

For his part, Charles could at least have held his nose and carried on.

Have a great week ahead,



Portrait of René Descartes (1596-1650), philosopher and scholar. Artist Unknown. (Photo by Heritage Art/Heritage Images via Getty Images)

Philosophers amongst you will be familiar with the work of Rene Descartes – a mathematician, epistemologist, and rationalist – much of his work laid the ground for modern philosophy and in particular the strand that has grown out of Hobbes and Locke that informs a lot of the 17th century and the formation of states and societies thereafter.

There is one eerie and unsettling aspect of his life that is gaining greater attention. Descartes had a relationship with a servant (Helen van der Strom), and their relationship produced a young daughter Francine, to whom Descartes was very attached. Tragically, Francine died of scarlet fever, aged five, and so distraught was Descartes that he had a robot or automata (clockwork, lifelike doll) built in her likeness.

He transported this ‘doll’ with him whenever he travelled (in a casket), and on a trip to visit Queen Christina of Sweden, the crew of the ship on which he was travelling became so alarmed (it was a stormy night) by the robot and Descartes murmurings with it, that they invaded his quarters, seized and broke the ‘doll’ and threw it overboard. Descartes was further traumatized, and whilst it is not clear the incident immediately impacted his health, he died soon after.

Descartes ‘doll’ is enjoying renewed attention for what it suggests about the relations between humans and machines, how robots can potentially replace and even supplant humans in different ways and for the manner in which this can cause consternation.

The relationship between human and machine is a theme that will cut through the advance (or decline) of the world, and we have written about it frequently (i.e. ‘Talos’). As my limited vision can perceive,  will attempt a classification that says there are at least two aspects of this megatrend – the risks that machines take over our (human) world (AI), and the risks that machine led worlds start to exist outside the human one (Defi, Web3/metaverse).

The bad news is that in the case of the former, there is an unknown risk that machines could injure the human race (weaponized AI, the use of AI by ‘bad’ humans and the use of robots in war not to mention the creation of chemical and biological weapons by AI that I referred to in ‘The Final Problem’).

The good news is that ethereal new worlds – Web3 and Defi (decentralized finance), whose architects had boldly proclaimed were independent of the ‘old’ system, now look like they will be adjuncts to it.

While much of the early hype around Web3/metaverse suggested it was a place that humans could stay in for considerable amounts of time, it now looks like a country they can visit or ‘pop in to’. This much was made clear to me as I attended the Validify digital retail conference in Hertfordshire last week, where the consensus view is that Web3 can help consumers (try clothes or mock up house decors) but will not necessarily become a domain that rivals ‘our world’.

Much the same is true of decentralized finance, which has so far failed to rival in the incumbent financial system, but where its most useful elements such as digital asset infrastructure, are being adopted by incumbent financial system players.

In both cases the growing modesty of new ‘inventions’ is correlated with rising interest rates (and falling market liquidity), highlighting that (as with Descartes time in the Dutch Republic in the 1630’s and 1640’s when the Tulip Bubble took place) many triumphs of innovation are to a large extent cheap money in the drag of new technologies.   

In some cases, cheap money and – good design/branding – allows new technology led companies to grab market share, to build new supply chains and to generally make consumer life easier (a small number of fintech and consumer platforms do this). What cheap money also does is allow investors and the wider commercial marketplace to believe that ‘new commercial worlds’ (like the Metaverse) can be created and will have corresponding commercial potential as the human world. The tide is going out on this idea.

To some extent, as expectations of the potential of the metaverse and decentralized finance are deflated, investors and analysts should become more circumspect about AI. AI, the metaverse and defi are very different things – though all driven by the same capital markets, venture capitalists and evangelists.

To my own experience, AI is rooted in data regression analysis – which makes me cynical about it given the time I have spent on econometrics. I do think it is different to Web3/metaverse and defi in that AI can potentially operate in and build out both of these ‘worlds’, as well as ours. AI driven computer programing is an example of such a productivity enhancing application.

What potentially makes it interesting and deadly, to my earlier point, is that it can evolve and enhance the way it has been structured by programmers, to the extent that, to quote Descartes ‘it thinks, therefore it is’. That’s something to worry about.

Have a great week ahead,


Brexit peters out

Brexit might be over, at least in the sense that the ‘Windsor’ framework brings much of the legal and political wrangling to an end and opens up the vista of better relations between the UK and the EU. Economically and strategically though, Brexit lives on.

One of the accomplishments of Brexit has been to set very low standards in political behaviour and a very high benchmark for the absurd, so it was no surprise to hear Rishi Sunak praise Northern Ireland’s newfound status in that it enjoys open trade with both Great Britain and the EU, though I did blink once or twice. The risk for Sunak is that Scotland and Wales might want the same, not to mention England.

