This will be our last briefing before the summer break. We will return on Monday, August 22.

In this briefing we will only touch peripherally on yesterday’s events, but offer some thoughts on the policy errors in diplomacy and economic policy that are now interacting with each other and blowing up around us.

This is not so much a post-mortem than a pre-mortem. The really bad stuff is still ahead. China’s deployment of missiles in the Strait of Taiwan, and the Bank of England’s gloomy assessment of the economy, were two events from yesterday that in their own separate ways gave us as a flavour of what lies ahead. The political and economic instabilities of our time are deeply intertwined.

Microchips play an important role in Taiwan diplomacy. At its deep end, the fight is over the Taiwan Semiconductor Manufacturing Company, the world's largest producer of chips. Just as Germany has given itself an economic model that is reliant on Russian gas, the western world as a whole is reliant on cheap Taiwanese microchips. Electronics components are to our modern economies what cars and plastic used to be in the 20th century. What we term as the global supply chain crisis is really a semiconductor crisis. The west has the capacity to produce high-end versions of semiconductors, but they are not the ones that power the cheap electronic devices or the electronic durable goods we mostly buy in shops. And it takes a long time to get a chip factory up and running, as the Germans are just discovering. This is why our supply chain crisis comes with inflation and stagflation. We will produce at a higher cost, and lower volumes.

The failure to take quantitative easing back in time was the big policy error of the last decade, next to austerity, the policy error that immediately preceded it. The $5tn US stimulus is the big policy error of this decade, the one the Biden administration will be mostly remembered for, though these are still early days.

The stupidity of various US politicians in trying to take on China and Russia at the same time has a distinct 19th and 20th century European quality. This is not about the ability to walk and chew gum at the same time, as one commentator put it. Germany’s strategic failure in the second world war was not the act of fighting on two fronts, but failing to comprehend that your enemies will unite in a strategic alliance. This is exactly what we expect to see now. A strategic alliance between China, Russia, parts of Africa, parts of the Middle East, and parts of Latin America is beginning to form. It will take a long time until this constellation wields real power. We don’t underestimate the massive shifts that would have to happen in those countries. China needs to change its economic model, and reduce its dependency on the US for its excess savings. This is a ten or twenty year project. But we think that China is far more likely to accomplish this shift than Germany and the UK, which also badly need new economic models. In our estimation, the German political establishment would rather let people freeze than switch off the likes of BASF, Bayer and other gas-guzzling chemical process plants.

Economic policy and diplomacy share the same ultimate goal: to stabilise. Both have failed spectacularly, for essentially the same reason: short-termism on an unprecedented scale. US foreign policy, love it or hate it, used to have strategic goals. Since the beginning of the Obama administration, it has embarked on a chaotic retreat.

The EU fares no better. As long-standing observers of European integration, we have come to the conclusion that the current model of European integration through enlargement, accompanied by only moderate deepening, is not suited to tasks ahead. It is based largely on the EU as an umbrella organisation, a piazza so to speak, to forge consensus among member states with usually diverging short-term interests. A lot of that stuff is fake, like the phantom investment programmes of the last decade. Most of it falls into the category of things that have minimum impact but maximum announcement effect. Ever wondered why EU programmes always have fancy names attached to them, like transmission protection instrument or next generation EU? We don’t use those terms ourselves, and prefer to call a spade a spade. The first is a permanent bailout-instrument. The second is an almost imperceptible investment programme, amounting to 0.3% of the EU’s GDP over a period of five years.

Brexit is of a similar category. What Remain and Leave had in common is a total lack of strategic purpose. Remain stood for a trickle-down economic system that no longer trickled. Concretely, it was based on the City of London as the financial centre of the euro area, and an entrepreneurial boom that was based largely on cheap immigrant labour from eastern Europe. The economic model of Leave was a return to the feudal past that bore no resemblance to reality. Brexit should have been discussed, and understood, as a shift in economic models. It is ludicrous to think that you can replace the physical trade in goods with your geographical neighbour with some far distant places. This should have been about how to exploit economic opportunities through a different regulatory regime.

