Ulysses, Opium and Electric Vehicles

Trade wars can have long-running, unintended consequences. The Smoot-Hawley Act of 1930, widely regarded as a catalyst to the Great Depression, contained a clause (section 305) that permitted the banning of obscene materials, a classification that (in the US) covered James Joyce’s Ulysses. Joyce’s publisher, keen to sell the book in the US, brought a test case under the Smoot Hawley Act (United States vs. One Book Called ‘Ulysses’), and the resulting verdict that the book was not ‘obscene’ made Joyce’s text a bestseller in the US and changed American obscenity laws.

A more serious case was the consequence of the Opium Wars, which ended with Hong Kong ceded to Britain, and began what China recalls as its ‘century of humiliation’, a perspective that still colours Beijing’s view of the West. In 1997, Chris Patten presided over the handover of Hong Kong to China, and in 2020 the introduction of the national security law drew Hong Kong legally, institutionally and politically back to China, with little protest from the West, and in my view, this is the defining event that marks the end of globalization as we knew it.

A key institution in the process of globalization was the World Trade Organisation (WTO), which in its early incarnation as GATT (General Agreement on Trade and Tariffs) enjoyed strong leadership under Peter Sutherand and later Pascal Lamy, but is now defunct.

Beyond its trade agreement rounds, the most consequential event for the WTO was the decision to admit China in 2001. The move was approved by President Bill Clinton at a time when there was an uneven power balance between the US and China and, at the time, Clinton described China’s economic relationship with the USA as ‘the equivalent of a one-way street’ (arguing that it was a highly attractive opportunity).

The trade, manufacturing and financial relationship between China and the West formed the basis of globalization, and it is the evolution of China from a provider of cheap labour into an economic powerhouse, together with the failure of the West to hold it to the terms of WTO, that has led to the breakdown of globalization. Indeed, many expected that the second Trump presidency would pick up where the first one left off, with a hostile trade stance on China (in 2018 Marco Rubio released a very hawkish report on China ‘The World that China Made’).

Now, Europe rather than the US, may be the one to pick a trade fight with China.

China’s growing prowess in technology, intense domestic industrial competition, coupled with large quantities of state aid for ‘champion’ firms, and the need to replace a deflating real estate sector with a manufacturing boom, have created a surplus in/of manufactured goods, which China has opportunistically dumped on the European market (known as the China shock 2.0), to the consternation of auto manufacturers, chemical producers and pharmaceutical firms in the EU.

Until very recently, the EU has permitted this to continue, for at least two reasons. The first is that EU trade policy is very product-focused in terms of its corrective measures, and the second is that there has been no strong consensus amongst the large European countries on how to deal with China. For example, in his 946 page memoir “La diplomatie n’est pas un dîner de gala’ (a play on Mao’s line that a revolution is not a dinner party) the former French ambassador to China, Claude Martin states that the lack of a coherent, watertight view on China by the EU (with policy measures to support), meant that China could divide and conquer across European capitals.

That is apparently changing. In recent weeks, commentators and industry bodies in the major countries, notably France and Germany, have been striking a bold and hawkish note on China, and this much was reflected in a major development with the issue of a letter by French and German presidents to the EC president, where they call for a much tougher stance on China.

In my view, there are three mistaken elements in the French/German stance, a lamentable view of Europe as the victim, a lack of urgency to get European industry to reform and become more competitive (notably few of the Draghi recommendations are in place), and third, the lack of an even more aggressive view on China in the sense that its economy may be even weaker than many think.

Diplomatically, the move is being presented as a ‘conversion’ by the two governments, each led by intensely unpopular figures (Macron’s ratings are at an all-time low and Merz’ is not far behind).

There are two elements to note in the letter, which aims to protect key European industries such as chemicals, pharmaceuticals and autos in particular. The first is a diversification instrument that will safeguard supply chains from over-reliance on Chinese goods and inputs, and the second powerful measure aims to exclude Chinese companies (China is not mentioned in the document but the sense is that it is very much the target) from the EU market where trade dumping produces severe and systematic distortions. The implementation of such a measure could be rapid and would need a majority of EU states to block it.

EU trade commissioner, Maros Sefcovic spent last week in China, trying to extract a commitment from Beijing to limit the flow of Chinese goods to Europe. My sense is that the polite apathy that greeted him (as I write there is talk of an agreement on are earths) means that China has little intention of striking a reliable deal, and that a trade confrontation between Europe and China in early 2027 is something European businesses need to prepare for.

Have a great week ahead, Mike

The Rotten Heart of Europe

One of the first books I read that helped to explain how Brussels worked was Bernard Connolly’s ‘The Rotten Heart of Europe’, published in 1995. It was a massive hit (in the UK) and hugely controversial. Indeed, a second edition came with a cover recommendation from the then editor of the Spectator Boris Johnson (‘one wanted to stand on the desk and cheer’).

The book did much to propagate Euroscepticism in British politics, and we might trace some of the roots of Brexit to it. With some irony, Brexit showed that the Commission can function in a forceful way when a crisis befalls it. However, as is well documented the challenge for the EC is to now step up a level and reinforce itself for a multipolar world where it will compete more acutely with China and the US, with at the same time Russia snapping at its heels.

