Profiles in Courage

John F Kennedy, who died this week 61 years ago, is famous for many things, but a lesser known accomplishment is that he won a Pulitzer Prize for a bestselling book entitled ‘Profiles in Courage’, that told the stories of eight American political figures (mostly senators if I recall) who took morally courageous stands on issues that went against the views of their parties and popular opinion. An example was John Quincy Adams’ decision to break from the Federalist Party (over foreign policy).

Like all things Kennedy, the book was a dazzling success, but also had a few magical ingredients. It is generally accepted that Ted Sorensen, adviser and speechwriter to Kennedy, contributed much of the book, or in his own terms, he wrote ‘many of the words that made up the sentences’. Equally, the book did not make it through the formal entry process for the Pulitzer, but was nudged into the competition by Joe Kennedy, the president’s father.

As an aside, in the context of the recent presidential election, it could well be argued that Joe Kennedy was a Trumpian figure…or that Trump is simply following the ‘Patriarch’s; example (David Nasaw’s book of this title is very good). Joe Kennedy accomplished more as a businessman than Trump, but fell short in his political career. Instead, he groomed Joe junior(killed in the second world war), then John, Bobby and Ted.

One of Joe senior’s achievements was his appointment as American ambassador to the UK, but his term was cut short because of his perceived stance on appeasement. With some irony, Joe senior had encouraged the publication of his son’s Harvard thesis as a book.

‘Why England Slept’ queried the ‘soft’ stance of the British government towards Germany in the lead-up to the war and argued that if Britain had re-armed earlier and taken a more robust stance with Germany, the second world war may not have happened, or at least might have taken a different path (the book was a great success and the British royalties were given to the city of Plymouth which had been badly bombed by the Luftwaffe).

Though Robert Kennedy junior may now take the ‘Kennedy’ limelight, the message of JFK’s books echoes in today’s world. In a couple of years’ time, someone might write ‘Why Europe Slept?’ in the sense that Europe has let its guard slip on security and not built defence infrastructure to keep up with the threat of Russia.

In a week where a Chinese vessel is suspected of cutting a telecoms cable between Germany and Finland, when the first EU defence and space commissioner has been confirmed (Andrius Kubilius’ first task is to compile an inventory of Europe’s defence supply chains) and where an intercontinental ballistic missile has apparently been used on Ukraine, there is a sense that Europe is still not ready for the worst.

The idea of ‘profiles in courage’ is even more pertinent. In a multipolar world, where countries and companies have to ‘take sides’, where America will arguably become more transactional and less relationship driven in its foreign policy and, where democracy is being eroded from within and afar, moral courage will be at a premium.

One unfortunate example here is Olaf Scholz’ moral capitulation in calling Russia’s president last week, ostensibly to lay the groundwork for a peace deal. Scholz likely had the upcoming German elections in mind, but his call was rewarded with an intense bombardment of Kiev.

This has left Scholz even more discredited. Up until this week there was now a growing debate around his future as SPD leader and the prospect that he could be replaced by Boris Pistorius, the popular defence minister. Pistorius has declared that he does not want the leadership tole.

This is a pity for Germany, because having Pistorius in place as Social Democrat leader by the time of the election might boost the party and would also make a coalition with the CDU easier to form and more ideologically consistent. As it stands, the polls show the CDU/CSU with some 32% of the vote, the SPD on 16%, AfD at 19% and Sara Wagenknecht’s party at 7%. At that rate the CDU-SPD coalition might need to take on a smaller partner, but in effect Merz would be the dominant partner.

A Merz lead coalition could be a real change for Germany, could reignite its economy and remake its energy policy, and may turn it into a more robust geopolitical player vis a vis Russia.

My advice is that Merz, and his compatriots at the head of the SPD both read the works of John Kennedy.

Have a great week ahead,

Mike

Empire

Donald Trump will be president of the United States for a second time, defying those who thought his first term was an anomaly and who considered that the American people still care about the rule of law. He will preside over the 250^th anniversary of US independence, the next Olympics and World Cup.

This is an election result of such great consequence that it will decide whether America’s hegemony is renewed, or that its empire fades like so many others have done through the ages. Fittingly, I woke up to the news of Trump’s victory in Vienna, a city that knows a thing or two about empires. In that context, an interesting and possibly underread book is ‘The Hapsburg Way – 7 rules for turbulent times’ by Eduard Habsburg, known formally as the Archduke of Austria and now a career diplomat for Hungary.

Of Habsburg’s seven rules, the most important are ‘Believe in the empire, and your subsidiarity’ and ‘Respect law and justice’. Trump will likely not do well on these counts, nor does he score on ‘Be Catholic’ though the Catholic church has chased his coat-tails through the electoral campaign. He does better on ‘Get married and have many children’ and ‘Be brave in battle’.

The book is full of interesting snippets, such as that the first governor of Texas (in 1691) was installed by the (Spanish) Habsburgs. In that respect the only blemish in the book is the foreword, written by Habsburg’s boss Viktor Orban, who this week held court over his European counterparts in Budapest, in the wake of the Trump victory.

