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21 March 2025

What are we defending?

Our briefing this morning looks at divisions within the EU on defence and security policy, which we think are based on the lack of a common objective; we also have stories on the OECD's alarm over sovereign and corporate debt; on attempts in France to depoliticise its pensions debate; on the return of more severe US sanctions on Iran's oil industry; on the ECB getting serious about stablecoins; and, below, on the EU's surrender in its trade war with the US before any shots have been fired.

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Today's free story

EU caves in on trade retaliation

The EU raised the white flag even before the battle commenced. It is a good thing too. Maros Sefcovic, the commissioner in charge of trade, announced the decision to postpone the EU retaliatory package from the end of this month until mid-April. This puts us past the 2 April date, which Donald Trump has earmarked for the retaliatory sanctions. If there is no deal, the EU would recalibrate, according to Sefcovic. Recalibrate? We think fold is a better word.

What happened is that France and Italy got scared at Donald Trump’s threat to tariff EU wine imports at 200%. Interesting that France is now the camp of the trade-retaliation sceptics. Francois Bayrou said last week it was a mistake to impose a tariff on US whisky. This is interesting coming from the prime minister of a country that traditionally supported activist trade agendas. It is interesting in particular that Bayrou singled out whisky, and not motorbikes. In trade war battles, whisky is paired with wine and champagne, whereas motorbikes are paired with cars. The EU is folding because its member states care mostly about their own industries.

The big misjudgement in Brussel is that Trump will negotiate once we impose counter-tariffs. He did it last time, but this is different. He has different agendas with different countries, as we see most clearly in Canada. The EU has something like a €230bn goods trade surplus with the US and is dependent on the US for its own security. This puts him in a stronger position. The EU has no leg to stand on in a trade war, unless we are willing to slap sanctions on US imported services and are ready to live the consequences of such a decision. Or alternatively, we can recognise that we cannot win this trade war, and should therefore not fight it, and instead think about other policies to mitigate the impact.

There are obvious parallels to the way the EU approaches the Russia/Ukraine war. The absence of end-game strategies has become a defining characterisation of EU politics. We do not act, but react. This is how you lose wars, both trade wars and real ones.

20 March 2025

More war, not less

A lot has happened in the Western democratic world this week. Israel resumed war in Gaza and the US struck several targets across Yemen with a threat to Iran. Germany voted for a massive increase in defence outside the debt brake and the EU slammed the door on using its additional defence funds to purchase US arms. On Ukraine, Donald Trump and Vladimir Putin agreed on a partial ceasefire. Turkey, meanwhile, steps up its role in Syria and tightens its grip over political opponents at home. Does this look like a world getting ready for more peace? We see more power politics, a division of worlds, and no path to peace.

The conflict in the Middle East is set to escalate. The US and Israel are together affirming their powers in the region. Yesterday defence minister Israel Katz gave a final warning to Gaza residents saying they should head Trump’s advice to throw Hamas out and return the captives, otherwise they face destruction of the strip never seen before. This morning we read in Haaretz that the IDF dropped alarming leaflets in Gaza saying that the world will not change if all the people of Gaza vanish. This is Trump’s Riviera plan on steroids.

By bombing Yemen, the Trump administration pressures Iran to rein in their proxy, the Houthis, in Yemen. The US warned that they will hold Iran accountable for disruption to international maritime traffic by the Houthis in the Red Sea. And the US also gave Iran an ultimatum of two months for a new nuclear deal. Marco Rubio said the US would choose war over Iran having nuclear weapons.

Over the Ukraine conflict, the most striking feature was the shift in geopolitical power. The rapprochement between Donald Trump and Vladimir Putin created a new reality for the EU and Ukraine. Russia is back as a world nation, negotiating for itself and China a new relationship with the US, with profound consequences for Europe. This week Trump and Putin agreed on a partial cease fire in a two-hour phone call. Russia kept its red lines, a stop of weapons deliveries to Ukraine and demilitarisation as a condition for a full ceasefire. Russia did also not see itself bound by what had been agreed, and continued bombing Ukraine’s infrastructure. It will decide on its own terms when the time is right.

At home the US administration is crossing one red line after the other. The Trump administration is flooding the zone with outrages about detaining legal migrants and threatening judges. There is still an unshakeable trust in the US democratic system, with its checks and balances. With the avalanche of executive orders that surpass what any president before him had ever done, Trump wields and consolidates his power. Loyalty to the president is the new yardstick. 