Connolly’s book came to mind a week ago when speaking at an investment conference. I was joined on a panel by economists and policy makers from Italy, Spain and Portugal, so that together we made up a representative group of the euro-zone periphery countries hit hardest (though Greece suffered the most) by the euro-zone debt crisis.

Each of the periphery economies has had a remarkable turnaround – Italy is a bastion of political stability, Spain is the fastest growing of the large economies and Greece, Portugal and Ireland are arguably ‘too hot’ in terms of the rate of growth and price inflation they experience. What is telling is the signal from bond markets – yields for Italy, Spain and Greece for example, are below those of France and the UK, and Ireland is nearly on a par with Germany.

In that respect, the tables have been turned. It is not forgotten how Angela Merkel and Nicola Sarkozy upbraided the lazy Mediterraneans in the 2010’s. Now, the three large countries at the heart of European history – the UK, France and Germany, are struggling, and to unkindly borrow Bernard Connolly’s title, constitute the ‘rotten heart of Europe’

They share common problems – sluggish, low growth, an inability to foster sustained private investment, political instability in the face of electorates who are in thrall to the easy solutions of populist parties. The reaction to last week’s triumph of the AfD (Alternative fur Deutschland) in Saxony-Anhalt is an example, and it may mean that Frederich Merz suffers the fate of Keir Starmer should his coalition collapse or his party cast him aside in favour of a younger leader.

Though the tempo of growth is picking up in Germany, the UK and France, it will not rescue the leaders of the large economies. An additional complexity is that trading partners and allies are turning against them – China is exporting its manufacturing over-capacity to the German consumer and the special relationship that characterized US-UK diplomacy has all but withered away. The prospect that the White House might favour Argentina’s case for sovereignty over the Falkland Islands is a stunning case in point.

Unlike France, the British and German economies suffer from a similar failure to upgrade their ‘production capital’ – investment in research, skills, new technologies and to an extent, manufacturing capacity. Both are behind France in terms of military power, but France is a leader in over-regulation. The fate of these three great nations has already inspired an endless flow of analyses, ideas and suggestions – the best of which from Mario Draghi, seems to be ignored.

The sole thought I have to add, is that incumbent, centrist politicians in all three countries appear to ignore the increasingly obvious lesson that the rules of the geopolitical game have changed, and as we have referenced before in this note, we live in an ‘age of predators’, and consequently prey (Starmer). In this regard, new ideas are not the solution, but a change of method is. That method is more singular, less consensus led and aggressive. Edouard Philippe in France and Andy Burnham are its test cases, we will know by next May if they learn this lesson, and if not, Europe is in dire straits.

Have a great week ahead, Mike

La Conquête

A few years ago I was walking through the Gare de Lyon in Paris when I was brought to a halt by the sight of an elegant woman strolling through the concourse. She was followed by a black Labrador, a porter, and then a smaller gentleman trundling behind. The lady in question was actress Julie Gayet, wife of Francois Hollande, the former President of France (the gentleman). One of Hollande’s most famous acts as President was to sneak out of the Elysee on a scooter for what the British tabloid press might call ‘trysts’ with Julie.

A distinguishing factor of French politics compared to Anglophone countries like the UK, Australia and Ireland (it used also be the case in the US) is that a politician’s private life is private, and not for public consumption.

In keeping with this spirit, in 1899, President Félix Faure allegedly died in the arms of his mistress. More recently, presidents like Giscard and Jacques Chirac married well, but had plenty of ‘adventures’. Indeed, the film about Bernadette Chirac ‘Bernadette’, starring Catherine Deneuve is quite good in this regard. Speaking of which, another film to recommend is ‘La Conquete’, the story of the disintegration of Nicolas Sarkozy’s first marriage whilst he rose to power. Sarkozy has done more than most to banalise French politics, but his relationship with Carla Bruni has also introduced a popular sense of glamour into public life.

My reflections on the love lives of French presidents are motivated by two things. Francois Hollande has this week declared himself ‘ready’ to enter the battle for the 2027 presidency. With much attention on the right, there is space on the left of French politics for a serious candidate, and Hollande sees an opportunity, though he may well be beaten to it by Dominique de Villepin (famous foreign minister and then prime minister under Chirac who led France’s policy on the 2003 war – there is a good film on this ‘Quai d’Orsay, starring Julie Gayet).

The other event was the ‘coming out’ of Jordan Bardella and Maria Carolina de Bourbon des Deux-Siciles as a public couple, thanks to Paris-Match. In the likely event that Marine Le Pen cannot contest the 2027 presidency, Bardella will be the Rassemblement’s candidate, and according to polls the frontrunner in the contest.

If elected, he will have little in common with previous presidents, apart from the fact that he is male. He is different in a few respects.

The first is that he is a manufactured candidate, in the sense that from a very early age he has been groomed and cultivated by the Le Pen clan, provided with speaking coaches and marketing strategists. To that end, many suspect that the ParisMatch report is just another marketing stunt to burnish his profile, it appears too sterile and planned, and there is nothing worse than a French politician who is not genuinely passionate.