The Windsor framework was also a coming out of sorts for Sunak as an independent political creature, one that is analytical (the first prime minister to have an MBA) and unusual, in that he does not have the same amount of political baggage as other Tories. In that context he is less attached to the unionist point of view and slightly more rational than some of his predecessors.

Politically, the Windsor deal means several things.

First, the bad blood between London and Brussels is likely over and there will be a more pragmatic, productive approach to working together on defence/Ukraine, innovation and border policing. The EU will now have more political time to spend on ‘strategic autonomy’ and the reordering of its defence and foreign policy, while Sunak will have more time to spend tending to the British economy. Despite ‘Windsor’, Britain still owns Brexit and its economy will still be handicapped by it and still suffers poor productivity, a weakening housing market and anemic investment.

Second, speculation about the breakup of the Union – the reunification of Ireland and Scottish independence, will be tempered for the moment. As soon as Brexit happened my first thought was that it would catalyse dramatic, and hopefully constructive political change in Ireland and Scotland. As we noted last week, Nicola Sturgeon’s departure from Scottish politics plus the

recent ruling from the Supreme Court limiting a Scottish referendum have sapped the moment of the independence movement.

In Ireland, there is also the realization that the case for unification needs a stronger and arguably different basis in the sense of their being more cross border tourism, investment, commerce (this is picking up) and shared public goods (similar health systems for instance).

A lot of imagination needs to go into conceiving what a united Ireland might look like (Brendan O’Leary’s recent book on this is good), ultimately the structure of a united Ireland could well look like a Swiss style federation (see ‘Ireland and the Global Question’ (2006)!). What is also interesting is the role of demographics in changing Scotland and Ireland. This is noticeable in the sense of younger populations that are less rooted in traditional politics, as witnessed by the successes of the Alliance Party in Northern Ireland, and to a large extent the SNP in Scotland.

A third reason to be cheerful is for Northern Ireland itself. More than many other regions in Europe it has suffered the backwardness and intransigence of its own politicians, and the careless neglect of many in London. Whilst politicians in the Major and Blair eras had a sense of the complexity of the North, and in general were careful with this, a string of recent secretaries for state and prominent Brexiteers have displayed a shameless ignorance of Northern Irish politics and society, whilst at the same time treating it as a political pawn. That still seems to be the attitude of Boris Johnson.

My sense is that the vast majority of people across Northern Ireland desire a return to normalcy and I hope that the Stormont’ assembly now sits and the North enjoys a period of uneventful calm, and enjoys the benefits of close ties to the EU. The assembly members may have come comfort in the existence of the ‘Windsor’ brake, but some trepidation that it was designed by the same people who crafted the ‘backstop’.

In that respect, that Rishi Sunak referred to Northern Ireland as the ‘most exciting economic zone in the world’, which is probably an exaggeration that stems from his days as a hedge fund salesman. However, a friend of mine is leading a social impact real estate project to revitalize the centre of Belfast, and as I help along, I can see the potential there is for the city to grow (especially compared to other UK cities).

As a final word, Brexit cannot end until the villain at its centre stage is slain. Sunak now needs to take on Boris Johnson and the ever-delusional Liz Truss – by for example canceling the resignation honours lists of both former prime ministers, by cooperating with civil servants who are investigating multiple breaches of ethics and security by Johnson, suspending Johnson’s part membership and potentially by steering the Tory party away for awarding Johnson a safe seat at the next election. Labour will probably win that, and they could then remake British politics by changing the electoral system (introducing proportional representation for instance). Such a move might well shatter the Tories and produce a new party of the centre and a (far) right one.

If that happened, Brexit might well and truly be over. Though we might also miss it.

Abandon Hope!

In the past year, two specific political interviews have struck me as being particularly interesting. Recently, Emmanuel Macron gave an interview to a group of autistic journalists where they posed questions that might not normally be aired in everyday press briefings. Macron to his great credit, was open and frank, in a way not normally so in everyday briefings (he tends to speak for too long and always gives the ‘bonne réponse’).

The other interview that caught my attention was Micheál Martin, until recently Ireland’s Prime Minister (Taoiseach) under the Fianna Fail/Fine Gael led coalition. When he became Taoiseach, it is fair to say that Martin did not have a strong public persona in Ireland and to many, his interventions appeared too mild and often controlled.

However, in February of last year he gave a long interview to the Two Norries podcast. This is one of my favourite podcasts because of its complete honesty, the colour it gives on the complexity of social problems and mental health, and of course the strong flavour of Cork city.