Talking about peace but acting otherwise to force their way, leaders like Trump, Putin, Netanyahu and Erdogan thrive while everyone else gets increasingly exhausted. Playing for time is a strategy Netanyahu and Putin know very well.

Europe will have to find its way forward alone. Yesterday Emmanuel Macron agreed on a two-state solution conference with Saudi Arabia. It is a first step but words have to be followed by actions. As long as EU member states remain disunited on how to respond to what goes on around us, they are not going to sit at the adult table of geopolitics.

19 March 2025

End of ceasefire in Gaza

Israel’s surprise bombardment of Gaza yesterday killed over 400 and injured many more. After two months of ceasefire, these massive air strikes are unlikely to be the last.

Benjamin Netanyahu said that further negotiations will only happen under fire. Mediators have reportedly been pushing Hamas to release Israeli hostages in exchange for a de-escalation after the strikes. Israel’s strikes and the end of the ceasefire bring Gaza back to the front of international politics just when Donald Trump was focussing on ending the war in Ukraine.

Internal political dynamics suggests that even in the best of cases there is no return to the cease fire any time soon. Itamar Ben-Gvir was reinstated as National Security Minister within 24 hours of the bombardment. Ben Givr quit when the government agreed to the ceasefire deal. Now that Ben Givr is back in government, Netanyahu cannot simply return to the ceasefire. He also needs Ben-Gvir’s party to pass the state budget on 31 March. Failure to get parliament’s approval by then would bring down the government and require elections.

What deal would there be to return to? Israel had signed the US three-stage plan for ending the war and freeing the hostages. Yesterday Israel reneged on its signature to this deal after it failed to get a better one. Israel wanted to extend the first phase and an earlier hostage release, but Hamas insisted on the initial deal. Hamas refused to release further hostages without entering into the phase 2 of the deal, which would have entailed a permanent ceasefire.

The two sides are thus once again stuck. Hamas rejects everything that is not an internationally guaranteed permanent ceasefire. Israel has no post-war strategy. It refuses to let Hamas be in charge in Gaza yet rejected all alternative proposals for Gaza over the past year, writes Al-Monitor.

What about the US? Netanyahu is about to recast himself into Trump mould. Netanyahu fired Ronen Bar, the head of Shin Bet, Israel's internal security agency, accusing him of disloyalty. He also stated his intention to fire the country's attorney general. Netanyahu had to attend hearings in a corruption trial involving his staff members. There are renewed mass protests against him too. Trump’s Riviera plan has been embraced by the government, including far-right parties, while the proposal from the Arab nations, backed by the Europeans, was immediately dismissed. Will acting like Trump and working on implementing his plan guarantee Netanyahu the backing of the US administration?

The US president has his own people to answer for. He promised peace once in office. If the war were to resume in full, this would then be a war under Trump’s watch that he can no longer blame on Joe Biden.

18 March 2025

Could Russian gas return?

It has not been a fun winter if you are a European gas buyer or consumer. A relatively cold winter has meant that storage facility levels have fallen below those of the previous two years. European countries are still trying to figure out if we’ll have mandatory gas storage refilling targets in subsequent years. We’ve at least partly swapped a dependency on Russian gas for one on US liquefied natural gas.

One cause of these problems has been the way the Europe-Russia energy relationship blew up, both figuratively and literally, after Russia invaded Ukraine in 2022. But, as Vladimir Putin and Donald Trump prepare to talk about peace negotiations, could the gas eventually come back? Russia is clearly interested in exporting more of its gas back to Europe, to try and regain the markets it has mostly lost. Gazprom also has plenty of spare production capacity, and an ability to ramp this up quickly.

But there are two big, overarching questions. The first is how this gas will actually get to Europe. Nord Stream 2, directly from Russia to Germany, never came online. Both it and the first Nord Stream pipeline were damaged by an undersea explosion in September 2022, and would need to be repaired before being operable.

Yamal-Europe, another pipeline that runs via Belarus to Poland and then on to Germany, is also out of action. This is because of disputes between Gazprom and the Polish operator of the line. Consequently, the Polish government ended its intergovernmental agreement with Russia to buy gas via Yamal-Europe. To transit gas on to western Europe, this leaves the Ukraine transit network. There would need to be a new agreement between the Russian and Ukrainian government, as the previous one expired at the end of last year.