We have been mostly focused on the EU in our work. But this lack of strategic thinking is not just an EU thing. It is a feature of liberal democracy itself. It is in the nature of liberal democracy that it is not centrally planned. Strategies are always a form of central planning. Free societies evolve. Its leaders take decisions, but they are not strategic. Strategies are taken at the micro level, by companies, groups and individuals. In the absence of large global shocks, this turned out to be a stable self-correcting system.

But it turns out a fair-weather system, such like the idealised world of macroeconomists with its rational agents, a world in which shocks are normally distributed. All the big issues we are facing today are not of that variety. Like climate change and global economic instability they need to be solved at a higher level.

We are sceptical that this will happen. The scariest thing about the Bank of England yesterday was not the decision, but the sheer look of panic on face of Andrew Bailey. The governor of the Bank of England had the look of somebody who has discovered rather late that he had inadvertently stumbled into a horror movie.

There aren’t any easy answers for how to fix Europe’s energy crisis. As the result of decades of failures and poor decision-making, it will take time to reverse. More pertinently, both national governments and the EU will face a difficult choice: how to bring down the cost of fossil fuels in the short term, while continuing to move away from them in the longer run.

The crisis itself is perhaps best thought of as two interlocking crises, which have somewhat independent causes but mutually reinforce each other. We can call them, for simplicity’s sake, the Germany-centred gas crisis, and the French-centred nuclear one. The first is the most well-discussed and publicised. It’s also generated more attention because of how it functions as a reversal of the German morality tale of European political economy. There can be no more credible lectures about responsible policymaking after most of Germany’s political parties have been willing participants in one of the most irresponsible policies in Europe’s post-war history.

But the French crisis has also had a marked impact. France’s nuclear fleet has normally functioned as the backbone of northwestern Europe’s energy system, and it enabled the country to become the EU’s largest energy exporter. But maintenance issues with Electricité de France’s ageing reactor fleet and summer heat waves have conspired to hit output. France’s nuclear output dropped by 15% in the first half of this year, pushing EDF into a historic H1 loss of €5.3bn. The need to import power has meant even more gas burning in Germany and the UK, further contributing to the gas crisis.

In the shorter term, neither of these issues will be easy to mitigate. German firms can, and are, trying to convert gas boilers and generators to run on oil distillates instead. But this simply replaces one problem with another. Limited refinery capacity, partly linked to pandemic shutdowns, has driven up refining margins, and large-scale switching could make the situation worse. Fixing the corrosion issues could take years, and summer heatwaves will be an ever-present risk as climate change takes its toll.

But longer-term, solving the energy crisis is complicated because it coincides, awkwardly, with an energy transition away from fossil fuels. Europe will continue to need gas in the short term, but over the coming decades it will have to shift away from it in order to meet its climate targets. The timing is dicey because this transition can’t happen overnight, but potentially needs to happen more quickly than the kind of use that’s necessary to guarantee viability for new gas infrastructure.

As was the case with Germany’s Energiewende, the European orderly transition model was built on the assumption that there would be cheap and plentiful natural gas. In a world where that is no longer the case, new thinking will be necessary in order to guarantee energy security without also wrecking climate targets.

It will be especially tricky to do so without a revision of Europe, and especially Germany’s, economic model. If cheap energy and feedstock inputs for industry are scarce, that will require adjustments. It will also mean heightened geopolitical sensitivity. In an interview with Les Echoes, Martin Wansleben, the head of Germany’s chamber of commerce and industry, hit the nail on the head when he said that

“The principle that a company can choose its suppliers based on the best price, and sell to its customers the best bidders, no longer works”

One of the more profound impacts of the energy crisis could be how investors and creditors appraise political risk, after Russia reneging on its gas contracts threatened to financially destroy Germany’s energy sector. That may also have implications for the energy transition, and how Europe charts its course out of the current crisis, given China’s firm grip on battery and solar supply chains.