The second more serious accusation is that Bardella has done little of consequence in his professional life and is effectively untested as a leader and driver of policy. In this regard, he has more in common with other young politicians across Europe, whose only claim to credibility is their addiction to TikTok posts. To date many of his public appearances are carefully choreographed, but in the long run into an electoral campaign, Bardella will have to think and speak on his feet, which may be his key weakness.

A related, and underestimated criticism is that Bardella has not demonstrated his intellect, and has not passed through France’s Grandes Écoles – as have the likes of Hollande, Edouard Philippe, Macron and Chirac, who apparently topped his class. This rite of passage is important in the context of the way the French state operates – it is a pyramidical elite, made up of generally very capable people, who act and think alike. In order to make this system work, the person at the top needs to think like, and have the intellectual respect of those below.

Under that scenario, a young, inexperienced Bardella, without the crutch of an experienced policy team, would struggle, and it is becoming clear that the French establishment is girding itself for a Bardella presidency by placing centrist type policymakers in key institutional posts.

There is a scenario where, if he was victorious, the establishment might hand him two poisoned chalices, a crisis over immigration and potentially, a financial crisis. France is in my view the most financially vulnerable country in Europe, given the state of its finances and the fact that parliament has done nothing to resolve this. In that regard, a Bardella presidency could trigger financial chaos in France, that might eventually force reform of pensions and social security (Bardella would be a lame duck by then).

Thus, Bardella does not fit the profile of the typical French president, and as the presidential contest gathers steam his limitations may become more obvious. According to polls, the one centrist politician who can come close to beating him is Édouard Philippe, former prime minister and author of the excellent ‘Dans L’Ombre’. If anything he needs to learn from this work of political fiction, and go a little ‘MAGA’.

Have a great week ahead

Mike

Battle for Budapest

In the days before what is now known as the Iran War, and amidst the horrific suppression of its citizens by the Iranian state, a Dutch diplomat, having arrived at Tehran airport, was stopped and asked to disclose the contents of his luggage. He refused, citing diplomatic immunity, and left Iran, leaving his luggage behind. A subsequent inspection of the luggage in the presence of another Dutch diplomat, allegedly revealed three Starlink modems and a number of satellite phones.

It is not at all clear whether the devices were for ‘personal use’ or for the benefit of Iranian dissidents, but the incident reminded me of the efforts of George Soros to export hundreds of photocopiers into communist Eastern Europe in the late 1980’s and early 1990’s, so that dissident texts could be copied and circulated.

This was the very tip of the iceberg of Soros’ funding of the pro-democracy movement in Eastern Europe, and at one point it was said that he gave more in aid than all the Western governments together. In particular Soros, who studied under the philosopher Karl Popper (author of ‘The Open Society and its Enemies’), was committed to creating an ‘open society’ in Hungary, the country of his birth, and established the Central European University (CEU) in Budapest in 1991.

Around the mid 1990’s I recall Bill Newton-Smith, a philosopher and Fellow at Balliol College and associate of Soros leaving England to help run the CEU. As he left Oxford, a young student activist called Viktor Orbán had come the other way (in 1990 I think), to begin a research fellowship on the topic of civil society in Europe, sponsored by the Soros Foundation.

Orbán didn’t last long at Oxford, returned home to become a member of parliament and the leader of the main liberal party Fidesz. Orbán has been a central figure in Hungarian politics since then, but in the late 2000’s, underwent a political and moral transformation. At a conference in Prague some years ago, I spoke with a few entrepreneurs who had been early associates of Orbán’s, and who had suspicions as to the motivation behind his change of tack.

This change pivoted on his relationship with Soros, who Orbán has transformed into a figure of hate for the far-right internationally. Equally, Orbán flipped his view on Russia. He had been highly critical of Russia’s 2008 invasion of Georgia, but soon after, following a visit to St Petersburg to meet Vladimir Putin, Orbán started to change his stance on Russia.

For much of the past sixteen years, Orbán has commanded a large amount of popular support, though his actions and attitude in going against the grain of the EU have cost Hungary – in the last fifteen years, Hungarian GDP growth has lagged that of Poland by 0.8% per annum, tens of billions in EU aid has been withheld, and corruption has become institutionalised under Orbán. Budapest has become a staging post for the Russian security services and teachers, women, judges, amongst others have suffered in ways they would not expect in a normal European country.

In this context, the general election in Hungary (April 12^th) could become a critical turning point, and is highly important for the EU. At a broad level, polls point to a victory for Peter Magyar of the Tisza Party, with the majority of the opposition parties in Hungarian politics having swung behind him. However, in the context of extensive gerrymandering, a propensity for ethnic voting groups (Hungarians living abroad and Roma in Hungary) to tilt toward Orbán, and the capture of state institutions and budgets, the outcome is highly uncertain.

Not only is Orbán an ally of Moscow (Orban’s team has been accused of leaking confidential EU discussions to Russian officials, and Orbán holds frequent meetings with the Russian foreign minister), but he has become the darling of the international MAGA movement. Orbán’s campaign been endorsed by Benjamin Netanyahu and Donald Trump, Marco Rubio visited Budapest in mid-February and vice president JD Vance will travel there on April 7^th, just before the election.

There are already allegations of impropriety and vote rigging against Orbán, in what will be a hotly contested election, and deep suspicion of social media influence by Russia, not to mention the support of the White House.

