I have mentioned previously that I spent a good deal of time this year writing a book on how to reinvigorate French democracy (co-authored with Pierre-Charles Pradier, L’Accord du Peuple’ will be published in mid-January by Calmann Levy).

As we started the book in 2022, France was calm and I wondered if I had the wrong subject but two bouts of violence in early 2023 have convinced me that French democracy needs mending. One way we proposed to doing this is to follow some of the innovations in Irish democracy (i.e. deliberative democracy). No sooner than we had sent the book to our editors, violent riots erupted in Dublin.

All of this suggest two things. First, I am not good at forecasting and in fact curse whatever subject I write about. Secondly and more seriously, the world is still in a democratic recession, and in particular Europe, as the epicentre of the democratic world is challenged and under attack from multiple angles.

Against this backdrop, next year will be a crucial one for democracy as it is a year of consequential elections (as David Skilling and I note in our recent 2024 ‘Scramble for Supremacy’ note), with voters in countries representing over 50% of the global population going to the polls.

Last year we expected to see a stabilisation in the ‘democratic recession’ and increased stresses on autocrats. This has largely played out.  In Europe, where we have EU level elections in June, the centre has largely held, but shifted to the right somewhat.  Indeed, in several countries the far right has surrendered power to the centre (Spain, Poland).  

Immigration and the shadow of Russia’s war on Ukraine are the two motivating forces on European politics and in general we have seen the centre adopt a tougher stance on immigration and values.  Robert Habeck’s speech in the aftermath of the attack on Israel and the collaboration amongst the Nordic countries on deportations are two signs of this.

The likely accession to power by Donald Tusk in Poland is a significant positive, though we do not expect the Sanchez government in Spain to endure.  German politics is in flux and in both Germany and the Netherlands new parties are emerging that mix left wing socio-economic policies with stringent policies on immigration.   

As Europe shifts to the right, we expect the UK to move to the left.  The next UK general election is now Labour’s to lose and despite the recent cabinet reshuffle, the credibility of the Tories is so badly damaged that we consider the outstanding issue to be the magnitude of a Labour victory.

If European democracy is more stable, a series of elections in Asia and the US have the potential to reset the democratic and geopolitical debate for the next decade.

Chronologically, we highlight Taiwan’s presidential election in January, Indonesia in February, Russia in March, and India in April. A general election in South Africa will then likely follow and on November 5^th the US votes for its next president.

The US Presidential election is obviously the key event.  The risk is that not just that Donald Trump is re-elected but that American voters demonstrate disregard for the constitution, the rule of law and the reputation and role of the US abroad.  This event would create a constitutional and political crisis (not least as Trump’s retribution committee becomes active) in the US, and would likely upset economic and investment activity, and alter the balance between the democratic and ‘non-democratic’ world.  

In other key elections, Vladimir Putin will almost certainly win the Russian vote – though turnout and the protest vote will be interesting to watch.  In India, Narendra Modi is likely to stay in power next year – India’s economy and notably its geopolitical position are in the ascendant, and with a fragmented opposition (we are watching five state elections in December) he stands a high chance of being re-elected.

Finally, Taiwan’s election in January bears watching for its global implications – from the risk of war to global semiconductor supply chains.  As we write, the two opposition parties have failed to cement a coalition, and it is likely that the DPP’s Lai Ching-te will be the victor, something that would displease China.  This election could influence the geopolitical tone for the year.

These elections in 2024 will have implications for markets and for economies.  Expect more government spending as governments seek to strengthen economic activity – and the prospects of re-election.  And there is the potential for ructions in markets if there are unexpected political results – and there are particular market risks around the US Presidential campaign and elections.

Specifically, and with a financial markets hat on, ‘Losing America’ would have enormous implications for bond markets.  In times of crisis, Treasuries and the USD rally, but a ‘rule of law’ crisis of confidence in the US could lead to prolonged weakness. Corporate investment (with less room for tax cuts this time) would be curbed, and ‘American division’ could spoil the economy.

In such a scenario, geopolitical risks – emanating from Russia and China – would rise, vulnerable and contested sectors from semiconductors to vehicles would be volatile, and we expect that a ‘supply chain’ wobble might well reoccur.  In response, we expect the EU to focus more on defense and security, and that ‘strategic autonomy’ would be deepened.

Let’s hope the voters do the right thing!

Christmas has come early for readers of ‘The Levelling on Sunday’!