In brief, Martin’s interview in an untypical setting, gave a highly personal view of his family life, background and political convictions, in contrast to his far more stilted public briefings. My feeling on listening to the podcast was that the initial part of Martin’s premiership would have gone more smoothly if he had done such an interview earlier and given the public an opportunity to ‘know him better’.

The Macron and Martin interviews are instructive about the way politicians live, behave and are treated by both the media and the public. They speak to a political class that, for various reasons, regards the media as both a foe and as part of the arsenal of political tradecraft, and also of the growing mental health strain on politicians.

This point was made volubly with the resignations of Jacinda Ardern and Nicola Sturgeon as prime/first ministers of New Zealand and Scotland respectively. Both are accomplished leaders, and as women have had to endure troubling levels of sexism, and abusive commentary about their personal lives in a political climate that has at the same time long seemed immune to the appalling personal behaviour of the likes of Boris Johnson and Donald Trump.

That both Sturgeon and Ardern pioneered the ‘Wellbeing Economy Governments’ that seeks to measure a country’s progress through a broader range of measures than GDP, suggests that they had a more balanced vision of society, economies and politics – which they perhaps struggled to implement. Unfortunately, the halt to their political careers suggests the opposite – that politics is becoming a blood sport where only the very tough and singular can participate (especially in parliamentary systems). The media treatment of Kate Forbes candidacy for the leadership of the SNP is potentially a test of this. She is an untypical candidate, educated in India, and then through Gaelic in Scotland, and unconventionally openly religious.

More broadly, the political climate is now not unlike professional sports, where politicians need to practice their art to the exclusion of all else. I had flagged this in The Levelling

the personal characteristics of politicians have become less traditional, less family-centric…which suggests that the intensity (and perhaps cruelty) of the political game makes it increasingly difficult to enjoy both a family life and a political career’.

It would be naïve to suggest that life was rosier for politicians in earlier times, but the intensity that television and now social media have brought to politics is becoming debilitating, not just for the time it takes but the bad behaviour it engenders. This development risks creating an environment where bad actors can thrive – and to a degree the rise of ‘strongmen’ politicians has been enabled by social media and by an environment that is intensely contested (note the current debate on the American right regarding a ‘national divorce’).  

This trend tallies with last week’s note on the need to emphatically bring an end to the democratic recession. There is an opportunity for (effectively centrist) politicians to reduce the impact of social media in politics, deploy deliberative democracy better and to devolve power to more local levels. Switzerland is a good example here – though admittedly hard to replicate. Doing so will create platforms that are not as demanding in terms of time and emotion for people to become involved in politics.

If public service has to come with the caveat of ‘all hope abandon ye who enter here’ to quote Dante, then the public will bear the consequences. Brexit is an example. Another contemporary one is Peter Obi’s entry into the Nigerian Presidential elections (the first round is taking place as I send this). He is, compared to Bolu Tinubu, Atiku Abubakar and Muhammadu Buhari, and untypical candidate in a hugely consequential election for Nigeria and Africa in general. Let’s see how he fares.

Have a great week ahead,


Democracy’s Keynesian Moment

With the one year anniversary of the war in Ukraine passing, the media will doubtlessly be filled with analysis of the military and geopolitical lessons (so far) from the invasion. One aspect that is perhaps underestimated but nonetheless vitally important in the context of growing strategic competition between the West and East is the bottoming out of the democratic recession.

This phrase was coined by Prof Larry Diamond to describe the end of the wave of democracy that begun with the fall of communism and likely peaked before the global financial crisis, and that has now left the world at a multi decade low in terms of the number of ‘full’ democracies and the greatly diminished quality of democracy. Starkly, the last EIU Democracy Index Report notes that only 8% of the world’s population lives in a ‘full democracy’ and 37% live in autocratic regimes.

The quality of democracy is intrinsically linked to the debate over the end of globalization, and the three factors that have marked its demise – high inflation, rising rates and war in Europe – will further stress test democracies and their leaders. Notably, they might also catalyse responses from governments that could help repair democracies, whilst also making for further misery for autocrats.

This possibility, taken together with the fact that the ‘centre’ is generally speaking holding across European governments (note the relative calm of Italian politics), and growing marginalization of the clowns and the corrupt of the populist right (Trump, Bolsonaro and Boris) suggests that democracy is steadying whilst autocracy is crumbling.

In economic recessions, when negative growth looks like it is bottoming out, there would usually be a call for a stimulus. Democracy, at this critical point, should be no exception, and the time has come for a dose of ‘democratic Keynesianism’, where states will invest in the quality of their democracies, public goods like education and act to limit ‘subprime’ elements like rogue funding of political candidates, corruption and the use of social media and cyber to meddle in elections.

This can take several forms. For instance, the EU has launched a Democracy Action Plan but this will have little credibility if its Parliament is structurally prone to corruption, nor if individual states do not implement telling policies on campaign finance, freedom of the press and better civic education.