Another is what kind of contractual arrangement the gas would be sold under. Gazprom previously preferred signing long-term contracts with European buyers. But this caused problems for these buyers during the gas shut-off that occurred through 2022. Several of these buyers, most notably Uniper in Germany, were left in a very bad financial position after having to buy gas on the spot market to cover off lost Russian gas.

It's possible that Russia makes European buyers an offer they cannot refuse – gas at such a cheap rate that they cannot possibly say no. But there are still clear risks to signing long-term contracts that these buyers would at least need to consider, or get another counterparty involved with to mitigate. Trust is the most valuable commodity in any industry. Once it has been lost, it takes a long time to regain.

17 March 2025

In sickness and health

European governments face the following situation: low economic growth, an imperative to spend more on defence, already high taxes, and increasingly high welfare spending. Holding all of these together are not fiscally sustainable, and something will have to go. But figuring out what that something will be, or how it is going to work, is not easy politically. We can already see that in Germany’s turn to debt-spending, Italy’s own equivocation about higher defence spending, and what feels like the millionth French pension debate.

Now, in the UK, the issue is what to do over welfare budgets. Since the pandemic, there has been a sharp increase in certain kinds of benefits claims for long-term sickness or disability in the UK.

Personal independence payments (PIP) claims have gone up by 67%, or 310,000, from 2018-19 to 2022-23. The Office for Budget Responsibility’s own projections are that spending on PIP will rise from £18bn in 2023-24 to £34bn in 2029-30. It also expects that claimants will go up from 2.7m to 4.2m. Although it is possible to claim PIP benefits whilst working, only about a sixth of recipients do so.

A rise in disability benefits causes two issues for the government, which compound each other. The first is that, rather obviously, more people claiming the benefit puts extra fiscal pressure on the government. This is already at a time when low growth and persistently high interest rates are squeezing its own room for manoeuvre on fiscal policy.

The other is the impact it has on British labour force participation. Since the pandemic, long-term sickness has been a drag on the UK’s labour force participation rate, and the country has seen an increase in economic activity. This is despite an otherwise very tight labour market, with an unemployment rate of 4.4% in October to December of last year.

Labour wants to change the sickness and disability benefits system to try and get out of this quagmire. But it will be difficult to do so, given opposition within their own party. One discussed option was freezing PIP so that payments do not rise in line with inflation. But there was significant opposition to this from backbench MPs. The government, we think, is likely to try softer options, like changes to eligibility criteria and a so-called right to try that makes it easier for PIP claimants to work without losing their benefits.

This may be more politically feasible, and sensible policy-wise, than a broad-based freeze. But the question is whether the government can come up with a series of more palatable reforms that add up to the £5-6bn that Rachel Reeves wants to cut from welfare in the next spring statement. She will be delivering the statement on 26 March, not giving the government much time to figure out what to do next.

Ultimately, Sir Keir Starmer and Reeves' problem with PIP is that like an increasing proportion of the British populace, the British state itself is pretty sick, in a way that goes beyond this. Whether you're looking at pensions, the court and prison system, university funding, or healthcare, the UK has numerous issues that could, at any time, flare up at great difficulty and expense. Underlying all of this is poor economic growth, and the UK's persistent inability to find a post-2008 economic model. Bad growth begets bad choices, which beget bad policy. 

14 March 2025

How not to win a trade war

"Them good old boys were drinkin' whiskey and rye", wrote Don McLean in American Pie. In Europe, the good old boys soon no longer will when a 25% tariff applies to American whiskey from April. And any successors of Hannibal Lecter in the US will have to seek alternatives to fava beans and a nice chianti when Donald Trump makes good on his threat to impose a 200% tariff on European wine.

The Europeans need to stop hyperventilating, and start thinking this through. Trump takes two seconds to respond to EU's trade retaliation, while the EU is like a chess player that can only think about the next move. It is true that there are no macroeconomic winners in trade wars. But not everybody is losing to the same degree. The US is the relative winner. And politically, Trump is the absolute winner.  