The third heat wave for this summer is upon us. For the next ten days temperatures will be rising to record levels under a heat wave that is moving from Spain to the northwest of Europe.

Social media is still debating whether is this a unique event, like the heat wave we had in 1976, or a new trend due to climate change. We may not know the answer to this question for another couple of years. In the meantime, adapting to heat will be a new concrete challenge. We look at a few below.

Heat is not for the lighthearted. It kills up to half a million people worldwide each year, more than any other natural disaster. Cities are more badly affected, heating up twice as fast as the average global rate due to the fact that they can trap heat more than non-urban areas. Health policies will need to offer a mix of preventive and emergency measures at local and departmental level. Some countries like France have heat plans already. In other countries like Germany, plans exist but they are either not serious or have not been tested. A lot more effort will have to go into planning to make sure vulnerable people are looked after in these times. Some cities have already created a new job profile, the heat official, to find ways to help cities cope better. This will include new ways of thinking about how to offer cooling areas for citizens, with new requirements for infrastructure and buildings codes.

Heat waves make the current energy crisis worse. High temperatures push up demand for more energy. At the same time, nuclear power stations will have to power down as rivers, usually used to cool reactors, are heating up. This means more dependence on gas and coal. This is bad news for those countries preparing for a winter without Russian gas and count on their storage facilities. Instead they have been forced to draw from them already during the summer. Some countries, like Spain, have ordered to limit air conditioning to 27 degrees, in order to save energy. In the medium term, the new energy mix will have to take heat waves and the increased energy demand during the summer into account. Northern European predictions may have to be updated, if this heat wave is not going to be a single year event but a trend.

Climate change politics will get a boost with this free advertisement, and climate change deniers will seem more radical. There will be new pressures building up in societies on both sides. Heat is not as directly linked with life threatening disasters, such as sudden floods or hurricanes. Heat is more of a silent killer. But the message will get through eventually. Heat also affects biodiversity. Heated up rivers and savanna-like grass land will change the mix of animals able to cope with the heat. How and to what extent we will only find out when it is already happening.

Heat will affect agriculture. Farmers have already lost parts of their crop due to the two previous heat waves. Water use has been restricted and the new crop got hit with too much heat too early. Some livestock farmers won’t be able to let their cows or sheep graze on the meadows. This means farmers will have to use their reserves to feed the animals, drawing down on what was usually reserved for the winter. In the heat there is also a heightened risk that cows may lose their foetuses. Fields as well as stored haystacks may catch fire. Fires on fields are more frequent, and fire procedures in several northern countries will have to be updated to allow for a quick deployment of fire helicopters to these emergencies. New farming methods have to be found, with more heat-resistant crops and new machinery, as some of them increase the risk of fires.

Heat affects trade. It requires new routes of transport for those relying on rivers that now become too shallow to pass through like the Rhine. Cooling will become more of a necessary requirement, as well as checking on the fire safety of merchandise. This may add additional costs, and will boost demand for some new storing methods as well as more cooling, drawing down further on energy resources.

It may affect tourism. Heat in cities is not something tourism is prepared for. The hospitality sector might be pressured to do more to look after the wellbeing of their tourists. If these heat summers reoccur, expect holiday makers to switch destinations to cooler places, or chose different months for their holidays.

At this point we stop our list, ready for our holidays. No, we have not changed our plans due to the heat and we will not avoid cities nor the south of Europe. But maybe next year, we may choose Scotland or Sweden instead.