While I think that Trump will be much more disruptive for Asia and Europe, and that his presidency will see an unprecedented re-shaping of the Middle East, a great deal of media attention is devoted to his impact on Europe and NATO. Overall, the reaction is far too alarmist and the vision of world leaders cowering before Trump gives little acknowledgement of his and America’s vulnerabilities.

Despite this, with near comic timing, only hours after Trump’s victory was confirmed, the squabbling German government fell apart, a development that has been simmering for some time.

Germany will likely have an election next March, and this is good news. Scholz’ ineffective and indecisive government will be thrown out (Scholz may also be replaced by Boris Pistorius at the head of his party), and Germans will vote in a centre-right government, if polls are to be believed. There is very strong appetite on the part of German businesses to restart the economy, unblock planning laws and rethink energy policy. This much was very clear to me when speaking with investors and businesspeople in Hamburg (after Vienna).

If a new centre-right government transpires in Germany, this should re-engage the political engine at the heart of Europe between France and Germany. But there is a small chance that Emmanuel Macron will not be president of France in a year’s time. Macron, who this week compared Europe’s fate to ‘herbivore in a climate of carnivores’, is fantastically unpopular in France and it cannot be discounted that the Rassemblement will try to bring him down in 2025. Similarly, there is a risk that far-right parties in Europe are emboldened by the Trump victory.

Apart from the travails of the German and French leaders, there is a shift of power going on across Europe – in favour of Poland and Italy, and towards the Baltics/Nordics. The sense is that a Trump led US will bring about the end to the Pax Americana, which may initially leave Europe more vulnerable diplomatically, though ultimately it will become more independent (to America’s disadvantage). Arguably the loser here is the UK, stranded offside the EU, and at odds with Trump and his vice-president.

A Trumpian America, if true to the caricature, will leave Europe as the last bastion of democracy and independent institutions. This is a great challenge and one that most people are not ready for. In events I speak at, a trick question I pitch to the audience is to ask how many of them (usually accomplished, educated people) would enter politics – in most cases there are few volunteers. If European democracies are to be renewed, politics must re-civilise itself and to quote Eduard Habsburg, politics also needs more brave people.

Another area to watch is institutions. Donald Trump already politicized the Supreme Court and might well do the same with the Federal Reserve. On Thursday the Fed, oddly in my view, cut rates, but the press conference after the meeting was dominated by Chair Powell denying that he would resign if Trump requested, he do so. As America’s institutions may become more politicised, and world institutions like the UN and WTO become less relevant in a Trumpian world, Europe needs to ensure that the independence and competence of its institutions is pristine.

Returning to the topic of defense, perhaps the most interesting confirmation hearing (by the EU Parliament) of EU commissioners designate was that of Andrius Kubilius, the Lithuanian, first defense commissioner. His first task will be to deliver a paper (in 100 days from now) on the state of defense procurement, the integration of defense supply chains and the opportunities for a more intensive commitment to space technology. In his commentary, he revealed that a pan-European missile defense shield could cost up to Eur 500bn. So, we should brace ourselves for the issue of EU war bonds to pay for this.

To end this note with a very big picture view, in the context of the theme of the ‘Levelling’, Trump’s first victory was a wrecking ball to globalization. This second one shatters it completely and will try to remake America and the world order with a narrative and vision (‘tariffs’, ‘deportation’, ‘loyalty tests’) that will deglobalize. Politically, Trump has sold Americans a political vision based on the Leviathan (the people surrender their liberty to a singular leader in return for protection). Europe is still a ‘Leveller’ type system (bottom up democracies). Of the two approaches, I am with the Levellers.

Have a great week ahead,

Mike

Act of Union

There is a theory abroad that the British Empire was so vast and dominant, simply because a large country (England) was attached to a brilliant small country (Scotland). It is true that many of the individuals we associate with the advancement of Britain are Scottish – economist Adam Smith, scientists James Watt, Alexander Fleming and Alexander Graham Bell, and writers like Arthur Conan Doyle and Walter Scott. More recently, some of the more prominent political figures in Westminster have been Scottish – such as Gordon Brown.

This year is the tenth anniversary of the Scottish independence referendum, which whilst the motion for independence was defeated, set in train a groundswell in favour of independence and the resulting electoral landslide for the Scottish National Party in the subsequent general election. At the time of the referendum, the SNP was led by Alex Salmond, who died last week, and who was the founding father and driving force of the independence movement (and a subscriber to this note).

At the time of the referendum, there was great interest in the prospect of Scotland going it alone, and the way the Scots might dis-engage their economy from England was the focus of attention. In many respects the downfall of the independence side was that they became mired in an argument over the kind of currency arrangement Scotland might have, and the resulting impact that this could have on household finances. In the land of Braveheart, this battle by spreadsheet proved too much.