On a more positive note, there is a renaissance in the use of deliberative democracy – at a local level in many countries, and significantly at a national, constitutional level in the case of Ireland’s Citizen’s Assembly whose work has led to a number of changes to its constitution. The challenge of deliberative democracy for many incumbent governments is to cede power to the people, and to trust their judgment. This has proven problematic in France, where there is a gulf in trust between the state and its citizens.

Then, there are areas for policy coordination between the US and the EU, notably in marshalling the role of global social media companies in politics, in using multi-lateral institutions (i.e. World Bank) to support democracy, and in working aggressively to limit outright attacks on democratic systems (e.g. cyber security and money flows).

At a country level there are several questions to be answered before a democratic recovery is truly underway. One relates to the political identity of the Republican Party and whether it as an entity is ready to come in from the hard right and actively support the rule of law, or whether it may split. The isolation of Liz Cheney in this respect is not encouraging here.

The other is the UK, where there has been a measurable decline in the rule of law, respect for institutions and a rise in corruption since the early 2010’s. The worry is that this has not triggered a broad realization of the damage that these trends are doing to the UK’s democracy, economy and place in the world, nor has it led to the arrival of a ‘democratic white knight’ figure in British politics (though Sir John Major’s speech ‘In Democracy We Trust? is well worth a look).

Then finally, the interesting long-term question is how governments and electorates in large populous emerging nations will regard democracy. Any causal link from autocracy to higher growth  – visible for some time in China and Turkey – is broken, whilst the trend relationship between economic stability, the rule of law and human development and investment remains in place. While Iran is an extreme example of a population ambitious for a more open society, there are other countries where the pressure on leaders to provide greater prosperity and representation will grow and optimistically, may spur a new wave of democracy.


A rule of thumb of mine (the O’Sullivan Zombie Rule of Economic Modelling) states that once a model has been written off as dead by the economics profession, it makes a comeback. The ‘death of budget deficits (under Clinton)’, the ‘death of value investing’ and a ‘this time is different approach’ to debt are some examples.

The latest one I have in mind is the Phillips Curve – an economic relationship researched by the New Zealand economist Bill Phillips that maps an inverse relationship between unemployment and inflation, and subsequently developed by prominent economists like Milton Friedman and Robert Lucas.

Over the past decade, a period characterised by low inflation, low interest rates and low unemployment, a number of economists have sketched the obituary of the Phillips Curve. James Bullard, a prominent Federal Reserve official, has stated ‘If you put it in a murder mystery framework – “Who Killed The Phillips Curve?”– it was the Fed that killed the Phillips curve’. Peter Hooper and Frederic Mishkin have pondered ‘The Phillips Curve – dead or Alive’, while a 2022 discussion paper from the Fed wondered ‘Who Killed the Phillips Curve? A Murder Mystery’.

There are some good reasons as to why the death of the Phillips Curve has been declared – falling rates of unionisation in the US have diminished the bargaining power of workers. In the UK in the 2010’s the sharp increase in the gig economy – where many workers effectively privatised themselves – also meant that a large number of workers had little wage bargaining power. An environment of generally falling productivity also laid bare the weaker claim that workers had to higher wages.

Though empirical evidence suggested that in many countries the Phillips Curve is dead, it still remains an important and well-worn policy setting for the major central banks, and many of them devote considerable resources to researching them as this paper from the ECB shows.

For instance, in recent years, in the US Janet Yellen as Fed Chair repeatedly spoke of driving down long-term unemployment to help spur a little inflation. Central bankers are typically very conservative, slow moving creatures – hence the logic of my ‘Zombie Rule’ is that by the time they reject a model, it is time to bring it back.

The reason I think this to be the case now, is that many developed economies are perched between multi-decade highs in inflation, and multi-decade lows in unemployment. The prevailing view is that inflation is now decelerating, and strong employment means that we will experience a ‘soft landing’. This appears to be the view that financial markets are extrapolating from recent comments by the Federal Reserve Chair Jerome Powell.

In this context, the risk is that the Phillips Curve makes a Lazarus-like comeback in policy circles, and in practical terms that tight labour markets lead to very sticky, high inflation. One mystery in this respect is the ways in which the labour market is changing because of demographics, the post COVID economy and the attendant changes in the geographic location of labour, as well as the impact of ‘strategic competition’ on supply chains and thus labour markets.

Most of these factors however should lead to upward pressure on wages and it is striking that economies that have seen high inflation, are those where labour market participation has changed. To that end we will very likely hear more about the ‘revival’ of the Phillips Curve as we enter into a highly noisy macro environment characterised by highly pessimistic readings from lead indicators and very competitive labour markets.