I want to give you a heads up that my programme ‘Waking up to World Debt’ will air on the BBC 4 on Monday evening (8pm UK time, and again at 11am on Wednesday – I will also circulate a link). It is my first and hopefully, not last radio project, and I can admit having had great fun making it (with thanks to the production team and my guests Prof Raghuram Rajan, Prof Barry Eichengreen, Ruchir Sharma and Joyce Chang).

The idea for the programme came from The Levelling where I mapped out the contours of the post-globalization age, the logic being that a new world order will be very slow to form until the imbalances created by globalization – such as climate damage, the democratic recession and indebtedness – are repaired.

One of the parallels with history we invoked was the 1924 Dawes conference where amidst a greater discussion on reparations and geopolitics there was a round of debt-forgiveness (to Germany by Britain and France, and in turn to them by the USA). I don’t want to spoil the surprise but ‘Waking up to World Debt’ starts in Horse Guards parade in London, not far from where the Dawes conference was held. The idea is that as the centenary of the Dawes conference approaches in 2024, that we may well need another world debt conference to reduce what are unsustainable levels of indebtedness across the major economies.

Indeed, since I wrote The Levelling, world debt levels have climbed rapidly. In the US and UK, stereotypes of financial strength and rectitude, debt to GDP levels are now above 100%. In the past, the two main Anglo-Saxon economies have only been as indebted in times of war (the Napoleonic Wars and the aftermath of the Second World War), and to an extent we are currently in a ‘war by other means’ in terms of the geopolitical competition between nations.

We are used to the EU being castigated for its high levels of debt and France and Italy remain burdened with debt, though the core countries and Ireland are in much better shape. China today looks like Ireland in 2006, government debt to GDP appears modest, but that could change very quickly if unemployment rises, and the government is forced to intervene in the heavily indebted private sector (wisely China has studied what happened in Ireland).

I am mindful that ‘predicting the next crisis’ is a low quality and very crowded perch and that is not the objective of the programme, but I increasingly worry that high interest rates and sticky inflation could ignite the vast pile of debt across regions. I am also mindful that the economist Rudiger Dornbusch observed that crises happen much more slowly than one might think, and then rapidly.

The fascinating aspect of world indebtedness today is how it has become complicated by geopolitics and national politics.

Over the past fifty years, all financial crises have been brought to a close by a ‘committee to save the world’ led by US policy makers. It was the case in Latin America in the 1980’s, Asia in the 1990’s and the US itself in the 2000’s (with help from Gordon Brown). This time is different, as they say. COVID showed that collaboration between the large regions is de minimis, with relations between the two largest economies especially frosty. Indeed, with all three of the regions that make up the multi-polar world (EU, China and the US) facing a substantial debt load, the competitive logic is that the one that unburdens itself first will have an advantage in the race to dominate the 21^st century. Hence the incentive to collaborate through a debt crisis is very limited.

The situation is ever more complicated when national politics are considered. Even when it is the author of a financial crisis, US assets (Treasuries and the dollar) play the role of safe havens. This time, as they, might be different, again. I

In the same way that a large section of the Americans is apparently ready to discard the strictures of the constitution, the guidance of the Federalist Papers and the norms of American politics, and vote for Donald Trump, it is possible that this sentiment is contagious to the bond market. If investors begin to fear deeper chaos in the US economy and an end to the rule of law (this is what Trump prescribes) the Treasury market and the dollar may no longer serve the role of safe havens. We may get an inkling of this in early March when Trump’s arraignment in Georgia coincides with the republican primary.

This is just one potential scare story. With credit markets pricing little risk of a debt event, and debt levels at multi-decade highs, the risk of an accident is high. You’ll have heard it first on BBC 4.

Enjoy the show,

Mike

An important contribution to the future of space engineering came on Wednesday when the US Fish and Wildlife Service gave their thumbs-up to the launch of SpaceX Starship IFT-2, which blasted off from Texas on Saturday. The IFT-2 is one of the largest, most powerful spaceships ever made, and completed its launch following a failed run this April (this time the ‘ship’ completed its initial launch phase though the booster rocket exploded and the ship was destroyed). Many readers will know that the Starship is ‘re-useable’ in that the ‘ship’ element can slow horizontally and then flip to perform a vertical landing.

Starship has all of the elements we now readily associate with Elon Musk – disruptive genius, oodles of capital and a tense relationship with government – Starship will ferry satellites to space (Starlink satellites will account for about 40% of Space X revenues) and is also intended to taxi astronauts to the moon, and eventually Mars, and in so doing it creates a dependency of NASA and to an extent, the US military on it.