The independence referendum also brought into focus the kind of socio-economic model that Scotland might enjoy, and this spurred me to start researching the model of small, advanced states, a theme I have developed in collaboration with David Skilling over the years.

Simply put, our thesis is that while the likes of Sweden, Switzerland, Singapore, Ireland and the Netherlands are culturally very different they, and a handful of other small states are all highly successful. Alex Salmond used refer to the northern most small, advanced economies as the ‘arc of prosperity’.

Small-advanced states dominate the lists of ‘happiest nation, ‘most innovative’ and ‘most open economy’, and share a common set of factors upon which their success is built (strong institutions, a healthy regard for the rule of law, prioritisation of education and innovation for example).

Indeed, this ‘secret sauce’ tallies with the work of the winners of this year’s Nobel Prize in Economics, Daron Acemoglu, Simon Johnson and James Robinson, the body of whose works links growth to institutions and laws (the book ‘Why Nations Fail’ is worth a read).

One of the first occasions that David and I presented our work was with Alex Salmond, in Singapore, and since then David in particular has been an active adviser to the Scottish government.

My sense is that the death of Alex Salmond, and the near implosion of the SNP amidst a series of leadership crises (and the resurrection of the Scottish Labour party who have increased their tally of Scottish MPs in Westminster from 2 to 37) will gravely diminish the political momentum towards an independent Scotland. On the other hand, the limits that Brexit places on the UK in general will serve as one of several motivators for the Scots to go their own way.

One of the underlying theses behind the small state model is that they are adaptive and strategic – nimbly ducking around the imbalances of a chaotic world. To a large extent this is still true – the Nordic countries, as well as the smaller Baltic states have impressively upped their game on the security and defence front (Ireland has not), and Sweden and Finland have thrown off their neutrality.

In addition, and a marker of how policy is changing in the Western world, the Nordic state – once a near parody of tolerance – are adopting much tougher stances on immigration, and after too much patience, organised crime. If they are really canaries in the coal mine of world politics, this turning point suggests that in Europe, there is now little welcome for an increase in immigration.

To that end, having been in the vanguard of economic advancement during globalization, small, advanced states are at the forefront of dealing with the challenges of an intensely geopolitical world.

Have a great week ahead,

Mike

Another Tea Party?

The Boston Tea Party is an early example of how a trade dispute can reshape an economy (Boston) and foment political change. It is iconic enough that the first presidency of Donald Trump was prefigured by the rise of the Tea Party as a disruptive force in Republican politics.

With the presidential election not far off now, tariffs form the spear-end of Donald Trump’s economic strategy, potentially because he can implement them unilaterally (without the approval of the Senate). In addition, many of his acolytes, from Robert Lighthizer to Peter Navarro, are ‘trade’ obsessed, and have recently published books like ‘No Trade is Free‘ to underline the ways in which they would re-order the international trade system.

In addition, other members of the Trump entourage such as Robert O’Brien, the National Security Adviser (2019-21) has in the July edition of Foreign Affairs Journal invoked the idea that American can bring peace to a disordered world through ‘strength’. In this vision, strength comes in the form of 60% tariffs on Chinese goods and export controls, a message that has repeatedly been emphasised by Trump himself.

In that context, a second Trump presidency could begin with a trade war, and a verbal assault on the currencies of ostensible allies that have weakened in recent years, such as the yen. American consumers and potentially the bond market might pay the price of tariffs (we wrote last week that Trump wanted to fund the development of a sovereign wealth fund with revenues from tariffs).

Trade wars are generally not successful, and while Trump may have in mind America’s trade spats with Japan (1987), the weight of past trade disputes going back to the Smooth Hawley Act suggest that there are better ways to guard American economic power. China could respond with measures that cripple supply chains for at least a couple of years. In this scenario, a trade confrontation between the US and China would decisively shatter the axis of globalisation as we know it, and finally render the WTO (World Trade Organisation) obsolete.

A US-China trade war might have many other consequences.

One might be the rise of populous south Asian (and southeast Asian) from India to Bangladesh to Pakistan, Indonesia, Thailand and Vietnam, with Singapore as their organising locus. Many of these countries are urbanising and rolling out infrastructure, most of them need but distrust China, and in most cases aspire to closer commercial ties to the USA. Tariffs on China by the USA will accelerate supply chain de-risking by Western multinationals towards these countries, though this could well complicate their relationship with China.

A second consideration is Europe. The EU has been caught by surprise by the consequences of several Biden administration policies – the Inflation Reduction Act and the CHIPS Act – which illustrates that US international trade policy is usually made with a view to domestic politics. A second Trump presidency should be no surprise to Brussels, and there is a small but important team of officials working on a policy response to a potential trade war on Europe by Trump. Europe’s trump card may lie in its role as a partner with the US against China. It will be difficult for Washington to reshape trade relations with China, Europe and potentially Japan by taking each one on. Stymieing China is better done in collaboration with Japan and Europe, and Trump should really see the constraints of the policy situation that faces him.