We have been scratching our head over the Russian turbine, previously under repair in Canada, now sitting on display in a factory in western Germany, waiting to be dispatched to Russia. German government ministers, from the chancellor down, are repeating the implausible statement that Vladimir Putin no longer has an excuse to reduce gas flows. The notion of an excuse is a very western concept. Olaf Scholz posed yesterday for an absurd photo shoot in front of turbine, an impressive-looking piece of mechanical engineering, very much in contrast to the diminutive and oddly twisted frame of the German chancellor. He says there is no reason, absolutely none whatsoever, for this turbine not to be send to Russia straight away. We suppose he is right, but so what? There are a lot of jokes in Germany about what to do with the turbine. Our favourite, from the cartoonist of FAZ, is to put it on a pedestal next to the Brandenburg gate, as a memorial to Germany’s failed Russia policy. There is not really much else that it can be usefully deployed for.

So why are the Germans going to these ridiculous lengths about this turbine? In doing so, they are violating the west’s sanctions regime. Ukraine condemned the decision, as did several central and eastern European countries. The damage that the silly turbine has done to European unity is significant because it demonstrates once again that Germany acts unilaterally with no regard to its neighbours. We are also not surprised to hear Annalena Baerbock make the exact opposite claim. She praised Canada’s decision to send the turbine to Germany as a contribution to European solidarity. The Germans have an interesting definition of solidarity.

The reason why everybody is acting so strangely is, of course, domestic politics. There are already voices in the SPD calling on the government to give in to Putin’s demand to open Nord Stream 2. This is something the German government cannot do even if it wanted to because the pipeline is not certified. So instead, they play this game of charades to demonstrate that they have done everything in their power to maintain a minimally sufficient level of gas flows. In an extreme scenario, where people die during a cold winter, they don’t want a discussion that they could have done more. This is not about depriving Putin of an excuse, but to avoid a domestic discussion.

We keep an open mind on whether current gas flows stay the same, go up or down. The one thing we know for sure is that the levels of gas flows are a political, not a technical decision. And that Putin, unlike Scholz, doesn’t need or care about excuses.

Nato membership for Sweden and Finland is not a done deal yet. This will depend on whether they can deliver on their anti-terrorism commitments to Turkey. It will also be intertwined with what happens to Kurdish opposition at home, according to Burcu Ozcelik, a Cambridge lecturer, in Arab Weekly.

To overcome the veto against their Nato membership, Sweden and Finland bent over backwards to give Turkey its anti-terrorism assurances last month. One of the pledges is the extradition of 76 Kurds, deemed as terrorists by Turkey. But this is not so easy. The question is whether the courts in Finland and Sweden have the same definition of a terrorist as Ankara does. There is also resistance from politicians, especially on the left. Theoretically, their Nato membership could still be stopped or delayed if the Turkish parliament votes against it. So indeed, their membership is not a done deal from a Turkish perspective.

The international deal with Sweden and Finland strengthened Erdogan’s cards at home. He is facing his own challenges with a tanking economy and sliding popularity ahead of next year’s presidential and parliamentary elections, coinciding with the centennial anniversary of the founding of the Turkish Republic in 1923.

Kurdish voters have been a significant bloc in previous polls and their votes have swayed tight elections, according to Ozcelik. Selahattin Demirtas, the jailed former leader of pro-Kurdish Peoples’ Democracy Party (HDP), wrote a passionate letter from his prison cell, saying that politics and violence does not go together and called on Kurdish groups to find new ways for a joint effort against Erdogan’s AKP party. He also called on his own party to seek an honourable peace within the unity of the country. The question is whether the Kurds will follow his advice. The HDP is a significant party with a mandate of 12% of voters. But the Damocles' sword is coming from Turkey’s Constitutional Court, which will review a case seeking to ban the HDP on grounds of its links to terrorism. Depending on the timing relative to the elections this could trigger an avalanche of more violence. The road towards peace with non-militant Kurds has many stumbling blocks, at Nato level and domestically.

The first Ukraine grain ship left Odessa a cargo with 26,500 tons of corn under a Sierra Leone flag, bound for Tripoli, Lebanon, with a stop-over in Istanbul for checks. It is the first Ukrainian shipment via the Black Sea since Russia invaded Ukraine in February, made possible under a deal brokered by the UN and Turkey. It is a first sign of hope for Ukrainian farmers and those threatened by food insecurity due to the war. But it is far from a normalisation of the situation.