EU leaders fear a close election or that Orbán, having lost the vote, will use his remaining days to change laws and appointments to key institutions. The example of Poland is being mentioned, where on taking power Donald Tusk faced years of difficulty in removing hard-right opponents from media and other institutions.

As such, the EU will have to invest enormous time, energy and capital in remaking Hungary. The short-term gain for the EU will be the absence of the Hungarian veto on European foreign policy stances, notably so in the case of Ukraine.

Should Orbán win, or continue to contest a close vote, a more existential issue faces the EU that will centre around a gathering debate on how to further sanction and potentially expel an EU member that is steadfastly recalcitrant.

Lurking behind the election, is a deeper foreign policy issue for Europe, in the context of several major wars and the disintegration of NATO, the need to combat more fiercely interference in the democratic processes of EU member states.

Have a great week ahead,

Mike

Mars, Venus or just lost in space?

Two recent events have me thinking of a 2003 book by the international relations expert Robert Kagan, entitled ‘Of Paradise and Power: America and Europe in the New World Order’, which started life as a 2002 article in Policy Review. In the foreign affairs world, the book is known colloquially as ‘Mars or Venus’, because the opening sentence goes ‘Americans are from Mars and Europeans are from Venus’.

Kagan’s aim was to explain that Europe and the US had very different views of the world, and that these differences were rooted in culture, history and aims. Europe is the older, wiser and more genteel continent, concerned with roping its social democracy in well made rules, whereas the relatively younger American republic (250 years old this year) was more muscular, in military and financial terms. Kagan’s book, in keeping with the reception given to Francis Fukuyama’s ‘The End of History’ and more recently Graham Allison’s ‘Destined For War’, is better known for its strapline than the detail of its argument, but then again that is the art of the successful author, and one that in comparison, few European international relations experts have cracked.

That, in 2002, Kagan felt the need to state that Europeans and Americans are different, betrayed the long-held sense that they are the same people, in the sense that in 2002, the vast majority of Americans could trace their family history back to Germany, Ireland, Britain and France (in 1960 some 85% of foreign-born Americans were from Europe in vs 10% today).

That much was also clear during the many events in Washington to mark St Patrick’s Day. President Trump invoked his own European heritage (Scottish mother, German father), teased Speaker Mike Johnson as to whether he was a WASP or Italian, whilst Taoiseach Micheal Martin told how a Cork man, Stephen Moylan, a senior officer in George Washington’s staff, is credited with the first use of the phrase ‘the United States of America’ in 1776.

In that context, the ‘Mars and Venus’ argument is ever more relevant today as the divide between Europe and its American cousins widens. While European countries wholeheartedly supported the US in the 1991 Kuwait War (see our recent note) and in the aftermath of 9/11, the doubts that many European governments had over the 2003 invasion of Iraq partly motivated Kagan’s book (the film ‘Quai D’Orsay is very good in this context).

In that context, the polite refusal of nearly all of America’s allies, not just in Europe but also the likes of Japan and India, to send ships to the Strait of Hormuz, is emblematic of a deepening divide, and in recent weeks a good number of American friends have reached out to ask ‘is it us, or is it you?’. My polite response is that ‘it’s the White House’ (noting that most Americans are against this war), but more broadly I feel that one of the great anomalies of our time is that so few Americans realise the damage that is being done to America’s reputation abroad.

So, one might argue that Kagan’s ‘Mars-Venus’ short-hand for international relations has never been more true, and the fact that Europe has done little in the past twenty years to bolster its security, and to deepen its financial markets, gives some weight to American frustration and derision. Equally, the vandalization of shared values (democracy) and institutions (NATO, the United Nations) by the White House causes horror across European capitals.

Yet, at this painful point in trans-Atlantic relations, I wonder if we have reached peak ‘Mars-Venus’, in the context that Europe today is still quite like it was in 2003 in terms of world view, whereas the US is politically and socially very different to that of 2003.

My reasoning is that Europe is finally having the ‘neo-con’ moment that the US went through in the early 2000’s (Robert Kagan was part of that movement), and is starting to rebuild its defences, though it lags badly on capital markets union (now Investment Savings Union).

Oddly, Europe no longer shares the same enemies as the US. Russia should be the prime concern of European security chiefs. It is also troubling that the Trump administration actively supports far-right parties like the AfD in Germany, and the few European nations who side with the Kremlin (VP Vance visits Hungary next week).

As such, Europe’s path and challenge is clear – to remain the sole liberal democratic pole in a disordered world. When Robert Kagan wrote his book in 2003, the natural assumption was that American democracy was a beacon for others to follow, as far as Asia and even across Eastern Europe (Kagan’s wife Victoria Nuland was a senior American diplomat serving in Eastern Europe during ‘the Maidan’ in 2014, where her most famous utterance was ‘f@#k the EU’).

Yet, America’s democracy is now in deep trouble, and one of the sharpest critics of Donald Trump’s approach is Robert Kagan, who warns of the descent towards a dictatorship.