The test flight is a reminder of the competitive interest that privateers and states are showing in the scramble for rare places, that is, the desire to unearth, control and harvest (pillage might be a better word) the deep seas, outer space and the Arctic, for example. Each of these rare places is a source of bounty, but also a potential theatre for warfare, and space is no exception.

Satellite warfare – whether satellites are either bumped out of place, smashed to smithereens in kinetic attacks or lasered – is something that militaries and their space wings (e.g. SpaceForce) prepare for. For instance, French has developed bodyguard satellites that can protect its own military and commercial satellites from attack.  Indeed, satellites are massively underestimated in terms of the reliance we place on them – to guide supply chains, telecommunications, military targeting and weather mapping to name a few uses, and any future conflict between large regions would very likely involve a ‘war on satellites’.

Each contested ‘rare place’ will soon be granted its own specific vocabulary, to the extent that we now speak of astropolitics and of the evolution of the rule of law of sorts of space (i.e. the Outer Space Treaty), a polity for space, I am waiting for someone to coin the term ‘the spolity’.

One aspect, where I am on more solid ground in terms of my grasp of the laws of gravity of markets and economies, as opposed to space technology, is the space economy, which covers many aspects – from space tourism, to mining and resource harvesting to the very promising rents to be garnered from satellites.

For the US the space economy is already rooted in the military, aerospace and telecoms industries and has a ‘blue sky’ element in the sense that Washington has bought into the strategic value of the space and this view is shared by entrepreneurs and enough investors to make a difference.

If we had to map the share of the space economy on to share of gdp back on Earth, the US, China and Japan would, have chunks of the space economy that might be commensurate with their ‘Earth’ gdps, and Russia would have a chunk of the space economy that is well above the role its flailing economy plays, while India might play an important role. The EU, which accounts for over a quarter of world GDP, likely has a smaller share of space GDP (the Space Foundation puts the size of the space economy at close to Eur 500 bn). Europe’s space industry has a smaller footprint than Fiat (roughly 200,000 people are employed in the space industry according to the European Space Agency, with roughly Eur 60bn in direct and indirect revenues).

It is not without key assets though – the Ariane and Vega rocket ships, Galileo navigation system and the Govsatcom secure communication system. Across Europe there is a rising number of growth companies forming a commercial eco-system, in the production of food and water in space like environments, in mineral mining and notably in satellites, which is where the money is in space commerce.

Europe’s problem in space commerce is not unlike its banking industry, still nation centric and the common capital market is not deep enough. To make things more complex, the speculative nature of many space-oriented projects makes them difficult to finance, even for risk taking venture capitalists (space tech venture activity is back down to 2018 levels). In time I suspect that Europe may need to adopt new forms of financing for select space tech projects, that bring entrepreneurs together in pan-national projects and that combine public and private money. It might be too early for a Bank for Space, but the EU needs to realise that succeeding in space is as much about the right kind of capital, as it is about technology.

For their part, Europeans may just prefer to sit and wait it out, glad not to have funded Space X.

In his book, the Origins of Political Order, the political scientist Francis Fukuyama grapples with the issue of building quality institutions, which he coins as ‘getting to Denmark’ in the sense that ‘For people in developing countries, ’Denmark’ is a mythical place that is known to have good political and economic institutions: it is stable, democratic, peaceful, prosperous, inclusive, and has extremely low levels of political corruption’.

Fukuyama traces the quality of Denmark’s socio-economic pillars to the Protestant Reformation. I am not sure he is right here, but that is a debate for another day. In general though, the model of the small, advanced economies (not just Denmark but also the other Nordics and smaller leading nations from Singapore to Ireland to the Netherlands) is the exemplar for policy making internationally, as David Skilling and I continue to stress.

Now however, there is trouble in the ‘Denmarks’.

Whilst the Nordic economies are famous for their socio-economic balance they are increasingly known for their struggles in integrating immigrants. Against a background of violence and gang led crime, Sweden’s prime minister has referred to a period of ‘political naivety and cluelessness’ and has even sought to involve the military in curbing violent crime.

In this context the five Nordic countries (Finland, Denmark, Norway, Iceland and Sweden) have signed an agreement to collaborate more closely in deporting illegal immigrants (for example in pooling deportation flights). In the background, individual Nordic countries have been tightening their policies on immigration – towards the relatively tougher Danish approach.

