The Diplomacy Crash

US stock market valuations have only been as high as in 2001 and 2020, market concentration is more extreme than in the late 1920’s (the top ten companies now make up 38% of the market capitalization of the S&P 500 index), and money manager surveys show US households to be the most bullish on future returns from equities since the survey began in the early 1980’s.

So, given this precarious euphoria, when is the crash?

My response is that crashes come in unexpected places and times and one idea that has not had much coverage but that might become current is the idea of a ‘diplomatic crash’. By this I mean that a host of countries have invested diplomatically, or in terms of soft power, in institutions, partnerships and causes. The acceleration of a multipolar world by the second Trump presidency will crash the value of many of these diplomatic investments.

An example might be the ‘special relationship’ between the UK and the US, the seeds of which were sown by Roosevelt and Churchill during the second world war (Churchill coined the term in 1946), and later cultivated by Thatcher/Reagan and then the Bushes and Clintons with both John Major and Tony Blair. Today, it is very hard to see any personal chemistry, or philosophical common ground between Donald Trump and Sir Keir Starmer. If the ‘special relationship’ were a stock or even a crypto coin, its value would be at a historic low.

In more detail, the idea of the ‘diplomacy crash’ came to me the night before I voted in Ireland’s general election. Ireland is a very quirky, even eccentric country from a geopolitical view in that unlike many other European countries there is close to no debate in Irish politics on defence and security, and its defence capability is miniscule compared to benchmark countries like Norway and Sweden.

In that context Ireland, like many other mid-ranking developed countries, is about to suffer a diplomatic crash. It has, correctly, invested heavily in the UN and the rules-based order. Some of the pillars of this order, like the World Trade Organisation – effectively built by an Irishman (Peter Sutherland) – are in a state of dereliction. It may well be the case that the UN ceases to be effective in dispute resolution between states, world health policy and great power coordination.

In addition, together with Spain and Norway, Ireland has spent significant geopolitical capital supporting Palestine (all three countries recently recognized Palestine as a state). Here, it cannot be ruled out that a grand peace deal is made in the Middle East, between Israel, Egypt, the UAE and Saudi Arabia, whose goal is to create greater investment and commercial flows between these countries and strategically disable Iran, but whose outcome is to render the ‘two-state’ solution unachievable. This new, harsh reality would leave the humanitarian led foreign policies of many European countries well ‘off-side’, compared to the stance of the Trump administration.

Ireland is just an example here, and there are plenty of other crashes in diplomatic capital – Germany’s trade policy with China, and potentially Japan’s relationship with the USA, France’s relationship with Africa and in general the cultivation of the rules-based order by democracies.

In finance, when a market crash occurs, investors become structurally risk averse, run for safe assets and generally retract positions. This might be the same in diplomacy. The risk then is a more unsure, less engaged diplomatic world, and worryingly one where the international rule of law is ignored.

In Europe, reflecting the lessons of the euro-zone financial crisis, this may imply that EU foreign policy becomes more consistent across countries (though perhaps not yet unified) and more focused (Katja Kallas is perhaps the most forceful foreign policy chief that the EU has had). In addition, new policy coalitions and leadership groups will form, notably so in the case of the Nordic and Baltic states on defence and immigration.

The EU also needs to stop geopolitical hedging by its members. Hungary under Viktor Orban has become notoriously close to Russia, and whilst Serbia had tried to play both sides it seems more comfortable as a bona fide EU nation (it is an accession state).

Once Ireland’s election result is clear, the first task for its leaders may be to choose sides – solidarity with Europe and active participation in the EU defence effort, or a singular, eccentric relationship with the Trump administration.

Have a great week ahead,

Mike

Coherence

Kim Hong-Kyun is not a name that very many Europeans know, but they really should, given his grave diplomatic intervention last week. Hong-Kyun is the South Korean ‘first foreign minister’, who last week summoned the Russian ambassador to Seoul to register South Korea’s displeasure at the news that up to 12,000 North Korean soldiers are in or on their way to Russia to fight in Ukraine.

While North Korea’s contribution to the Russian war effort is already known (their armaments industry is producing as many shells as Russia itself – and more than all of Europe), the prospect of an Asian state sending soldiers to fight in a European country is unprecedented, and I am perplexed that European governments have not reacted to this (though South Korea, Australia and Japan sent representatives to a recent NATO meeting).

The South Koreans have pledged to arm Ukraine if North Korean troops fight there, raising the complicated prospect of an Asian proxy war in Europe – again something that would have been inconceivable years ago, and that also tilts us towards the notion of a world war.

Whilst some readers might find this an exaggeration, we are at a moment of coherence, when threads that have been developing over the years become clearer and begin to describe the contours of the emerging geopolitical order.

One of the notable formations here is the SCO or Shanghai Cooperation Organisation, which I wrote about in the Levelling (p. 245) describing them as a geopolitical ‘gang’ of the future and sort of anti-NATO coalition, or at least an anti-AUKUS group. Despite this, few of the university post-grads in international relations I have come across in recent teaching sessions knew of the SCO.

There is a sense that the shadow or the logic of the SCO was lurking behind last week’s BRICS meeting, given the perception that the BRICS is becoming an anti-Western alliance, which in reality is not true. Reinforcing this are the very different cultures across the BRICS countries, and the risk to their project that relations between them depend on individual autocrats rather than institutions or peoples.

Yet, a sign of the times is the manner in which large emerging nations like India and Turkey are hedging their bets in the sense of maintaining good relations with Russia and the US. For India in particular, the BRICS meeting was a chance to begin to repair relations with China.

They could be forgiven for doing so granted the impact that the outcome of the US presidential election will have on international relations. The choice is one between an effective continuation of the foreign policy of the Biden/Democrat administration in the context of growing pushback against American power, versus a Trump foreign policy that is unsure, opportunistic and likely goes against the deep grain of Republican foreign policy as established by Ronald Reagan, George H Bush, Colin Powell and Condoleezza Rice.

2025 will hopefully see the end of wars in Ukraine and the Middle East, following which the notion of the coherence of rival systems will come into sharper focus. It is increasingly clear that the leading autocratic states (Russia and China) are hell bent on undermining the democratic world, and any nations that toy with the idea of joining it (witness the heavy handed Russian interference in last week’s referendum on EU membership in Moldova, and it’s obvious interference in Georgia’s election which takes place this weekend).

The danger is that the sharpening coherence of the SCO is like the development of AI – it has been gathering pace amongst specialists for some time, and then a public event (the launch of ChatGPT) brings it into the public domain.

One of the obvious casualties of the emergence of the SCO and indeed the geopolitical trials the world is suffering, is the diminished influence and credibility of world institutions like the UN and WTO (World Trade Organisation), which are being reduced to the role of bystanders in this emerging geopolitical contest.

The scene is set then for the November 5^th election to either reinforce or undermine the world order.

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