It will be over by Christmas

Mon centre cède, ma droite recule, situation excellente, j’attaque

At the First Battle of the Marne, not so far from Paris, in September 1914, Marshall Foch sent the above, inspiring communiqué to Marshall Joffre (‘my centre is crumbling, my right is retreating, the situation is excellent, I attack!’). The Battle of the Marne was arguably the greatest land battle of the twentieth century and caused over 500,000 casualties. Its strategic effect was to halt and reverse Germany’s lightning attack across France towards Paris and set the scene for years of entrenched warfare. At the time, the Great War was some three months old, and many thought that ‘it will be over by Christmas’.

There are few parallels between the First World War and the Iran War, but there is a creeping feeling that, in the absence of a clear strategy from the White House (see last week’s note ‘Safe Places’), there is a risk that this conflict becomes entrenched.

It is already very costly. In the first week of the attack on Iran, the US apparently spent close to USD 11bn on weapons and munitions, and that is without calculating the human and economic costs. In the context of record public indebtedness, the question is not so much can America win the war, but can it afford it?

Indeed, it seems largely forgotten now that America’s own wars have been associated with indebtedness. That the American Revolutionary War was financed mostly by the French (Lafayette and Beaumarchais), Spain and the Netherlands – indeed in a lesson for policy makers today, Congress had to print money to pay off these loans, which had the effect of causing rampant inflation and devaluing the dollar. It’s also worth flagging that the American Civil War saw a sharp run up in debt (US sovereign debt in 1865 was 40 times what it was in 1860, according to figures from the Treasury), the consequence of which was a collapse in the dollar, again.

Still, the lesson that wars generally strain finances, seems to have been habitually forgotten. Some might recall that Larry Lindsey, an economic adviser to George W Bush’s administration left his job after producing what at the time was considered to be a high estimate (USD 200bn) of the costs of the second Iraq War. It turned out to be a conservative estimate, as the Congressional Budget Office put the cost of the war at USD 2.4bn and other analysts have put the total cost at closer to USD 5bn.

Equally, Britain and France are fascinating in many ways – they have very old and rich economies and together have been involved in most wars going back to at least 1000 AD. Britain is a nose ahead of France in that there is arguably a longer thread of data available about its economy, and it is very well curated by the likes of the Bank of England and the Office for Budget Responsibility, whose note on ‘300 years of public finance data’ is a must read for aficionados of economic history.

If I could sum up those 300 years of data it would be to state that wars drive indebtedness, and then indebtedness itself drives fiscal reform. Between 1700 and 1800, debt to GDP in Britain rose from 25% to close to 200%, during a period that was marked by wars over the Spanish Succession, the Austrian Succession, the Seven Years War, the American War of Independence and of course the Napoleonic Wars (after the French Revolution). As a rough rule, British participation in the many and varied wars of the 18^th century led to spikes in defence spending of up to 10%, whilst the more deadly world wars saw defence spending push beyond 50% (of GDP).

More broadly, the Kiel Institute has created a database of conflicts going back over the past 150 years that measures the economic costs of war and they have used this to create a model that scopes the potential economic costs of war scenarios. Though quite chilling in its consequences, their interactive tool is useful, and I recommend it to the White House.

For example, I input a scenario (based on 2023 economic valuations) for a war that takes place in Taiwan and also in China (assuming a dramatic US riposte). The direct economic and capital damages are well into the USD 20 trillion, and that is without counting US military losses and the disruptive effect on world trade, risk appetite, and financial market collateral damage.

So, not only do armies march on their stomachs as Napoleon hinted, but also on their balance sheets. In this alarming context, geopolitical ‘players’ have two pressing needs. One is to build out their military capabilities, and the other is to reduce debt – in part to allow them the fiscal space to be warlike. With the US now spending over USD 100 bn more on interest payments on its debt than on its military, it is living a strategic contradiction.

Have a great week ahead, Mike

Persepolis

In October 1971, a time when Mao ruled China, Brezhnev was in charge in the USSR and Nixon president of the USA, Maxim’s, the famous Parisian restaurant closed for two weeks so that staff could prepare the restaurant’s greatest order – the feast organised by the Shah of Iran to celebrate the 2500th anniversary of the establishment of the Persian empire by Cyrus the Great.

The Shah’s celebration became known as the greatest party of all time (Life magazine called it ‘the party of the century’) and became highly controversial for its lavishness. For instance, nearly 300 red Mercedes were used to ferry guests around a large, tented city and in the end Maxim’s and other establishments sent some eighteen tonnes of food to Iran. Waiters had to open and taste all of the bottles of Chateau Lafite Rothschild 1945 for poison. Many of the world’s royal families attended, as did a range of social and political figures from Grace Kelly to Tito to Haile Selassie, to Imelda Marcos. It’s perhaps no surprise that this display of excess was followed a few years later by the Iranian Revolution.

The spectacle of the Shah’s party, his ties to foreign governments and the cruelty of his secret police and a drawn-out recession contributed to months of protests in the late 1970’s, which then led to the Revolution. One of the best accounts of the Revolution is a somewhat accidental one – Desmond Harney’s excellent eyewitness account of the revolution “The Priest and the King.” At the time, Harney worked in Tehran. He had been ready to leave Iran on vacation, but for work-related reasons he remained, and then witnessed the eruption of the revolution around him.