A clue to how this plays out may come from my favourite piece of work from Bill Phillips.

Well before he was celebrated for the ‘Curve’, Phillips built an extraordinary machine that pumped colored water through glass vessels in order to demonstrate how money flows around an economic system. The machine named MONIAC (monetary national income analogue computer) included parts salvaged from a Lancaster bomber. Levers in the machine permitted users to simulate the effect on the system of fiscal (budget) policy changes for example, and such was the intuitive appeal of the machine that major universities like Harvard and Oxford ordered their own versions.

In today’s algorithmic driven economies and markets, such a simple contraption might seem well out of place, but the time might be ripe for the major central banks to install MONIAC’s.

At very least their use might help induce further humility to a central banking community that has gotten the inflation call badly wrong in the past two years, and that is now presiding over a premature easing in financial conditions and ‘animal spirits’ in the context of still high inflation, and very low unemployment.

Have a great week ahead,


Strength and Honour

Over the last year a number of you have pointed out the odd typo or two in my Sunday note. For example, one eagle eyed reader in Brazil registered that I had written ‘South China Sean’ rather than ‘South China Sea’, which is a Freudian slip of sorts.

The real reason the quality of the note may have slipped is that this time last year my ‘editor’ Nicholas Benachi, passed away. In addition to being a good friend, he made sure that the logic and quality of the note were up to scratch. One of his favourite greetings and ‘sign-offs’ was ‘Strength and Honour’, which may have been inspired by his love of bushido and his family’s ties to Greece, not to mention a sweeping appreciation of history.

It is a phrase that comes to mind more and more often in a world where the moral pendulum is swinging wildly, and I often find myself using it as a maxim to scrutinise people, places and projects. Here are a few examples.

With respect to people, especially public figures, ‘strength and honour’ can mean that they are trusted and admired by peers, as opposed to feared or derided. The war in Ukraine has, as wars do, exposed a gulf between those who might fall into the ‘strength and honour’ bracket (prime ministers of Estonia, Finland, president of Ukraine) and those who manifestly don’t (Presidents of Russia and Hungary for instance). What is less satisfying is that in many countries being trusted and admired is not sufficient to get and hold power.

Nation states are easier to gauge in terms of their ‘strength’. In the past I have developed a country strength indicator (David Skilling has developed a similar approach to ‘economic strength’). The idea is to identify the factors a country should focus on in order for it to be strong in the sense of not habitually falling victim to the ebb and flow of the world economy and the pressures of socioeconomic imbalances. Strength in this regard is not necessarily made up of military might or large GDP but rather the capacity to stimulate human development, to withstand economic shocks, and to have a stable society, among other values.  

The idea of country strength is also more than a set of policies; rather, it is a mentality or policy culture that is evident in countries like Singapore and Switzerland that are acutely aware of the potential impact that outside forces (i.e., immigration, currency fluctuations, and world trade) can have on their societies.

One finding that shines through in some of the research projects I have been involved in is that the countries that score well on country strength are also the most globalized. Interestingly, they also score well on many other criteria such as “most innovative nation” or most “prosperous nation.” Most of the countries topping these rankings are small

dynamic economies (Singapore, New Zealand, Sweden, Switzerland, Finland, and Norway, to name a few), plus larger developed ones such as the Netherlands, and sometimes the United States.

What they have in common are drivers like education, the rule of law, and the deployment of education—their intangible infrastructure. In many respects intangible infrastructure is more important for a country’s future than its physical counterpart. These factors can be political, legal, or socioeconomic. Political factors include the degree of political stability or the strength of the institutional framework. Legal factors include the rule of law, tax policies, and intellectual and physical property rights protection. Examples of socioeconomic factors include research-and-development capabilities, business processes, or employee training and education. There are arguably five specific pillars of intangible infrastructure: education, health care, finance, business services, and technology.

In my view, this framework is the key to surviving a turbulent world, where productivity and social stability will be the two most important policy goals. The tantalising aspect for politicians is that building intangible infrastructure takes a long time (they cannot reap short-term gains), and this places a premium on having high calibre institutions and civil service that can prolong the implementation of national development plans. For this reason, some non or partial democracies are good at developing ‘country strength’ (South Korea in the 1980’s and 1990’s).

There is also a good long-term relationship between growth and the quality of a country’s intangible infrastructure, and sharp changes in ‘country strength’ provoke changes in economic performance – Turkey is the obvious example of a country where structural improvements in institutions have been squandered as deep corruption has taken hold and many of the people who had populated its institutions (professors, teachers, judges, army officers) cleared out of its system.