A second Trump presidency will be different to the first in the sense that he has had time to prepare for it, and crucially, his supporters have had four years to concoct a policy strategy (‘2025’ seems to have dropped out of headlines). In the same way, a Harris presidency comes with deeper reserves of policy experts, and to a large sense on the international trade and economic outlook, the Harris case represents ‘more of the same’ in terms of the techn0-strategic economic policy that is currently pursued by the White House.

An idealised, and though I like the idea a lot, too lofty rendition of this policy is Walter Russell’s Mead’s September Foreign Affairs essay entitled ‘The Return of Hamiltonian Statecraft’ which argues for the very un-Trumpian notion of ‘enlightened patriotism’.

In this context, a Harris White House would use trade and investment policy to laser focus on America’s race with China for global supremacy. Driving Chinese economic and investment activity further inwards might be one goal, and ironically anything Washington can do to make Chinese public life more closed and repressive, the better (because it curbs innovation and wealth creation).

At the same time, the US and Europe, would both pursue parallel strategies of ‘strategic autonomy’ or what Trump refers to as ‘strategic national manufacturing’ focused on sectors like defence, new computing power (quantum, AI, data storage and management), batteries and new power sources and revolutionary medicine. Europe’s challenge is to find a way of reducing long-term energy costs.

Kamala Harris, who has trialled a few incoherent policies (taxes on unrealised capital gains, price controls) is likely to be more constrained in her fiscal policy – because her government is likely to instinctively focus more on tax and spending changes, for which she will need the help of the Senate (which in turn could tilt towards the Republicans). As such her fiscal policy will focus on not increasing the national debt, and like many other governments, encouraging the private sector to work with government to build out strategic technologies.

I am so far surprised that markets do not seem to price in uncertainty over trade policy, possibly because they are more focused on falling interest rates in the US, Europe and China. However, the next month will start to reveal how seriously financial markets take economic rhetoric of each of the presidential candidates.

Building Sovereign Debt Funds

One of the attractions of elections is that they throw up new ideas and policy proposals – and it is not unkind to say that one increasingly gets the impression of politicians throwing suggestions at the ‘policy wall’ to see what sticks. Aggressive tariffs on China and taxes on unrealised capital gains are two examples from the US.

One idea that Democrats and Republicans share is the proposed establishment of a sovereign wealth fund in the US. In the case of Donald Trump, his aim is to fund it with tariff revenues, whilst the Democrats conceive a sovereign wealth fund that might take stakes in firms in strategic industries, which is a very French idea (recalling the ‘strategic yogurt policy’ of 2005). The flaw in this particular idea, is that there is in fact no money to capitalise such a fund.

In stark contrast, I recall the last time Washington pondered a sovereign wealth fund was at the end of the Clinton presidency, when Treasury Secretary Bob Rubin had in a financial ‘end of history’ moment engineered a fiscal surplus (government earning more than it is spending). At the time, the sense was that surpluses would feed a ‘social security’ sovereign wealth fund, which would allow Americans to enjoy a prosperous retirement.

What is striking is that if you look at the history of America’s financial health, the Rubin/Clinton surplus is an anomalous blip. Since then, the US has registered nearly a quarter of a century of deficits, which irregardless of the level of growth of the economy, seem to get bigger (relative to the economy) every year. These burgeoning deficits are starting to take their toll on the US (and I should mention that many other large developed economies – Britain and France prominently so), as its debt level rises beyond 100% to GDP (expected to hit 122% in 2035). It is a very odd situation. In textbook economics, large deficits tend to exist in times of war, recession or crisis. As such, if any of these occurs, there will be scant room for governments to help the economy (and rescue plans may become a trial of strength of central banks).

That’s not all. Readers will sense that I am writing more and more about indebtedness, and it is indeed becoming a preoccupation of mine. The idea of the ‘Age of Debt’ is that debt is becoming pervasive, and as a factor will weigh on geopolitics, the tenor of political debates and the shaping of the financial markets of the future.

In that context, once we get beyond the rise of election campaigns and into 2025, governments will have to jettison dreams of sovereign wealth funds and instead subject themselves to debt sustainability analysis. It is akin to a household giving up a dream of buying a second home as their bank manager demands that the mortgage and credit card balance are paid off first.

Debt sustainability analysis is one of those arcane activities in economics, and I can count at least three friends who can run their own debt sustainability models, which is not something I should readily admit. The essence of debt sustainability analysis is that the future debt load (and its precariousness) of a country are driven by a set of factors – the rate at which a government spends, the inflation adjusted interest rate it pays, growth and demographics. These factors are inter-related – borrowing that is deployed to productive investment can produce growth and thus reduce the risks associated with debt for instance. Today, the rapid acceleration in the indebtedness of many countries, low growth and ebbing demographics are some of the factors that make debt increasingly unsustainable.

If that was a reasonably technical explanation, the best parallel I can think of to communicate debt sustainability is climate sustainability – or at least both sets of analysis point to a world that is heating up, and where there is relatively little reaction to this. Debt and climate sustainability analyses are long-term processes, and my sense is that governments gladly ignore them, until they become immediately problematic.