My other Revolution-related thought is of former Ayatollah Khomeini, who, on disembarking the Air France aircraft that took him back to Tehran on the outbreak of the revolution, was asked by ABC anchorman Peter Jennings how he felt about his return to Iran. “Nothing. I feel nothing,” was the alleged response. It gave a pointer as to the austere image Mr. Khomeini wanted to portray and of his cold single-mindedness. The fact that the man who translated Khomeini’s comments, was executed three years later, was another clue as to what would follow.

The regime that Khomeini created has outlasted many others – perhaps only the late Fidel Castro and especially so the late Queen Elizabeth II of England have seen as many US presidents, German chancellors, among others, pass on and off the world stage. While Iran has until recently been a dominant player in the Middle East from a geostrategic point of view, it has, to be polite, not been an economic success.

Thus, in keeping with the template of revolutions, high prices, scarcity of food and fuel, and a broken economy, are triggering protests across Iran, that have become so vast, that expectations are growing that Iranians may eject their leadership. That moment may not be too far off, but the path to an Iran that benefits its people remains a difficult one.

Not only are its geriatric rulers stubbornly cut off from its people and the outside world, they have historically, to a worrying extent (this was especially the case under former prime minister Mahmoud Ahmadinejad), relied on heightened tension with the US, Israel and other ‘enemies’ for political oxygen. Also, economically, Iran is like Russia in that most of the assets and resources in the economy are held by a small number of people (IRG, business owners, clerics) who form a sclerotic elite around the theocrats. Breaking their hold on the economy will be difficult, even under a new regime.

Neither is regime change obvious. The name of the Shah’s son Reza Pahlavi is circulating widely (in the West) as a possible figurehead, but the story of the ‘greatest party’ and the memories of his brutality are at least two reasons why he will not lead a ‘new’ Iran. At the same time, it is not obvious what individuals or groups might replace the regime, if it came to that.

A further complication is that Iranians are highly distrustful of interventions from abroad, indeed some people joke that Iran is the only country in the world where MI6 is still considered to be a force to be reckoned with. Military intervention by the US or other states may not be welcome.

The EU is slightly less distrusted than the US and the UK, and it should take a more active stance – in terms of further sanctions, asylum for the hundreds of young people who have been jailed, organise the supply of communication technology into Iran (VPN’s, satellite technology), and potentially begin to plan to assist and shape a transition process.

Iran has been weakened economically by sanctions, humiliated by Israel and had its military capability enfeebled but sadly, the state still has an array of resources with which to repress its people.

My sense is that the brutal repression in Iran will continue now (with very little visible public support in the US and Europe), and the economy will weaken further. An opening may come when the Supreme Leader, Khamenei dies – he is 86 and suffers from cancer. This event could provide the cover for a discrete but meaningful shift in policy, and the start of negotiations on sanctions and Iran’s nuclear program, and the beginning of a more promising era.

Have a great weekend ahead, Mike

A Land Full of Vibrancy and Hope

Avid readers of the ‘Levelling’ book will know that some years ago, I wrote

Latin America remains part of the satellite region of the US pole. Sadly, it has been overlooked by Washington. The prime example of this neglect is Venezuela. The country is failing and in the grip of an underreported humanitarian crisis. Economically, this crisis may lead China to take a deeper role in Venezuela and in its oil production. Diplomatically, the lack of a comprehensive reaction from Washington brings to mind an article entitled “The Forgotten Relationship” that Jorge Castaneda published some years ago in Foreign Affairs in which he bemoaned the deteriorating relationship between Latin America and the United States.

Finally, my pleas are heard, and the White House is organizing a rescue (by gunboat) of Venezuela, and possibly much of Latin America.

While it is hard to know how the new engagement between the Trump administration and the fifth largest repository of oil reserves is going to play out, this administration is different to many of its predecessors in taking an active interest in Latin America – note the partisanship with regard to Brazil, generally good relations with Mexico, a chumminess with Milei and the likely support for the new president of Chile.

Despite very active backchannelling between the US military and the Venezuelan army the course that events might take is unclear, and laden with risks – the chaos of popular unrest in Venezuela, the risks that criminals in Venezuela and surrounding countries become involved (and strike in the US), or indeed the risk that other actors or countries use any regime change in Caracas to hurt the US, cannot be ruled out. Another risk is that some of Venezuela’s allies – Iran, China and Russia – become obstreperous, and dig in with Maduro and his cohorts, or that they use any change of government in Caracas to further their own ends. It is worth noting that only last week China launched a policy document entitled ‘Latin America and the Caribbean: A Land Full of Vibrancy and Hope’.

This is a significant risk of the Trump administration’s fetish for a spheres of influence motivated foreign policy. In the recent school boyish ‘National Security Strategy’, which has caused great anguish in the diplomatic parlors of Europe, the document refers to the ‘Trump Corollary’ to the Monroe Doctrine.

For context, the Monroe Doctrine was likely the first coherent, muscular expression of American foreign policy – at the time it was aimed at keeping the Spanish and other pesky European powers out of Central and Southern America. Indeed, the dithering by the large European powers (notably France) over the long running Mercosur trade agreement, suggests that the European dare not go back to Latin America.

The NSS document gives a good deal of attention to Latin America, and this tilt will have the active support of Secretary of State Marco Rubio. Like it or not, Latin America is now in Washington’s sphere.