Another country to watch is the UK, which is becoming a serial institutional and economic underperformer on many fronts. The latest data point to note is Transparency International’s Corruption Perceptions Index released last week, where the UK’s rating has dropped sharply, to its lowest level since 2012 (when the study commenced). The denuding of institutions, undermining of civil servants (the inquiry into bullying by Dominic Raab is an example) and a sizeable drop in spending on social infrastructure are part of a worrying trend.

Other countries to watch here are Israel where the country’s legal infrastructure and political system are being undermined by its new government, and then from a more positive point of view – Ukraine’s attempt’s to curb corruption (the debilitating effect that this has had on the Russian army should be a cautionary lesson), and the opportunity that the geopolitical situation the war has created for Poland to reverse the damage done to its institutional infrastructure (notably legal and human rights).

Strength and Honour!


Balance sheet of Jenga

William Miller, a former Fed chairman in the 1970s was known to have joked that 23% of the US population thought the Federal Reserve was an Indian Reservation, 26% thought it was a wildlife preserve, and 51% thought it was a brand of whiskey. On that basis the ECB might be confused with the England Cricket Board and the BoJ as Balance sheet of Jenga.

Miller shouldn’t really have been one to joke – his tenure at the Fed lasted only seventeen months after he flagrantly lost control of inflation, to be ‘promoted’ to the role of Treasury Secretary and replaced at the Fed by Paul Volker – the rest as they say, was history.

We are back at a Volker moment of sorts. Only ‘sorts’ because to Miller’s intuition, it seems to me that the vast majority of people have no idea of the chaos that central banks are sowing in their lives – having pumped excessively cheap money into the economy, trapping new home buyers and then as inflation took off, taking a hawkish turn and raising rates aggressively in an attempt to undo their prior mistake (see our earlier note Pantomime to Farce).

In this context, it strikes me that there is very little public sense of what central banks are doing, and of the accountability of the actions, views and forecasts of the major central banks. Strangely though appropriately, this period of monetary tightening is also accompanied by some introspection as to what the role of central banks is.

For example, in a recent speech at Sweden’s Riksbank, Fed Chairman Jerome Powell stated that the Fed’s mandate did not encompass the role of a climate policymaker. His comments likely reflect a debate in the US, predominantly amongst Republicans as to the extent to which ESG (Environment, Social and Governance) driven policies should be pursued by institutions and investors.

Powell is in my view, correct in the view that the role of central banks needs to be tightly defined, though incorrect if he assumes there is no link between the policies of central banks and climate damage (curiously excess temperature readings and world debt to GDP have risen in tandem since the time QE (quantitative easing) begun). Relatedly few central bankers return to the perspective that a significant opportunity to ‘reset’ finance was missed in the heat of the global financial crisis.

Powell’s attempt to frame the Fed’s role comes at a time when the role of central banks in the political economy is enormous. As they have come to the rescue of various crises – that of low growth in the US, the structural deficiencies of the euro-zone and the economic side-effects of COVID, their role has burgeoned.

Central bank mission creep appears contagious – Janet Yellen positioning the Fed as the ‘cure’ for long-term unemployment, Christine Lagarde as the solution to climate change, and the outgoing Bank of Japan Governor Kuroda positioning the BoJ to swallow the entire Japanese financial system.

What is increasingly absent is a sense that fiscal policymakers are willing to both channel and offset the power of central banks.

First, for crucial policy issues like climate change and wealth inequality, monetary policy is a powerful motivating force but too broad based to have real policy relevance. Here fiscal policy makers need to channel the impact of monetary policy through instruments (such as the issue of green bonds) so that capital is directed to viable green technology projects and similarly to curb its effects on wealth inequality through taxation. Europe is much better than the US in these regards. Where Europe falls down (apart from capital markets and banking union), is in the way individual governments set fiscal policy with respect to the common monetary policy.

The omnipotence of central banks also means that they are an important benchmark for the quality of institutions, and for public policy leadership. For instance, that the ECB’s view on inflation and the outlook for the economy have very little credibility is not a great thing.

Far, far worse, in September 2021 it came to light that very senior Fed officials had been actively trading securities – something that would be unimaginable to most investment bank compliance officers. Interestingly, the moment that the Fed introduced new policies to oversee and effectively stop trading by Fed officials (December 2021 /January 2022) marked the top for equity markets and the onset of a hawkish turn in US monetary policy.

Ideally, this should never have occurred, especially at a time when so many other American institutions – from Congress to the Supreme Court – have been under attack, and it is my sense that most of the previous holders of the Fed Chair would have resigned in such circumstances.