Though this is a specific measure, it highlights a turning point in the Nordic countries’ tolerance and approach to illegal immigration, and potentially migration on a larger scale. As harbingers of socio-political change, this is potentially an important development on the European stage in that it signals progressive European countries have reached a limit in terms of the scale and nature of migration they are willing to permit.

If this is the case it may have several implications.

One is that in the context of very tight labour markets, European countries will try to be more selective in the immigrants they welcome. In Ireland for example, central bank data shows that Indian women are one of the best paid migrant cohorts in the labour market (they work in the IT sector), while even Hungary whose illiberal government rails against immigrants, needs to take in half a million migrants over the next two years. Broadly, it is worth emphasising the point that employment is considered the best means to integrate new arrivals in societies.

We may also see some European countries make labour markets more flexible, notably finding ways to involve older people in labour markets (in Denmark the retirement age is 67 and from 2030 will increase by one year every five years, depending on life expectancy), and it is also possible we see the EC study how Japan manages its economy with few immigrants.

Politically, the notion that we are at ‘peak Denmark’ may have at least three interesting effects.

In many European countries, immigration is the leading, and most contested political issue, with the tone set by ugly rhetoric from the far-right. Suella Bravermann’s offensive courting of controversy – from promising to send illegal immigrants to Rwanda to describing homelessness as a life-style choice – is an example. The fact that governments are reacting more forcibly to illegal immigration may well move the debate back towards the political centre and arguably, make it more policy focused.

At the same time, I expect that we will see many European politicians focus on the notion of European values, and what this means in terms of the responsibilities they place on both Europeans and immigrants. Robert Habeck’s impressive speech on this theme is such an example, and I believe that we will hear more voices from the political centre echo his words.

 The other interesting trend, that is consistent with progressives reaching the limit of their patience with immigration is the rise of new ‘mongrel’ political parties. I say mongrel in the sense that they (Sahra Wagenknecht’s Alliance for Justice and Reason in Germany and Pieter Omtzigt’s New Social Contract party in the Netherlands) mix left wing economic policies with tough stances on migration and ‘values’.

It points to a major turning point in policy and politics in Europe, with serious implications for the developing world.

Have a great week ahead,

Mike

One of the side-effects of the attack on Israel by Hamas and its consequences, has been the noisy invective in social media and the international stage, that has made statements and gestures by diplomats nearly impossible to craft.

In this context, one very clear statement of policy that, perhaps coincidentally, appeared last week was Jake Sullivan (US National Security Adviser) in Foreign Affairs Journal (November/December 2023) where he lays out the broad sweep of America’s diplomatic views, and the strategic challenges that lie ahead to the ‘sources of American Power’, and frankly the number foreign policy issues the US is managing.

In the article he notes that beyond geography and natural resources, ‘It is the strategic decisions countries make that matter most—how they organize themselves internally, what they invest in, whom they choose to align with and who wants to align with them, which wars they fight, which they deter, and which they avoid’.

This view tallies with many of the trends I see emerging in Europe. Some years ago, Joe Lee the pre-eminent historian of Ireland remarked that the future of small countries is a function of their strategic thinking, and in this respect the entry to NATO of Finland and Sweden (soon) to NATO are critical examples as is the overly complicated web of alliances that Qatar has made for itself. In addition, larger countries are being forced to ‘choose sides’, as we have noted in the case of Germany in ‘Mugged by Reality’.

If states are grappling with the new world order, there is yet mixed evidence that corporations and investors facing up to it.

Many are used to a world where geopolitics was interesting to read about and debate but owing to the soporific effect of quantitative easing on markets, mattered little in the scheme of things until the monetary battleships retreated. A few investment firms like Sequoia have changed their structure to better fit the multipolar world but the majority of banks and asset managers are simply still talking about geopolitics rather than acting on it.

However, if and when they awaken to a changing world, what should they do?

To start with investors first, there are two practical elements to consider. The first is that in the context of relatively high equity and corporate bond valuations, the contribution of macro risks to portfolio performance (through currency moves for example) will be higher.

The single biggest macro risk for 2024 is that extremely high debt levels (across continents and balance sheets) are ‘ignited’ by a political or geopolitical risk, if might be a dramatic climate event, the prospect of another, but even more unorthodox Trump presidency or an event in the South China Sea.

A more intellectually interesting approach for investors is to accept the assumption that the world order is changing for good (i.e. globalization is gone) and to imagine who will be the financial power houses of 21^st century. The thought experiment is aided by research work by Profs Elroy Dimson and Paul Marsh, that compares the percentage of world equity market capitalisation held by different countries in 1899 to that today.