However, more generally, the establishment of a spheres of influence mindset in international relations may give the likes of Russia and China the sense that they may do as they wish in their own spheres of influence. In the same way that the invasion of Iraq, on the basis of flimsy evidence of weapons of mass destruction, apparently led Vladimir Putin to believe that the West was no longer respecting the rules of the international order, the ‘Trump Corollary’ strategy is a green light for bad policy actors.

That would of course be bad news for Taiwan, and perhaps Vietnam, the Philippines and Japan, who all to some extent count on the notion of a US security guarantee for Taiwan. It may also prove confusing for the US military which, when not loitering off the coasts of Cuba and Venezuela, is organized around the concept of a grand battle in the South China Sea.

Beyond the obvious implications for Ukraine, there are plenty of other open questions – will China take the ‘Stans’ from Russia, and who gets Africa? Russian mercenaries have forced France out of at least seven countries and China has a hand in nearly every African economy. The cancellation of US AID is already having deadly consequences for human and animal life.

A world of spheres of influence might conjure the diplomacy of the Great Game, but it would leave many countries worse off, and the nondemocracies of the world free to abuse their military and economic power.

A forlorn reminder of this was the jailing of Jimmy Lai, the Hong Kong democracy activist last week. Few Western governments were audible in protesting this act, save Britain, which used to count Hong Kong as part of its sphere of influence (Lai has British citizenship). The silent snuffling out of democracy in Hong Kong is the act that brought the curtain down on globalization in my view. An American spheres of influence foreign policy will sow further chaos.

Have a great Christmas week ahead, Mike (there won’t be a note next week, we return on the 4th January)

The UnRavelling Rule

Amidst the slew of corporate earnings and macro-economic data released in the past week, two developments struck me, both of which give the impression of the tectonics of geopolitics pushing against each other.

First, in the past year the number of children born in the US has caught up with the EU, at close to 3.6 million babies each (though the EU has a much bigger population). For comparison, Nigeria – whose population is less than half that of the EU – welcomed 7 million babies last year.

Second, in recent months the trend rate of consumer inflation in Japan has surpassed that of the US for the first time in decades, signalling a long awaiting shift in the Japanese economy that has been accompanied by a rise in long-run bond yields (a potentially critical development for the international financial system).

These two examples will give a sense of the rise and fall of nations, that is accelerating since the fall of globalisation (which I date to the effective end of democracy in Hong Kong). This rise and fall – think of countries like football clubs – is also associated by an unravelling of the world order. For example, in a recent note ‘Atlas Shrugging’, we detailed how the independence of the Federal Reserve was being undercut by the White House, and the attempt to remove Lisa Cook from the Fed’s rate setting committee confirms that Donald Trump wants to direct the Fed as an engine of his economic policy (as a giant bond buying machine I suspect).

The independent Fed has been one of the pillars of the globalised world system of the past forty years – and the snuffing out of its independence heralds the unravelling of that system. In the same way that the period of globalisation was characterised by low inflation and the absence of major wars – the presence of inflation and conflict today, is a sign that we are moving into ‘something else’.

In that context I find myself playing a mind game which I call the ‘Unravelling Rule’. Very simply, it is to identity the principal factors that have supported globalisation and that are positive outcomes of it and identify if and how they are unravelling. The crisis of democracy is one such trend (the Economist Intelligence Unit’s Democracy Index has fallen to its lowest level in twenty years).

Other certainties are also unravelling – notably the assumption that the USA is an unflinching ally of Europe and many Asian countries, and the possibility that it could even actively undermine them. In this regard, the fact that the Danish government had to summon the US ambassador over the conduct of three Americans in Greenland is troubling and reflects very badly on the White House.

The danger with the ‘Unravelling Rule’ is that in a chaotic world, it is tempting to see unravelling everywhere. It is more obvious though in the case of world institutions – the United Nations, IMF, World Bank and World Trade Organisation, who are frequently ignored by the very large economies, and sometimes badly undermined by them (the WTO is an example). These institutions need to be recast, most likely for the benefit of the populous emerging economies.

On a more speculative basis, there are at least four trends that have marked the past forty years, and that are now worth watching for a change of course.

The first is poverty. It is an underestimated facet of globalisation that it helped a billion people rise out of poverty, according to the World Bank. My concern is that in a world where the major economies (2/3 of the world’s GDP) have debt to GDP ratios above 100%, economic precarity may return, and this time to developed countries. We have already noted (The Road to Serfdom) the extremely high level of inequality in the US and broad economic vulnerability. In Europe, British and French policymakers conjured the spectre of IMF intervention in their economies (it would have to be a new, bigger IMF – which under this White House is unlikely). In that respect the growing disparity in incomes in the UK regions (relative to London) bears watching.

A second is corporate governance and the rule of law as it extends to international business. We have not seen a rule of law or broad governance crisis in sometime, but the rise of decentralised finance (i.e. crypto), the new idiom of the ‘art of the deal’ in the US, and the geopolitically tinged trade relationships that China is developing worldwide. As a global ‘way of doing things’ gives way to more regional or localised approaches, the watertightness of contracts and the oversight of business relationships is something that businesses will need to consider more carefully.