So, if central banks need to do better on the ‘G’ part of ESG they will soon be confronted with the lure of geopolitics. To continue the thread that David Skilling and I opened up at the start of the year in ‘War by Other Means’, and if readers don’t mind, returning to page 267 of The Levelling …

One dimension that may complicate the need for less central bank intervention and diminish their independence is the quest by the large poles for financial dominance over each other. Central banks could become a vital instrument in such pursuits. Echoing Carl von Clausewitz’s view that “war is the continuation of politics by other means,” in a multipolar world central banks could become the monetary battleships of the large regions, with currency wars shadowing trade wars.

Indeed, the epidemic of countries sanctioning each other in 2018 (Saudi Arabia sanctioning Canada, the United States sanctioning Turkey, Russia, and China, for instance) suggests that finance is a key part of the geopolitical arsenal. Against this backdrop, governments may be tempted to allow central banks to take on a more strategic or geostrategic role than the “mere” economic function they play today. For the United States and Europe, this compulsion may well grow. Financial globalization is the only area of globalization where the United States is truly dominant, and using financial architecture to entrench its dominance is a compelling strategy.

In this context, I think that once this rate hiking cycle is over, the major central banks, as well as the minor ones like the PBOC, will spend more time thinking how they can expand the circulation of their currencies (the US in the Middle East,  Latam and with swap lines to Asia, China in Africa, and the euro-zone in Eastern Europe and North Africa) and how they can use their monetary tools against other economies.

Before that, the central banks (note there is an important Fed meeting next week) may have to negotiate a financial crisis – every US rate cycle since 1970 ended with a financial/market crisis. The outcome of such a crisis will have a bearing on the strategic competition facing the world.

Have a great week ahead


Mugged by Reality

History is catching up with me. In my last two notes I wrote variously about the tendency for some authors to use the opening line from Dickens’ Tale of Two Cities…’it was the best of times the worst of times’ and, the ability of ChatGPT to write essays and speeches.

On Monday, I dug out an old speech from Xi Jinping – and to my horror found it contained the sentence ‘it as the best of times the worst of times’, and it was written in such a balanced, anodyne way, with an obvious appeal to the Western reader, that it must have been written by a ChatGPT engine- the Chinese are apparently years ahead of thus here.

The speech in question is worth dwelling on. It was given at Davos in 2017, only a few days before Donald trump was inaugurated. As America struggled with the reality of Trump’s election victory, Xi Jinping came to Davos to claim globalization for China and to place China in the vanguard of the world order.

After the speech I saw American CEO’s wander out of the Assembly, partly in shock and mostly in recognition that China’s time had come. It should have been the beginning of an era for China, but instead it was the beginning of the end for globalization. Xi’s autocracy, China’s hunger for productivity boosting technologies, and Trump’s telling, though infantile, castigation of China, all opened a sharp divide between the two biggest economies in the world.

The Davos crowd is still debating whether globalization has simply changed its spots or stripes, but I think the wider consensus view is that it is being replaced by a multipolar world order (of large regions that ‘do things’ increasingly differently).

What is much less a consensus view is the intensity of the strategic competition between the USA and China, and increasingly Europe. For the moment, Europe’s stance reminds me of the description that Iriving Kristol gave for a neoliberal as a ‘a liberal who got mugged by reality but has not pressed charges’. Europe is being mugged by the reality of strategic competition but has not quite yet decided how to proceed.

Armed with this insight I took my soapbox up the ‘magic mountain’ last week. As ever Davos is a mixture of James Bond and ‘The Pink Panther’ (á la Peter Sellers), with sleek security combining with the rich and famous slipping around on the snow.

On Wednesday we had a very good discussion (thanks to Creative Dock and Roland Berger) around the implications of ‘strategic competition’ for European companies. The audience was mostly made up of German and Swiss business people so I, diplomatically as ever, wasted no time wading into the topic of German politics (I was heavily outnumbered by experts on the topic).

Today, more than any other European country, Germany embodies the dilemma that many nations face of being ‘forced to choose sides’. Having spent decades managing and cultivating relationships with European neighbours and countries like Turkey and Russia, Germany now has to choose.

It must choose between being economically and politically close to the US, and commercially bound to China, more so than it realises. In different ways, it is coming under pressure from the US, and at the same time being subject to a charm offensive from China.

Within German politics, there are also multiple contortions – the Greens acquiescing to coal mining and the sale of weapons is an example, and traditional relationships with the likes of France are fracturing. Perhaps German politicians thought that its economic power would render it influential diplomatically, which was certainly the case – but it has now become a liability.

The debate over the provision of Leopard tanks to Ukraine is sapping Germany’s credibility, and especially that of its leader Olaf Scholz. He appears to be the outlier in a long line of generally impressive German leaders since the 1960’s. If he believes that his indecision will create an environment where negotiations become likely, then he is badly wrong – morally and strategically.