That is beginning to happen. France’s bond spread (over Germany) is elevated, and British bond yields are close to 4%. Neither country can afford to increase debt levels. The same is true for Canada. In the US, next February will see the installation of the new Treasury Secretary, and he or she will have the difficult task of telling the next President that there is no money in the kitty.

As such, the establishment of sovereign wealth funds is a distant, fluffy dream for most governments. A violent lesson here is that Ireland had a sovereign wealth fund in the early 2000’s, but it was swallowed up in the consequences of the euro-zone financial crisis, and is only now being re-established.

For those sovereign wealth funds that exist – in Norway or Saudi Arabia – the next trade may not be to buy quoted equities and private equity, but to either buy the discounted debt of developed countries when they have their sustainability crisis, or to engage in private lending to them. When that happens, a new shift in geoeconomic power will be under way.

Have a great week ahead,

Mike

JD Goes to Washington

I have twice shared a stage with J.D. Vance, which at the time of writing puts me one ahead of Donald Trump. On both occasions, Vance’s book ‘Hillbilly Elegy’(I managed to get a signed copy, for my mother-in-law) was seen as offering people a glimpse as to why working class America was switching their traditional allegiance from the Democrats, towards what they perceived to be ‘system-smashing’ politicians like Donald Trump. Indeed, to my own reading, a large section of Irish-America has recently made this political journey.

I thoroughly enjoyed Vance’s book, had widely recommended it, and would continue to do so. He has had a fascinating life, which I am sure will get ever more interesting. Somewhat ironically given the Trump political program, Vance’s success in life is testament to the role of institutions (US Marines and education (not unlike Barack Obama)) and in my view is an argument for greater government spending on education and more open access to elite education in the US.

When I spoke (at two separate conferences) with him, my unkind thought was that he expressed himself better – more thoughtfully – in writing than in the spoken word. That seems to be changing, and Vance has clearly crafted an ability to provoke. Much has been made of his intellectual journey to the extreme right of American politics, something that has become the norm as the Republican party has become shattered by Trump (a contemporary of mine – an elite soldier and former governor – has also veered off to the extreme right). As a result, the press is full of speculation on Vance’s views on the dollar and Ukraine.

Vance is in many respects the opposite of Trump in terms of his life story – he started poor, became a soldier, ‘pulled himself up’ through education and has now converted to Catholicism (thanks in part to the Dominicans). Trump had a privileged upbringing, disdains learning and the military (‘losers’), and could not possibly be more irreligious.

Curiously, the Catholic Church in America, which is much more conservative than that outside the US, appears to be attaching itself to the coattails of the Trump movement, a tactic that helps to explain why it is the largest, oldest institution the world has known.

Vance may now reflect on the role of vice-president, and what this will mean for him. In general, it is a political graveyard, populated by token political players. That Kamala Harris has not carved out a serious role in American public life is testament to this. There are, however, two examples of very effective vice presidents – George W Bush, who was more like a prime minister to Ronald Reagan, and Joe Biden, whose experience and vast range of political relationships meant that Barack Obama was tethered to the political establishment.

In this context, Vance, the critic of elites, is at an interesting point. Since ‘Hillbilly’ was released, he has been mixing more with the American elite, in the technology, policy and venture capital worlds. If he enters the White House with Trump, he will come up against the full complexity of the American power machine.

Here I recommend Robert Reich’s excellent book ‘Locked in the Cabinet’. Reich, a professor of labour economics, was appointed Labor Secretary by Bill Clinton, and the book recounts how his optimism and idealism left him outmanoeuvred by those who ‘really ran the world’ (Robert Rubin).

Another book that I know Vance has, is Chris Wipple’s ‘The GateKeepers’ which is. fascinating study of seventeen chiefs of staff to American presidents. Trump notoriously went through several chiefs of staff, but in many cases the chief of staff can be the most important player in an administration (Jimmy Baker is the most often cited example).

So, for all the clamour around Vance, he might well – like Robert Reich – find himself sidelined by the team around Trump. With the European press over-obsessing about Vance, this is where the real risk lies. The first Trump presidency was chaotic. The second will come armed with a mission to transform America, potentially along the lines of the Heritage Foundation’s Project 2025’. I will devote more time to this, but in short it is an aggressive plan to re-make American government (politicised), society and the foreign policy. As a recent article in Foreign Affairs put it, this will be an ‘Imperial Presidency’, shorn of the constraints that have shaped American public life for the past two hundred years.

To Europe, the US under Trump will look more like China – driven by a single, imperial leader, obsessed with the viability of domestic industry, slow to help allies and much more transactional in foreign policy, and will use financial policy in a more selfish way. Consistent with the end of globalization, there will no longer be an effort to transmit American values, a la George W Bush and Bill Clinton.

In short, it will be an America that few of us will recognise.