In 1899, the UK was the biggest stock market, accounting for 24% of world equities (measured in dollars), but now comprises 4%, Germany had 13% of world equities in 1899 and now has 2.3% while Russia has dropped from 6% to near 0. In contrast, the USA made up only 15% of world equities in 1899 but is now 60%. Thus, the thought experiment goes as follows – might the US drop to 40%, could Chinese bonds 33% of developed world bond portfolios by 2040, and might a bitcoin/crypto ETF take up 3% of a typical investment portfolio?

To jump to companies, my sense is that in Europe – old companies (Mittelstand for instance) seem to not be aware of how to adjust to geopolitics or map its effect on their businesses. In contrast, new companies, especially those in the deeptech sector (quantum computing, AI, robotics as examples) are in the crosshairs of geopolitics because their innovations are prized and strategic. Notably, and this is something many young growth companies are having to grapple with in terms of where they sell their products and whom they hire. Equally they also need capital to thrive, and even in a capital starved world they must carefully choose the investors they take on board in terms of the geopolitical risks this might present.

A final world goes to a small number of (mostly large) firms that understand geopolitics and that are becoming part of its apparatus, be it in cybersecurity, supply chain and logistical networks, banking and asset management and aerospace. What distinguishes them from companies of prior decades is not so much their size and power, but their information and technical capabilities, such that governments and international institutions need to cultivate them to an extent they may not be aware of.

Interestingly, Jake Sullivan’s otherwise well written essay barely  mentioned corporations as geopolitical actors. Maybe he is missing a trick? 

Have a great week ahead,

Mike

We had expected that compared to 2024, 2023 would be a quiet year in electoral politics, but this has not been the case. Amidst a geopolitical landscape marked by tragedy and turmoil, the past week has seen two electoral events that augur well for a more coherent, and less politically volatile Europe. Last weekend, Donald Tusk’s Civic Platform party and two, quite different opposition parties in Poland garnered 248 seats in the 460 seat assembly, most likely bringing to an end the reign of the PiS.

Normally Polish general elections do not matter much for the EU, but Poland is Europe’s rising power – because of its growing economy, a fast-growing military spend, the war in Ukraine and a slowing German economy (the Polish election campaign has led to new lows in relations with Germany). Thus, this election is highly significant.

The international political effect of the election result will be to bring Poland back into the European political fold, to add heft to Europe’s policy on Ukraine and to remove a festering quarrel over ‘European values’. Within Poland it is a loss for ‘illiberals’, a win for liberal groups (women’s rights in particular, many Poles ignored the divisive referenda votes held at the same time as the election) and a realignment of Poland away from the ‘eastern awkward squad’ to a better-behaved member of the EU.

As the Polish campaign was coloured by the castigation of Donald Tusk as the ‘EU/Germany’s boy’ in Poland, he will be slow to politically embrace the EU, but as a former EU Council President, will naturally work very closely with EU leaders. Perhaps his most important task for him will be to reverse the damage to Poland’s institutions – television, media, legal arena and even the central bank. One of his first moves will be to try to remove PiS loyalists from these institutions and introduce measures to safeguard their independence.

The election is a clear positive for Ukraine, not simply in terms of continued logistical support for its war effort, but also in terms of its long-term ambition of joining the EU. Hungary and Viktor Orban are clear losers and will find themselves isolated in many EU debates. In a cruel week for geopolitics, Orban chose to mark his allegiances by very publicly meeting Vladimir Putin in Beijing. In my view it is time for the EU to severely sanction Hungary, and to think of a mechanism to expel it from the EU.

The significant development is that we may start to hear more about ‘Hungrexit’, and now, less about Brexit.

On Thursday night in the UK, Labour overturned two huge Tory majorities in Mid-Bedfordshire (a Tory seat since 1931) and Tamworth. If these results were repeated in a general election there would be a landslide victory for Labour, and an end to the Tory government since 2010. The next UK general election (less than a year away) is now Labour’s to lose.

At the risk of showing my age, the rise of Labour puts me in mind of the early Blair years (I recall walking past Downing Street the day after Tony Blair came to power in 1997). What was telling in the run up to that was the quality of the Labour front bench, and the extent to which ‘New Labour’ prepared for government (taking ‘change management’ classes at Oxford with the academic Roger Undy).

While it is generally accepted that this Labour frontbench is neither as dazzling nor potentially transformative as that of the first Blair government, they are starting to behave in a Blairite manner. One example is the newly appointed shadow spokesperson for technology and innovation, Peter Kyle, who is treading very carefully on the topic of AI.