What we find striking when visiting New York or Washington, DC, is the dominance of European wines in restaurants and bars, as well as European cheeses. The Europeans have not opened up their agricultural markets to US beef and US wine to nearly the same extent. Trump will not exempt the EU from the steel and aluminium tariffs. So unless the EU backs down from tit-for-tat retaliation, targeted specifically at industrial companies in Republican dominated states like Kentucky, the US will almost surely retaliate. The regime of reciprocal tariffs, which will be announced on 2 April, will make retaliation automatic. The EU - mercifully - does not have such a regime, but needs to take into account that we are dealing with an adversary who does. This dispute is not going to be settled on chairs in the Oval Office. Jean-Claude Juncker staved off a trade war when he famously promised that the EU would start importing soy beans, which it already did. Tricks like these no longer work. We take Trump very seriously in his determination to reduce the bilateral trade goods deficit.

A 200% tariff on wines and champagnes would effectively kill European wine exports to the US. Every price would triple. France would be most affected. The car tariffs will hit Germany the most. The US is by far the largest source of European exports. The UK, another willing absorber of other people's surplus savings and exports, is no longer in the EU. And China is playing the same surplus game that we do. The most urgent thing for EU leaders to do is not to have another meeting with Volodymyr Zelensky, or agree on round two in an unwinnable trade war, but to discuss the future of the European export-based economic model when the rest of the world no longer wants to absorb our trade surpluses. 

Unless of course, we really want to take this to the brink, and start slapping tariffs on imported services from the US. We would keep an open mind on this matter, but it would take quite a bit of gumption to see this through. US restaurants can offer American wines if the French wines are priced out of the markets. There is a wide variety of US-made cars. But we Europeans don't have our own versions of X, Facebook and WhatsApp.

13 March 2025

The Irish diplomat

Ireland’s prime minister Micheál Martin was the first leader from the EU to visit Donald Trump after the bust-up with Volodymyr Zelensky in the oval office, on St Patrick’s day, just when the EU enacted its retaliatory tariffs on the US. As an Irishman, Martin just knew how to create a good vibe despite tensions by focussing on the long and positive history of the US-Ireland relationship. He commended Trump for his unrelenting focus and energy in bringing peace to Ukraine and the Middle East. Martin also strikes a conciliatory tone on the trade front, assuring that there is room to negotiate a deal that brings investment back into the US.

In that sense, Martin is on his own peace mission, to find a solution that keeps US companies in Ireland, and as a mediator between the EU and the US.

Trump has a problem with Ireland's massive trade surplus against the US, €72bn in 2024 and the fourth largest the US has against any country. But, as John McManus pointed out in his column for the Irish Times, the focus on tariffs hides a more subtle reading. Because for Ireland, the more important goal is to keep US companies in Ireland.

The trade surplus relates to physical goods, which is more than counterbalanced by imports of services, with a deficit of €149bn resulting in an overall trade deficit. Much of the trade surplus comes from US-owned companies supplying chemicals, drugs, and medical devices back to the US. It is Ireland’s guaranteed access to the European single market that makes shipping drugs back to the US profitable.

Getting those US companies back to producing at home would not be difficult for the US administration. Trump could change the intellectual property rights laws that makes it profitable for the IT companies to stay there. Or he could pull off something similar to the Chips act, just for drugs. Would Trump do that? This could be politically and fiscally costly. The Irish are part of the DNA that makes up the US society. If he were to drain Ireland of US companies, he may lose Irish-American votes in the US. Martin’s red line is that he cannot compromise his country’s membership of the single market, as this is one of the main selling points for international companies to move to Ireland. A compromise will have to be worked out, which may have to include some outside the box thinking. The pharmaceutical US companies already started to increase their investments in the US, assured Martin. Maybe, this is the way to go.

12 March 2025

Syria, a turning point

The massacres in the coastal region of Syria last week were a warning shot and a turning point for the new regime. Authorities moved quickly to contain the fallout by setting up one independent committee to investigate the violence, and another to rebuild civil peace with members of the region, including Alawites. Within 24 hours of the events, the integration of autonomous regions into the new state apparatus was also suddenly possible. Ahmed Al-Sharaa, Syria's new president, signed an agreement with the commander of the Kurdish forces to integrate them into the central state institutions. A similar agreement has reportedly has been reached with the Druze in Al-Suwayda, though no details have yet emerged.

According to Muhsen al-Mustafa, the attacks were the first organised and large-scale insurgency led by a former pro-Assad military leader, Brigadier General Ghiath Dalla. He was allegedly seeking to impose a reality similar to the autonomous Suwayda in the coastal region for the Alawites. In his interview with Diwan, al-Mustafa also suggested that the insurgency was supported by Iran, with whom Dalla had worked closely in the past. This will probably not be the last attempt to disrupt the nation building in post-Assad Syria. Several other big geopolitical players, such as Russia, Israel and Turkey, play a key role here.

