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February 17, 2020

Security issues we should be discussing

When future historians look back at the period of western-led global multilateralism, they will be amazed by our obsession with conferences that take no decisions and yield no results. Those present in a Munich hotel room must have suffered neck pain by nodding in agreement with Frank-Walter Steinmeier. The German president pronounced the west dead and declared the need for more European security co-operation. But he is addressing the wrong crowd. He did advocate more defence spending, but this is a message he should be directing to the Germans and especially to his former political party the SPD. 

We are also to hear yet another pro-European speech by Emmanuel Macron, and another exhortation of the European union. His EU reform strategy failed because he set the wrong targets, a European finance minister for example. He also chose the wrong advisers, and wrongly assumed that you can do this together with Germany. Mario Draghi’s strategy to isolate Germany has been much more successful. Davos and Munich are the visible manifestation that Europe's liberal leaders are better at talking about problems than at solving them.

If you are serious about European defence, do not start with grand designs but focus on defence capacity first. Ulrike Franke, an expert on high-tech defence systems, writes that the EU is hopelessly behind the US and China on military-grade artificial intelligence. AI is the single most critical issue for the future of European defence. The 21st century is the age of the drone, not the heroic fighter pilot. The use of AI extends beyond killer robots, so-called lethal autonomous weapon systems. AI is also critical in identifying security threats through big-data analysis, and even at improving military logistics. It is a productivity tool. In theory, it is ideal for countries like Germany with deep-seated political opposition to defence spending. You get more for less. In reality, this is not happening.

Germany is totally uninterested in military AI. France is well ahead ahead of it. The UK is at an advanced discussion stage. Germany’s AI strategy has no military component whatsoever, except for its use in arms control. 

In his FT column, Wolfgang Munchau makes a point about the spillovers between military and civilian high-tech investments. The German business model of the past consisted of industry-led research and development, funnelled through universities and independent institutes. But Germany's industry is not going to perform this task in the future. The German car industry is unprepared for the electric revolution or for AI-based systems. Medium-sized companies are still grappling with digitalisation. Even if your primary interest is not defence as such, there is a case for high-tech defence spending to generate spillovers to the private sector.

As a final observation, we would like to point out the parallels between the discussion on the future of European defence and the monetary union. The priority of eurozone reform is not the stuff on Macron’s agenda, but capital markets union. This involves especially the creation of a mutualised safe asset as collateral for the money market, and as the instrument of choice for central bank asset purchases. Busybody-type agendas like Macron’s or giant investment plans yield no additional investment. When future historians look back at our period, they will not only marvel about the rise and fall of multi-lateral conferences, but also about policy PR stunts. 

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February 17, 2020

Salvini has changed his mind on the euro - yet again

The single worst method in political analysis is to take politicians literally. When Matteo Salvini said that the euro was there to stay, we noted a UK-based commentator jumping to the conclusion that the euro was now safe forever. But Salvini has since changed his mind on that point. He is now threatening to leave the EU altogether unless the rules change.

This is, of course, an empty threat. Italy will not invoke Art. 50. But we should nevertheless consider the possibility of degrees of Italian detachment if and when Salvini comes to power. The EU’s ability to constrain a rogue prime minister is severely limited in the realm of monetary union. This is especially so if that prime minister hails from a large country, and is capable of building effective coalitions with other EU member states. 

We noted before that the EU has no instruments to stop Italy from introducing a parallel currency, and that such an instrument could provide a slippery slope towards an eventual euro exit. This is how you do this - not by decree or referendum. Those northern Europeans who have opposed further economic integration will find that the system of decentralised governance may at one point work against their interests.

We don’t think that Salvini has an actual strategy on the euro beyond keeping his options open. He won’t run his election campaign on a euro theme. We think this is smart from his perspective, but not a point of reassurance for the rest of us. What non-Italians need to reflect on is that Italians have ejected each incumbent government since the start of the monetary union. If Salvini seeks more than one term, he will have to do something different. 

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