At the recent Labour conference. Kyle and colleagues with similar remits, have been very careful to sound business friendly (emphasizing ‘progressive AI’) and the need for policy makers to permit ‘innovation’ in AI. His behaviour is not unlike that of Blairite politicians in 1997, who engaged with business before coming to power, and who worked hard to ‘not scare the horses’.

A Labour victory next year will quieten the British political landscape. It is likely that many of the badly behaved, ‘swivel-eyed loons’ – to use David Cameron’s term, of the hard right will either lose their seats or be relegated to the far fringes. Domestically, Labour’s greatest difficulty will be in the related challenges of restoring trend economic growth amidst weak public finances, and in replenishing investment in public goods like education.

Brexit will not be reversed, and neither will it be renegotiated under Labour, but there is scope for the EU and the UK to adopt a less antagonistic and more pragmatic stance with each other on trade oversight, financial services and the regulation of new technologies. Military and security cooperation might well grow even closer.

A Labour victory would mean that all of the large European economies have centre right or centre left governments, and that very few of them (even Italy) go against the grain of the European project. With Germany and France working on their relationship (over herring sandwiches in Hamburg recently) Europe will have the policy space to chip away at the many challenges it faces. 

Have a great week ahead

Mike

On Wednesday the EU Commissioner (Internal Market) Thierry Breton invoked the EU Digital Services Act to reprimand and investigate Elon Musk’s ‘X’ (Twitter) for the way in which it has quickly allowed disinformation and illegal content relating to the terror attack on Israel to spread. Elon Musk, the owner of ‘X’, in a clear mis-understanding of the EU’s rules, responded in an insouciant manner.

As the EU builds its case against Musk, the incident raises at least two issues. One is the increasingly central role of the EU in regulating the internet, data and AI, the other is the risk that the owners of these tools (like Musk) seem to care little for the harmful side-effects of social media, and that these negative effects could become more pronounced as AI grows in power and is further unleashed.

In that context, the race to establish the rules of the road for the use of AI acquires a new urgency, as does the need to frame a global code of conduct around these technologies.

In this respect, whilst not immediately intuitive to readers, I thought of early medieval history and especially to one of its authorities.

Those readers who are not familiar with the reading lists of medieval history might instead have read Frederick Forsyth’s book ‘The Negotiator’ (The Day of the Jackal is better known) in which they may notice a quirky entry where the protagonist, a student at Oxford, is told to go up to Mr Keene’s study. This was Forsyth’s nod to a well-known Oxford figure called Maurice Keen, the embodiment of the tweedy don, who held the seat of Professor of Medieval History (the prior holder as his father).

Maurice Keen’s great academic contribution was a book simply entitled ‘Chivalry’ which details the emergence of the chivalric code in the late 12^th century. One of the motivating factors behind the code (not dissimilar to the rules banning dueling six hundred years later) was the need to stop fatal disputes and attacks between knights (they were needed for the crusades), and to moderate the effect of their sometime arbitrary violence on medieval society as a whole.

Amongst the strands of the chivalric code were stipulations that knights should be generous, not lie and respect those weaker than them…elements that often appear lacking in the behaviour of the owner of ‘X’ and many of its users.

Thus, the reason for my discussing ‘Chivalry’ is an ongoing preoccupation with the various processes and attempts to build rules and frameworks to govern AI, and the corresponding search for benchmarks and heuristics. In the sense that it might illustrate how AI might not ‘do harm’, and be used in an honorable way, the chivalric code is not a bad place to start. This is especially so given that we are widely and frequently warned of the dangers of AI – to our jobs, media, politics and security to name a few domains.

The topic of the regulation of AI is perhaps the most significant institutional project of the day. At a point where globalization as we knew it is being left in the rear-view mirror of the world economic locomotive, the institutions that helped to frame the initial wave of globalization – the IMF, UN, WTO and World Bank are increasingly irrelevant or dysfunctional. The 21^st century will present new problems that will need to be marshalled by new technologies, and AI is the most prominent of these challenges.

In the race to frame and regulate AI, Europe has bolted ahead with its EU AI Act which delineates AI into four ‘risk’ segments. The US does not yet have a coherent AI regulatory framework and may find itself ‘reacting’ to what others are doing. China already has strict rules that govern the datasets and applications that AI can cover, though its framework is more ‘political’ than ethically driven. In this respect, Japan has become an interesting player.