Have a great week ahead,

Mike

The End of Globalization

In last week’s note(s) I focused a lot on France, to the exclusion of mentioning other debates that are live around the world. One that preoccupies me is that of globalization – which for most readers will seem so esoteric and distant, that they may rightly care little about it. It is in my view worth stopping to think about the direction of globalization – given the way it has shaped the past thirty years. I sense that as globalization crumbles, we are already starting to miss its notable characteristics – peace, low inflation and international prosperity.

Three things happened last week that have globalization, or its demise, back on my mind.

First at the Rencontres Economiques, I had a row with a former German economic minister who claimed that a new wave of globalization was about to start. This claim seemed fanciful, not least that the German economy is cleaven between a reliance on China, a need to be better aligned with the US, a disastrous energy policy and a fascination with Russia that has still not been broken by the war in Ukraine.

Granted that globalization refers to a world that is interdependent and interconnected, it is wrong to hold that we live in a globalised world when dependencies are shifting (the US and Europe want to be much less dependent on China for instance) while the US and China barely have any political and policy connections, and are, in the minds of many, about to embark on war.

The second encounter that set me thinking about globalization was that I ran into Prof Barry Eichengreen, the international authority on foreign exchange, financial flows and who was passing through Europe on his way back to the US from India, where he had delivered a paper entitled ‘Globalization and Growth in a bi-polar world’. Whilst I believe it impossible to enjoy globalization in the context of a world that is severely divided, I was much more careful to pick an argument this time, given Barry’s great mind.

In the paper he charts how trade (relative to GDP) – one of the tenets of globalization – has faced severe headwinds but remains at high levels and has changed course somewhat (trade and investment flows have pushed out to countries like Mexico and Vietnam). Capital and financial flows have retraced even more, and the Eichengreen paper details China’s efforts to deepen its financial markets and boost the use of its currency (though its political economy is a major obstacle to this).

The Eichengreen paper, based largely on what we see in trade and capital flows, paints a picture of the contours of globalization as we have come to know it, as remaining in place. However, I would add to the argument other metrics of globalization – the flow of people, the flow of tourism and overseas education, the flow of ideas and of political and diplomatic discourse between nations. On many of these criteria, walls are going up, and it is impossible to speak of there being a consensus on one global system or way of doing things. Markedly, most of the institutions of the globalised world order (IMF, WHO, World Bank to name a few) are defunct.

My argument is that globalization is not to be confused with the ongoing growth of trade, or the business cycle, it is a very specific form of interconnectedness of nations and regions that is breaking down. It started with the fall of communism, and mostly likely died with the snuffing out of Hong Kong’s democracy in 2020.

This idea was part of a great discussion I had with Chris Watling of LongView Economics as part of their podcast series. LongView is perhaps the best independent markets and economics research firm, and one of the elements they tend to capture very well is the idea of (short and long-term) cycles of risk appetite in markets and economies. In that context, the idea that we are passing from one long-running economic ‘regime’ (globalization, to something else, was apt.

The Interregnum will be a period of breaking (down the imbalances that have built up with globalisation such as climate damage and debt) and making (new world institutions and the integration of technology into economies and societies). It will be a noisy, chaotic process and its success is not yet a given.

For the moment, the very least we should do is accept that globalization has passed and start to think about the future.

Have a great week ahead.

Mike

Cold War to Total War

As I stepped out on the street in Kreuzberg (Berlin) on Monday, all was calm, with little to worry about save the choice of the excellent local food, loud music, beer and football (the Dutch invasion was just starting ahead of Tuesday’s match against Austria). Kreuzberg was of course once on the frontier of West Berlin, looking across to East Berlin and will have featured in the high stakes espionage between the West and East (notably so when Markus Wolf ran the Stasi).

Having once run into Mr Wolf, I was pondering what Berlin was like at the time, and we should not be surprised that it is still regarded as ‘the city of spies’, and that it continues to feature in espionage literature.

Given that context, it was no surprise to learn that Germany continues to be targeted by foreign spies. Over a week ago, German Interior minister Nancy Faeser launched the annual threat assessment of the German domestic intelligence service – which pinpoints Russia as well as China and Iran as the authors of multi-faceted attacks (disinformation, cyber-attacks, manipulation of people flows and racial tensions) on Germany, not to mention a recent spate of assassination attempts in Germany by Russia.

Of great concern is the range of threats to Germany (the same is true in most other countries), from Russian operatives defenestrating enemies of Moscow, to plots to overthrow the German state by the far-right to Islamic terror (there are over 27000 known radicalised Islamists in Germany, and the threat of Islamic terror has been growing since the October 7 attack).

The tactics that the enemies of Europe (and democracy) are deploying are likely very different to those crafted by the likes of Markus Wolf. Espionage during the Cold War was motivated by a need for information, with plenty of proxy battles for influence taking place around the rest of the world.

Today, the aim seems to be outright destabilisation and provocation – from the multiple attacks on arms production facilities across Europe to an epidemic of coups d’état across Africa, to the waves of disinformation on our social media. There is also the impression that the US is being tied down in multiple conflicts around the world.