Appropriately, the indecision in Berlin is a reminder of the lack of decisive policy making during the euro-zone crisis. Neither I expect, and again I am not an expert here, does the German public realise the extent to which the political mood has shifted in the West and what other nations now expect of Germany.  

Before I hector Germany too much, I also acknowledge that Ireland may also be on the cusp of a similar geopolitical dilemma. On a per capita basis, it has one of the best and most effective diplomatic services in the world, and a very large stock of soft power. However, it has ignored the creation of a proper defence and security policy and compared to other small nations (Denmark for instance), it effectively has no hard defence capability. It is the opposite of Israel – lots of soft power and little hard power.

The cases of Germany and Ireland demonstrate how crises occur – broad strands of policy are left neglected for years (often for good reasons), and then a shift in the world order makes demands upon them that cannot be met.

We are now living the great geopolitical ‘mugging’.

Have a great week ahead,


Two Cities

Writers or presenters in need of a catchy headline often deploy the line from Charles Dickens’ ‘A Tale of Two Cities’ that ‘it was the best of times, it was the worst of times’. The phrase in question compares London and Paris, around time of the French Revolution.

Having spent Thursday giving a talk on ‘La Guerre par d’autre moyens’ to a group of French economists and then Friday in London attending the estimable Pi Capital’s lunch meeting (Ian Bremmer presented his ‘risks for the year ahead’), I couldn’t help thinking of the ‘Two Cities’ and everything their history has to tell us about the development of economies, power and the state of the world today.

They are the two most extraordinary cities on earth, and no modern city, nor I expect Beijing (for a very long time the most populous city on earth – Rome has the record here) will match their colour.

I have lived in London and Paris for nearly half my life, so a full and worthy attempt to compare and contrast them could take a very long time. O’Sullivan’s Guide to the Pubs of The City and Paris Centre (sponsored by Eurostar) will have to wait.

What is interesting today is how each city confirms the stereotype of the other – London rather than Paris is beset by strikes and labour disputes, alternatively I find Paris more elitist than London and provocatively, I find Parisien(ne)s more polite than Londoners. There are certain elements of British culture I miss – notably the artistry of newspaper headlines. ‘Sex at No. 10 Covid Party’ is one such banner that greeted my arrival in London,

There are a number of serious points in comparing the two cities – not least in the context of the rest of Dickens’ quote that ‘it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair’ which underlined the dangers of the post-Revolution period.

The uncertainty that the French Revolution caused, and that Dickens wrote about, might well map onto Brexit. We are at a point in history where, as the old globalization led order dissipates, the rise and fall of countries will accelerate. For example, Russia, Estonia and Poland have all made strong choices this year, and will reap the consequences – in a positive way geopolitically for Poland Estonia, and quite possibly in a catastrophic way for Russia that could see the disintegration of its geopolitical hinterland and potentially the country become a renegade actor internationally.

Brexit is not quite as bad, but its folly is laid bare every day. Investment, especially in social infrastructure and public goods has collapsed over the past ten years, while productivity is anaemic. In France productivity is healthy, but France is reaching the limits of its budgetary and financial power. So, not entirely unlike the aftermath of the Napoleonic Wars, which drove economic innovation (in England), both the UK and France need to rethink everything they have done in the past forty years.

The UK needs to follow the French model – greater, better spending on education, health (and a less politicised approach to operating healthcare and policing), and possibly also on the military. The UK’s tax base needs to widen and arguably corporate tax needs to rise.

France on the other hand needs to look at what its neighbours are doing well. The heavy burden of administration needs to be cut away – to help businesses and to shorten the gap between the state and ‘the people’. Granted that France is at the limit of its budgetary potential, it has two (non-mutually exclusive) choices – political crisis or innovation. Mass privatisation is a non-starter but the digital economy in France offers the means to use private capital and expertise to improve public services.

As a final, crucial point, the ‘real’ tale of the two cities is how politically they have become estranged during the Johnson years. Brexit and the post Merkel era in Germany have left France the indispensable country in Europe, but with American singularity and Russian savagery on the rise, it needs to be politically closer to the UK (notwithstanding AUKUS) on topics of defense and security.

If this is the case it will suit Rishi Sunak, who I suspect will follow a foreign policy akin to the old Turkish one of ‘no trouble with neighbours’. There are already welcome signs of a change in tack in discussions around the post Brexit trade relationship of Northern Ireland. There is growing urgency to solve this before the 25th anniversary of the Good Friday Agreement in April.

Fittingly then, it has just been announced that Emmanuel Macron and Rishi Sunak will hold the first UK-France summit in five years on March 10, and King Charles III is expected to cross the Channel in late March.

At long last, harmony may reign between the two greatest cities on earth.

Have a great week ahead,