Last week’s sectarian violence is a reminder of the difficulties of integrating diverse communities and ensuring transitional justice. Nearly five months since the Assad regime fell, Syria cannot afford a weak government. The Europeans also have an interest in supporting state-building there as much as they can to improve conditions for Syrians at home. Germany seems to be on the ball. Within 24 hours of the committees being announced, the German envoy Stefan Schneck met with one of the seven judges, who are to investigate the events in the coastal region. According to analyst Benjamin Fève, Germany is setting the pace for European efforts in Syria. The question is: will this continue under Friedrich Merz?

11 March 2025

What about China?

In the commentary about the rapprochement between the US and Russia, China represents the large negative space of this relationship. China does not need to be part of this media blitz, but behind closed doors, China is gently reminding Russia that there are three powers at the table, not two.

To see the US-Russian relationship solely in its historical context would be a mistake. China had no major role to play in the Cold War, but it does hold many cards in its hand today. For Russia, an exclusive focus on the relationship with the US would make no sense in the current situation. And China has its own interests.

China backed Russia when the western world slapped sanctions on it after its invasion in Ukraine. Its bilateral relations increased on the economic and military front since then. Why would Vladimir Putin put all his might behind a fickle US partner across the oceans, when China turned out to be a reliable neighbour?

The joint military drill by Iran, Russia and China in the Gulf of Oman is a reminder that nothing has substantially changed on the ground. This is the fifth year of this kind of drill in a strategic location that links the Indian Ocean and the Strait of Hormuz, through which more than one-quarter of the world’s seaborne traded oil passes. A show of strength and a practice in cooperation between three autocratic nations.

A lot depends on what the US administration hopes to achieve in the long term. If it is serious about reconnecting with Russia not only for the sake of a Ukraine peace deal but also economically, trust will slowly have to be nurtured over time. This is not achieved by a couple of phone calls between Donald Trump and Vladimir Putin. And it would to involve Xi Jinping in some form.

10 March 2025

Middle East tremors

The Middle East is heating up again, and big players are moving their positions in the region.

The Syrian government is struggling to contain violence against Assad’s Alawite minority, where hundreds have been killed over the past few days. New violence also means a new wave of refugees towards Lebanon, far from being in a stable position, and perhaps further to Europe over the Mediterranean sea. The Europeans are not ready for another wave of refuges, nor do they have the means or foreign politics to prevent such an outcome.

Syria’s troubles put the spotlight on Turkey and its superimposed patronage role in Syria. This is already irking the Arab nations in the region and Israel. Will the EU try to pay Lebanon and Turkey to hold back migrants again? This would not solve, but could instead potentially aggravate, the instability in the region. At home the threat of more migrants could also make it easier for far-right parties to exploit.  

There are also shifts in the hostage deal. Donald Trump’s administration started to talk directly with Hamas about the hostages, a move inconceivable in Israel’s political establishment. US hostage envoy Adam Boehler defended the move in the press saying that the US is not an agent of Israel and has its own particular interests. In other words the US is its own boss. Will Israel’s government speak up against it? After the scene with Volodymyr Zelensky in the oval office and the cut-off in intelligence and aid to Ukraine afterwards, Benjamin Netanyahu won’t do to Trump what he so often did to the three Democratic presidents before him.

And then there is Europe. Last Saturday, foreign ministers from France, Germany, Italy and the UK  came out in support for Egypt’s Gaza reconstruction plan, which is backed by the Arab League.

The proposal envisages a five year reconstruction effort for $53bn without displacing Palestinians from Gaza, a technocratic governance during the transition period without Hamas, and a two state solution clearly on the horizon. It is still too early to tell what the European backing means in concrete terms, but it is the first time they openly endorse a proposal that is rejected by the US and Israel.

The humanitarian situation in Gaza, meanwhile, is getting worse, as no aid gets through for a week now. Israel also decided to cut electricity that is essential for desalination plants in Gaza for drinking water. The pressure from Israel is part of the plan to make the place as uninhabitable as possible to get people to move out. Trump’s Riviera plan is still on the table. And the geopolitics behind this is shifting, with the US playing its Trump cards in the Middle East and Ukraine.