The two big questions are whether grain shipment can be sustained throughout the year even if the war going on, and whether it can be scaled up to reach pre-war levels of grain exports.

As a starter Ukraine loaded sixteen ships with 580,000 tons of grains ready for departure. This first batch is still far from the 4-5m tons Ukraine used to export last year. Turkey’s government is optimistic that they could get 25m tons exported this way over the year. But that will depend on security and prices.

Ukrainian grain exports may take pressure off of grain prices around the world, but prices for Ukrainian grains could rock up any moment. The missile Russia sent to Odessa just a day after the grain deal was signed with the UN and Turkey was a warning, it immediately increased the insurance premium for grain shipping. Then there are storage issues. The summer harvest is in, and silos are full. If they are not discharged in time, other temporary storage places need to be found, with a potential loss in grain quality resulting. And finally, the agreement only lasts for 120 days, but could be extended if agreed to by Russia and Ukraine. Another moment when things could go wrong.

Turkey plays a key role in the enforcement of the deal. It is checking the Ukrainian ships that there is nothing but grains on their passage from and back to the Ukrainian ports. A special agency under the auspice of the UN and Turkey was put into place to coordinate the various shippings.

It is worth noting that Turkey concluded de facto two agreements, one with Ukraine on grain exports from Ukraine, and one with Russia covering food and fertiliser exports from Russia. Under the Ukraine agreement, safe passage of export ships would be allowed from the ports of Odessa, Chornomorsk, and Pivdennyi. Significantly, the agreement does not extend to the port of Mykolaiv, which accounts for about one fifth of annual Black Sea exports, but is closer to combat zones within Ukraine, according to the International Food Policy Research Institute.

In the second agreement Russia gets assurances from Turkey that its exports of food and fertiliser will not be affected by export sanctions. Russia is after all still a major exporter of agricultural products and fertilisers. Russia also has also geopolitical interests in Africa. On his recent tour in Egypt and Central Africa Russia’s foreign minister promised to fulfil their export contracts and heralded their balanced views on the war.

So the road to ensure Ukrainian exports making it through the year is hazardous and could be jeopardised easily. As long as both Ukraine and Russia have an interest in the agreement, there is at least a chance that both countries can contribute to alleviating the looming food crisis in the world.

Two years of pandemic changed the working world. Teleworking established itself during lockdowns, and introduced a new form of work organisation for many service providers. Some countries turned teleworking into a legal right that employees can reclaim when starting a new job. In Germany, 95% of larger companies with more than 500 employees are now offering teleworking contracts, while the numbers are lower for small and medium-sized companies with 46% according to an ifo and Randstad survey.

Enthusiasm for teleworking though is shrinking after two years though, according to a new study by Alliance Trade that interviewed 1000 teleworkers in Germany, France and Italy. Germans still seem to be the most enthusiastic teleworkers, but with a declining trend from 25% to 20% in one year. Italy has teleworking too, though less so. In France there is even a slight up-tick in its popularity, from 10% to 12% of those in favour of teleworking. The benefits are still the same as during the pandemic: reduced travel cost and time and flexible hours. But the downsides are starting to show up more clearly, now that the option to return back to work exists. Lack of social contact is increasingly perceived as a problem, with the number of respondents identifying this as an issue doubling to 28% compared to a year ago. Then there is teleworking's potential to blur the boundaries between private and work life, also doubling to 18%.

The lack of contact can create inequalities amongst workers in the sense that it compromises their chances to get promoted or to learn from others, warns the study. The occasional clues picked up whilst chatting next to the coffee machine are not replicable by scheduled meetings on Zoom. Learning is more than just textbook or trained knowledge. We also would add that remote working de-connects from the companies' narrative building. This can be a good thing, if the disruptive process is adding new ideas to the set. Or not, if employees are moving away from where it is useful for the company and there is not enough structure in place to bring them back in.