Japan, as the last G7 host, is now running the Hiroshima AI process, a G7 template on ‘rules of the road’ for AI across the G7. Japan’s own AI strategy emphasizes several areas – global cooperation on the setting of standards, the need for Japan to invest in AI capabilities (proper data archival, engineering and innovation for instance) and a human values centric approach to the development and use of AI.

In that context, and in the absence of a formal AI code in the US, it is likely that an important axis for a common G7 approach is the Japan/EU relationship, as well as the work done by the OECD on AI. Here, EU Commissioner Vera Jourova, one of two commissioners (Breton is the other) has commented this week (at a conference on internet governance in Kyoto) that there is convergence between Japan and the EU on how they see AI ‘rules’, especially on generative AI. She also disclosed that a code of conduct for companies producing and using AI models was not ready.

The Jourova comments suggest that the wheels are turning on a G7 template on AI (to be released by year end) and that the European and Japanese approaches are important benchmarks, possibly to the detriment of the more limited UK approach.

A key point of discussion, notably from the Japanese side, is the competitiveness of their economy with respect to AI innovation, and this may be an element that carries through the debate with the EU.

It might be far too much to hope that European ‘chivalry’ and Japanese ‘bushido’ come together to contain the harmful effects of AI, but the lessons of history and the codes of other ages offer a steer as to how this might be done. So far, the actions of Mr Musk and others across the social media and AI sectors demonstrate a dangerous lack of ‘chivalry’.

Have a great week ahead, Mike

It is increasingly debated that the current generation of politicians, notably in the two Anglo-Saxon countries, are markedly inferior to those of prior generations – intellectually, morally and in their commitment to public service. Rory Stewart’s new book (Politics on the Edge) highlights a number of examples.

This is a view I have some sympathy for and a more compelling argument, supported by most politicians I have met, is that social media has debased politics and political debate, to the extent that the untrue and absurd garner greater attention from potential voters. Speeches at the Tory party conference last week (e.g. Penny Mordaunt) and the toppling of Kevin McCarthy by Matt Gaetz, are instances.

One of many litmus tests of this hypothesis is that the quality and quantity of pithy, quotable remarks by political leaders and policymakers appears to have diminished. Outside of set-piece speeches there seems to be far fewer impressively intelligent public utterances from those in public life. As a result, essay writers are left digging for lesser used quotes from Churchill with which to start their notes. This is a pity, not just for essay writers, but for the public at large.

Often, when those essay writers have exhausted the reservoir of Churchill quotes, they dip into Keynes. I recently happened upon a deep pool of quips from Keynes in Benn Steil’s ‘The Battle of Bretton Woods’, which is a superb account of the tussle between Britain and America to shape the new world financial order and with it, bodies like the IMF.

Tussle is too generous a word, the meeting effectively formalised the transfer of ‘world power’ from Britain to the US, or as Keynes wrote to his mother ‘ In another year’s time we shall have forfeited the claim we had staked out in the New World and in exchange this country will be mortgaged to America’.

Keynes’ prominent role at Bretton Woods was as foil to the American negotiator Harry Dexter White, and Keynes felt his place was to negotiate a deal for Britain that would rescue it from ‘losing face altogether and appearing to capitulate completely to dollar diplomacy.” For some, Keynes was living proof of Lord Halifax’ view that ‘they have all the money, and we have all the brains’.

From this point onwards, American financial dominance grew, manifested in the broad international use of its currency which has risen to a very particular place as the linchpin of the financial system. Indeed, one of the most important tenets of the twentieth-century  world order and the rise of globalization has been the position of the dollar as the international reserve currency.

This pre-eminence was christened in another memorable quote as ‘exorbitant privilege’ by Valery Giscard d’Estaing, then French finance minister and later President. When Giscard made this statement, the dollar was tied to gold, and the response from France and a number of other countries was to exchange their holdings of dollars for gold. This set the stage for the subsequent breaking of the dollar’s tie to gold by President Nixon. Since then, the dollar has been first among equals in the currency world, and many developing nations have pegged their currencies to it.

Recently, as we have noted before, this notion of ‘exorbitant privilege’ has come under scrutiny in the sense that there is a long line of commentators predicting the demise of the dollar.

A more interesting line of argument, thanks again to some French wizards (Pierre-Olivier Gourinchas and Hélène Rey) is the notion of ‘exorbitant duty’, which is the role that the dollar and US financial system play in times of crisis as the provider of a safe haven, even when those crises emanate from the US itself. As it stands, the next largest currency bloc to the dollar, the euro doesn’t have capital markets deep enough to become a fully fledged global safe haven. It might be that a group of smaller countries – Switzerland and Australia for instance could also draw in capital in a crisis.