A true litmus test of the ‘Unravelling’ hypothesis will be the role of US multinationals in the world economy. Described as the ‘B-52s’ of globalisation in the late 1990’s by a prominent trade economist, they have shaped the world economy and come to dominate financial markets. I have lost count of the number of charts circulating that declare that Nvidia for example is worth more than the major European stock markets together. Whilst cash rich, they now face a number of challenges – the difficulty of selling into China as it broadens its technological self-sufficiency, and the collateral damage to overseas sales from the Trump trade and foreign policies, and the rise of more specific local tastes in markets like Africa and India.

A final unravelling, and one I would welcome, is for the EU to unleash its nasty side. In the past forty years the successes of the EU – enlargement, holding the euro together and the creation of a European identity (based on borderless travel the Erasmus programme for example). The likes of Poland and Estonia have benefitted greatly from this, and it is fair to say that the UK would be better off ‘in’ than ‘out’. But the emphasis has been largely on soft rather than hard power, and in a ‘harder’ world, the EU will need to take a tougher stance in terms of how it projects itself.

There are many challenges but three in particular are the potential exclusion of existing and prospective member states like Hungary and Serbia who habitually refuse to act in accordance with EU values and interests, a specifically more aggressive approach to countering sabotage by Russia (and at times China and Iran) in Europe, and then a retaking of the narrative as to what Europe stands for.

Have a great week ahead,

Mike

The Policeman Premium

I vividly recall seeing Imran Khan give a speech in the mid-nineties, in an era where many sportsmen had what was described as colourful backgrounds he stood out as particularly ‘Bond’ like – at the very top of his game as a cricketer and a ‘playboy’, as the saying goes (at the time he was engaged to Jemima Goldsmith). There are few people who have had such adventurous lives – and Khan’s is interesting for the ways in which he changed tack – towards Islam and politics (he served as Pakistani prime minister from 2018-2022) and his change of fortune (he is currently in solitary confinement in a Pakistani prison).

Whilst Khan’s rise and fall is complex, he ultimately fell foul of the Pakistani security establishment who allegedly became uncomfortable when Khan condemned foreign (US) influence in Pakistani public life. Khan was also the victim of an assassination attempt in 2022, something that has marked Pakistani politics (Benazir Bhutto was assassinated in 2007 and her father Zulfikar was executed in 1977).

In this regard one of the few constants in Pakistani politics has been the ever-present role of the security services in the affairs of the state, and specifically their tactic of creating private armies and terror groups. This has embarrassed them on at least two occasions – the discovery that Osama bin Laden was living in near plain sight in Pakistan and repeated attacks by the Taliban inside Pakistan. Add to that the 2008 Mumbai attacks perpetrated by Lashkar-e-Taiba, and the sense grows that Pakistan has been playing a dangerous game.

In this regard, India’s response to the killing of 26 people in Pahalgam (in Indian controlled Kashmir) took aim, it said, at terrorist infrastructure, in the most serious escalation between the two countries since the very early 1970’s. The subject of this note is not to predict how this conflict will play out – it could be costly, bloody and messy (India has reportedly lost five jets in its initial sortie) but to wonder why this confrontation is happening now and how much of this has to do with the alliances that the two countries have struck.

While India and Pakistan are both members of the Shanghai Cooperation Organisation, Pakistan is the much more active member and very close to China, Iran and Russia. While a lot of Indian hardware comes from Russia, its foreign policy projects the country as an independent actor, India is aiming for a close relationship with the US with whom it may sign a very high level trade deal (it has just completed a modest trade agreement with the UK).

It is very likely that in a different diplomatic regime the Pahalgam attack would have been met with intensive diplomatic engagement by the US, with India whom it regards as an ally and Pakistan, which it funds generously. This has not happened this time, and the tempo of involvement of the White House in this particular regional conflict has not been on a par with other administrations. It is so poor that vice president Vance has declared, in a most un-Kissinger like manner, that ‘it is none of our business’.

Indeed the recent death of Joseph Nye, the political scientist who developed the term ‘soft power’ and who wrote much about America’s engagement with the rest of the world is a reminder that one of the key elements in the old, globalised world order was America’s role as a policeman – with a near monopoly over deadly force and a very active, alert diplomatic corps. An example of this can be found in Brad Hope and Justin Scheck’s book ‘Blood & Oil’ that describes the rise of Mohammed bin Salman as the ruler of Saudi Arabia. For decades the US has steered Saudi diplomacy, and Saudi rulers have guided America in the region. However, the book describes in some detail the lack of strategic direction of the first Trump administration in the military and diplomatic affairs of Saudi Arabia, beyond the organisation of a lavish welcome ceremony for a Trump visit to the Kingdom.

The second Trump administration looks set to entirely do away the role of world policeman, and cynics might say, replace it with the role for rent collector. As such, the geopolitical risk premium will rise, and may help to explain why there are at least two conflicts where basic needs (water) are being weaponised (in Gaza and India/Pakistan). When it played the role of world policeman, the US kept the peace, much to its own advantage.

Now in the context of the very obvious dropping of moral guardrails around international relations, other countries will be less bound by a sense of world order, emboldened by an arms race, and will start to take risks and make mistakes. India-Pakistan is a very dangerous case of this, and one that draws into focus the trade-off between the cost to America’s role as world policeman, and the global ‘peace’ dividend it brought.