Here we are again: Turkey is increasing its tensions with Greece, rhetorically and with plans to dispatch a new drilling ship to the Mediterranean to search of natural gas in August. We remember before the pandemic when we followed Turkish exploration vessels on their maritime navigational path to see how far they would go to pass the disputed maritime boarders with Cyprus and Greece. The Greek coast guard was on high alert and at times it looked like a hot incident may happen any moment. It did not happen.

This year, we are back to drilling ships, but the geopolitical setup is different. There is a war in Ukraine that gives Turkey a crucial role due to its position at the Black Sea and its rights to grant passage through the Bosporus. Recep Tayyip Erdogan also kept its distance from the west and their sanctions. He is the only Nato member to meet with Vladimir Putin, and he holds the key to guaranteeing grain exports from Ukraine.

Greece and Turkey have a long history of quarrels and wars. They know how to keep several channels of communication open despite ongoing provocations. The question is one of balance and political opportunity. Earlier this year there had even been dialogue between the two leaders. But that soon turned into a blame game after Kyriakos Mitsotakis warned the US congress against delivering F-16 fighters to its aggressive neighbour. Now they are trading barbs in public. There is some political capital in this, as both countries will face elections next year.

Turkey has been disputing maritime borders with Cyprus and Greece, and where it is allowed to look for hydrocarbon resources. This is all about the exclusive economic zones islands have in the Aegean Sea. Turkey has long been of the opinion that islands are not entitled to EEZs, contrary to the position that most of the international community takes on maritime boundary demarcation. 

They could refer the case to be settled by international courts, but this takes years and may not be in their political interest either. After all, those drill ships are part of a regional power game. None of the parties may want to let go of an exercise that can rally their troops while poking at the other.

The battle between Russia and Europe for the hearts and minds in Africa is on. Sergey Lavrov blamed the west for worsening the food crisis in an op-ed he published shortly before his visit to Central Africa, citing its food shortages during the pandemic and western sanctions on Russia. Many African media outlets ran the piece unchallenged, and it became an instant hit on social media. Europe is no match against this well-orchestrated campaign of misinformation. The EU’s flight against misinformation is underfunded. Russia Today and Sputnik, sanctioned in the EU, are meanwhile increasing their presence in Africa. Emmanuel Macron’s visit to Central Africa, coinciding with Lavrov's, was to counter the rising influence of Russia.

Russia’s credibility in Africa rests on its anti-colonial history. Whatever Europeans say will have a colonial flavour attached to it. Whether something is true or not may not be relevant to readers as long as it is consistent with their narratives. And Lavrov did provide just that, courting them by heralding their balanced view on the war in Ukraine and encouraging them to emancipate themselves from former colonisers. Voting records at the UN illustrates just how divided Africa is: 25 out of 54 African countries refused to condemn the Russian invasion into Ukraine, 17 by abstaining, 1 voted against and five were not showing up for the vote.

Macron recognised the need to change the relationship with African nations. Already in his first presidency he demonstrated his willingness to address France’s colonial atrocities and repair relations not only with autocratic leaders but representatives of civilians and their diaspora. This week, on his visit in Cameroon, he promised to have a history commission look into colonial crimes committed by the French in Cameroon, and warned against Russia's misinformation campaign. Macron is also visiting Benin, another former French colony, and Guinea-Bissau with a similar message: don't trust what the Russians say. 

Lavrov, meanwhile, is actively promoting a new reality of a multilateral world system where Russia has its place. There are hard interests already: Russia is one of the main arms exporters to African states, and about 44% of African weapons import between 2017 and 2021 came from Russia according to the think tank Sipri. Lavrov also assured his counterparts that Russia will honour grain and fertiliser contracts. He promised to lobby for two seats for Africa in the UN security council. Together with China, which has major stakes in the economic development of Africa, the two could indeed tilt the geopolitical balance in Africa away from former European colonisers.