Today, the eyes of the world are on Gaza and Ukraine – and we are bracing for a new Trump Presidency – perfect conditions to ramp up outright destabilization and provocation. The issue then, is what the EU and its member countries need to do.

The first is to confront the problem and bring it into the open. Nancy Faeser’s report is just one of a growing number from security services across Europe – in May the head of Britain’s GCHQ outlined a similar, urgent threat landscape. The second will be for governments to give security services larger budgets (a Trump presidency might help), and potentially, to allow them a more flexible modus operandi.

The new development relates to the new EU commission. Following last week’s meeting of heads of state, it now looks likely that Ursula von der Leyen will continue as president – and with Katja Kallas as foreign representative, the tone of the next commission will tilt from ‘Green Deal’ to ‘security’ and ‘strategic autonomy’. Defence infrastructure and innovation will become a key trend in the private investment industry (private equity and venture). Von der Leyen has already flagged that enormous amounts of capital will be required to support this, and given the failure of the EU to build out its capital markets union (CMU) this will be an immense challenge.

One element that might help, a little, is von der Leyen’s proposal to create an EU defence commissioner. If it does happen, it will run into two of the common problems that beset bright ideas in Brussels.

First the role of defence commissioner will need to be based on the reallocation of powers from other commissioners – some defence innovation and military logistics responsibilities from Thierry Breton’s department, transport and infrastructure from the Transport commissioner (Valean) and various other responsibilities from the foreign representative.

The second issue is that it might take some power from national defence ministries, but there is also a strong argument that they need to be better coordinated.

In that sense the new EU defence commissioner might reflect changes that John Healey (currently the shadow defence minister in the UK) wants to usher in – an office for value for money in the Ministry of Defence and a restructured defence command.

The EU defence commissioner might also start by coordinating the purchase and use of heavy duty equipment, such as large transport aircraft, and driving the integrated use of new technologies across countries. Another potential task is to find means of better coordinating European security agencies and militaries, so that their collective, offensive capability becomes stronger.

It is a depressing, though necessary use of resources, and a sad sign of our times as globalization fades away.

Have a great week ahead,

Mike

Boring, boring …

One of the more ‘colourful’ habits in the otherwise sensible life of Sir Keir Starmer is that he is an Arsenal supporter, to the extent that he has been quizzed on this in media interviews, and cruelly asked if, like Arsenal, he will ‘bottle’ the premiership. For those non-football fans amongst you, even Arsenal fans like to chant ‘boring, boring..Arsenal’).

Consistent with his devotion to Arsenal, ‘boring, boring’ seems to be the guiding light of Starmer’s policy playbook, launched formally on Thursday in the form of the 23,000-word, 134 page Labour manifesto.

The subset of individuals who peruse political party manifestos is small, and I have heroically dug into it to save readers the trouble. It is worth paying attention to because of the likelihood that Labour will form the next government in the UK.

My first take is that the manifesto is very conservative, with a small ‘c’, in the sense that it emphasises Starmer’s reluctance to change many elements of existing fiscal policy (corporate tax stays at 25% for example) and effectively ventures very little in terms of dramatic policy moves. The headlines stress no ‘austerity’ but it is also hard to see this package producing a durable expansion and return to productivity. The manifesto is accompanied by a laborious compilation of the costs of the Labour programme, the object of which must be to convince markets that Labour are on top of their fiscal ‘game’.

My sense is that the manifesto is characteristic of a party that wants to avoid any kind of policy hiccup before the election, and confirms my sense that the big policy moves, if there are any, will come in the autumn or early 2025, once the government has been bedded in.

On balance it is a manifesto for workers rather than capitalists. The message for workers is that income tax, national insurance contributions and VAT won’t change, but we will see small groups (private equity execs for instance) treated more severely. Also, with the abolition of generous non-dom tax status, the international wealthy will feel the fiscal pain, added to which private education fees will be charged VAT. These measures are expected to raise GBP 6bn, which is small in the context of the economy and deficit. More efficiencies in spending are expected to bring ‘new’ fiscal boost to GBP 8.5bn

From the point of view of companies and investors, there is not yet much here to worry about, but neither much to be excited for.

We also have a little more colour on the landmark innovation of the manifesto, GB Energy – the brainchild of Ed Miliband (one of the most experienced Labour ministers and the most ‘policy ready’ one). GB Energy will be based in Scotland and will invest in renewables (co-invest with the private sector in new green technologies and help scale up startups in segments like solar and wind and help to invest in the installation of green energy infrastructure). It will take on existing state-owned stakes in energy projects like GB Nuclear, and the aim is to capitalise it (likely in 2025 to the tune of GBP 8bn). One element for the energy sector is the flagging in the manifesto of much tougher regulation of the energy sector (in terms of consumer prices).