So, the dollar may continue to do its duty, until perhaps it is undermined from within. While few in Washington will feel sorry for Kevin McCarthy, his removal represents another step towards the political unknown in America. Europeans and Asians are starting to worry about the prospect that Donald Trump could become president again and that the US might one day fail to do its ‘duty’.

Congress has got it wrong before. One of the comments in the Steil book recounts how after Bretton Woods ‘Congress was spontaneously more generous toward China than toward England, perhaps because no one envisaged China as a postwar rival for power or commerce.”

The Polish elections to be held on October 15^th are more important than many think. For Poles it may be the most important election since the fall of communism given the near existential struggle between liberal, pro-EU candidates (led by Donald Tusk) and ‘illiberals’ who increasingly resemble the Trump Republicans.

For reference, the incumbent ‘illiberal’ PiS (‘Law and Order’ led by Jaroslaw Kaczynski) has 35% support with Donald Tusk’s liberal Civic Coalition party on 28% and the three main smaller parties each with close to 9-10%. For Europe the election will be telling geopolitically, and notably for the way it reflects upon other EU countries like France and Germany (Slovakia which faces a similar contest goes to the polls this weekend).

Poland has the potential to become a driving force in Europe, or a thorn in its side. It has changed and developed rapidly in the last twenty years, but it is fair to say that its story is not as widely told and appreciated as other ‘miracles’. It interests me particularly because the way Poland has changed rhymes with what has happened in Ireland in the past thirty years.

Poland’s election is, even by the standards of other ages and countries, a very dirty, contested one, that was poisoned by the introduction of several referenda questions on divisive topics like immigration. In addition, the PiS have not shied away from anti-German sentiment and this will have long run consequences.

A bribery scandal where members of the PiS have been found to have offered visas to immigrants for cash has complicated matters further and provoked a deeper row with Germany which has threatened to closely police its border with Poland. Another strange incident has been the banning of Ukrainian grain by Poland, Hungary and Slovakia (ostensibly a sop to local farmers) and the brief ban on arms exports by Poland to Ukraine.

This is one of a range of issues where there is tension, to be polite, between Poland and the EU. I have a lot of sympathy with Poles who feel that they are condescended to by the ‘older’ European powers. That sympathy is in short supply however when I hear the arguments of the ‘traditional right’ in Poland. One such individual is Dominik Tarczynski, a Polish MEP and amateur exorcist.

He recently lectured fellow MEPs on the fact that Poland had suffered no terror attacks because it refused to allow in illegal migrants, the logic of which will have upset his colleagues. Tarczynski is guest on Fox news, where this kind of message goes down well, despite the reality that the deadliest form of terrorism in the US is from the far-right (the FBI has warned on this multiple times).

Another throwaway comment from Tarczynski – that unlike the larger ‘old’ countries, Poland is a high growth and low debt country, deserves a bit more attention. In 2030 Poland will likely be a richer than the UK and it has barely registered a dip in growth in the past thirty years. This is in stark contrast to Spain, Italy and France where last week the text of the 2024 budget was being finalised by Bruno Le Maire, France’s Finance Minister.

Whomever is in power in Poland in coming years will enjoy a strong economy (though with a compromised central bank) whilst the next (and current) occupant of the Elysée will have zero fiscal space. With government spending at 60% of GDP and debt to GDP easily above 100% France has little room to spend more. My hunch is that this will need to lead to greater innovation in its democracy and how the state is run, but not before further unrest perhaps.

This is why Poland becomes important. A victory for the ‘illiberals’ could have significant implications across European politics – it would deepen the divide between the Commission and countries like Hungary and Poland that do not adhere to the ‘European values’ framework, it could well complicate policy on Ukraine (though ultimately the main Polish parties are resolutely anti-Russian), and it might open up a new ‘Republican’ style debate on European politics and economics.

On the other hand, an EU friendly government led by the former European Council President Donald Tusk would be much less an irritant but rather a leader on foreign policy – notably in pushing countries like Germany to re-arm, in building a central European consensus and in pushing the growth narrative in Europe that is so lacking from Italy and France, and potentially becoming an industrial base with access to low energy (Poland is investing heavily in nuclear energy).

With the consensus that 2024 is the important election year, Poland might well be the political surprise.

Have a great week ahead,

Mike