What both the UK and Germany have in common right now is the beginning of a discussion on the future economic model. Brexit can only work within the context of a new economic model - one that is not based on trade relationships in physical goods. If it does not happen, there is no point, and Brexit would best be reversed.

The German model of industrial production is also not sustainable because of its exposure to obsolete technologies, Russian gas, and Chinese kindness. Germany’s Neo-Mercantalism has been, and still is, the single biggest obstacle to effective European integration.

In the UK, the Tory leadership election brought up an unexpected discussion about the country’s economic model when the forceful Kemi Badenoch called for the break-up of the Treasury, and a complete re-think of industrial policy. She did not win the contest, but she has established herself as the voice of future conservatism. For now, she is closer to Liz Truss than Rishi Sunak, whose orthodox economic discourse reminds us of what Keynes referred to as the Treasury view.

In Germany, the Greens tried to talk about a post-industrial society, not exactly a concept that caught fire in the last elections. But as gas becomes a scare resource, and as the EU reassesses its relationship with China, that is exactly where the country is heading towards.

The difficulty about this fourth industrial revolution - after the steam engine, electricity, and microelectronics - is that its contours are not entirely clear for everybody to see. This is the world of next generation technologies - from deep learning, robotics, renewable energies, virtual reality, a revolution in food production and genetic engineering to name but a few.

Germany and the UK, with their strong presence in engineering and science respectively should be well positioned, but in both countries there are formidable obstacles. We recall from our experience how large steel companies in the Ruhr area during the 1980s mopped up employment to such an extent that cities like Dortmund struggled to attract new companies from other sectors. It was the decline of the steel industry that brought change. Translated into today’s reality: without a decline of the 20th behemoths like Volkswagen, BASF and Bayer that transition may not happen. In Germany, you don’t win elections when you position yourself against industry. Just look at how the German media establishment, with its uncritical proximity to industry, rounded on Anna Baerbock during the last election.

The industrial revolution is happening right now, whether or not the UK and Germany make the transition. The question is only to which extent we take part in it. We Europeans missed almost all things digital. We are lagging in artificial intelligence. Germany and the UK are doing much better in biotech, as evidenced by the recent successes of Astra Zeneca and Biontech. An area where Germany could excel is environmental technology, not least because of the dire national emergency that is now caused by the cut in Russian gas supplies. In the long run, we think that a gas embargo is a fantastic opportunity, precisely because it kills old business models and necessitates innovation. The last thing Germany needs right now is continuity in the form of yet another diesel engine.

We are not there yet. The discourse is still some way off. We noted an article in FAZ this week, about the German government’s wish for industry to become less dependent on China. It is good that this stuff is at least talked about. We noted the journalist arrived at a sceptical conclusion on the grounds that the companies concerned did not follow the government’s advice, and continued with the China activities unperturbed. The big misunderstanding here is that disruption is not about existing companies. German companies have been mollycoddled, often without their own awareness, by a foreign policy that was geared primarily to their interest. As that protection wanes, the risks of an excessive China exposure are becoming obvious. They will either get caught out during a crisis, like the gas lobby in Germany right now. Or they will end up being gobbled up by the Chinese. What is not fully understood in Germany is that disruption is disruptive. This is Schumpeter stuff, not social market economy. It may come from the top, but don’t expect the existing generation of widget makers to lead this.

We conclude that the seeds of disruption are sown in both countries, but they will take some time to sprout. The concept of disruption has not yet reached the chattering classes. The accumulation of new technologies constitutes a massive opportunity for investors, especially now that asset prices have fallen. In the meantime, we would urge readers to reflect on where the future value-added will come from. We think the share of value-add from physical goods, and from existing business will decline significantly this decade and next. It will also impact how we look at economic and industrial policy, and at European integration.