On healthcare, my first impression is that the improvements flagged for the NHS are not transformative and as a trend, point towards more outsourcing of services, away from hospitals. Finally, there are some interesting comments in the ‘serving the country’ section of the manifesto (reform of the House of Lords and a focus on ethics in public life). My expectation is that Labour will lead with these reforms once in power.

In more detail, I think Labour will win the July 4^th election, their immediate accession to power will be marked by a number of high-profile foreign affairs events (i.e. NATO summit) where Starmer will be able to look ‘presidential’. August will be quiet, and I think the early policy moves will come, as above, in the area of institutional reform.

As we move into the autumn, the focus will turn to economics, and I suspect Labour will lead this with a series of announcements on inward investment. The launch of GB Energy and the national wealth fund will follow.

This manifesto is deliberately ‘boring’ in the sense that it will ease Labour’s passage through the election campaign with little policy friction. Voters’ disdain for the Tories will be enough for Labour to win handsomely, and they may well be helped by the damage that the Reform party will do to the Tories.

With the economy in mind, the absence of chaos that should accompany a Labour government (as opposed to the Tories) should help, and a great deal will depend on international factors. However, the manifesto, in my view, is not a convincing plan in terms of kickstarting productivity in the UK economy. ‘Boring’ will not be enough to satisfy the economic challenge that has been left to Starmer.

Have a great week ahead,

Mike

Is Labour Ready?

Rishi Sunak’s sodden, tragi-comic, and surprise announcement of a UK general election was an amusing episode in a so far uneventful ‘year of democracy’.

The announcement was a boon to headline writers, who had fun with phrases like ‘Drowning St’. My attention was piqued by the background music ‘things can only get better’ (D:Ream), which added to the farce, but which British political aficionados will recognise as the song that was also used by Tony Blair’s New Labour party in their 1997 election campaign.

At the time, I was finishing my studies and happened to be in London on the day of the election, and vividly recall walking past Downing St, where the sense of a new era was palpable. Today, the challenge for Keir Starmer is whether he can spura new era of growth and renewal in the UK, or whether his party simply turns out to be ‘not the Tories’.

In the late 1990’s, Blair’s government, bolstered by a very strong front bench, had spent a long time preparing for government, and once in power made a series of dramatic policy moves (see our recent note ‘Does debt smother politics?). By comparison, the most important question for the July 4^th election – with the Tories 21 points behind Labour in the polls and destined to be wiped out (some 100 sitting MP’s, mostly Tories, will not stand this time) is, how ready are Labour?

Whilst the election announcement has taken many Tory MPs by surprise, my sense is that Labour would also have much preferred a November election – they still must find candidates for over 80 seats and faces a few awkward spots such as Islington North where Jeremy Corbyn will stand as an independent. Indeed, the fact that both the Tories and Labour are logistically unprepared for a July election might benefit the Liberal Democrats, which opens up a small chance of a coalition government (importantly electoral reform would be the price of this).

To date, Keir Starmer’s Labour has given relatively few details on its program, partly to allow space for the Tories to slip up and partly not to skew the debate on the outlook for the economy. This will be Labour’s greatest challenge.

When Blair came to power in 1997 the British economy was bigger than that of China and India together, the world was under the steam of globalization and debt to GDP in the UK was close to 40%. Today, China regards Britain as a ‘little island’ (nothing wrong with little islands!), globalization has come asunder and debt to GDP is 100%.

I suspect that if there are early, dramatic wins for Starmer, they will be in tax (cutting back exemptions for the wealthy and potentially a wealth tax), corruption (standards in public life), and institutional reform (end of the House of Lords?).

Revitalising the economy will take longer, notably because Labour will initially stick to the UK’s fiscal rules and take pains to avoid any early volatility in the pound and gilt markets. In order to enact its plans for technology and ‘green energy’ investment Labour will most likely have to create partnership with international institutional investors.

Outside of these areas it is not clear to me how Labour can immediately reverse the damage done to educational, social services (NHS) and the fabric of small towns and cities, exacted by the Tories. It will require a level of imagination, funding and policy continuity not seen in British politics for decades.

In foreign policy, Labour’s approach will be a much less contentious one – relations with Ireland (which have deteriorated since Johnson) will be much warmer, and the approach to the EU will most likely be less confrontational and more collaborative. Whilst David Lammy (shadow foreign secretary) has spent a decent amount of time in the US, courting Republicans and Democrats, the scenario of a Trump presidency and a Labour government is a high probability one, but a configuration that would stretch the notion of a ‘special relationship’.

In defence I expect little headline level changes to Britain’s commitments, but the shadow defence minister John Healey will likely re-organise the military command and HQ, and importantly spend a good deal of time reorganising defence investment and procurement so that it gives ‘value for money’.

In the next few weeks, Labour faces twin, urgent challenges – mobilising the party across the UK, focusing on making inroads in the south and Scotland, and then preparing for government in the context of a gargantuan challenge.

The good news is that the summer holidays start just after the election which I suspect will mean that the effective policy launch of the new government will kick off in September.

Have a great week ahead,

Mike