13 February 2025
We're on our own
In our lead story today we look at what Donald Trump’s plans for Ukraine means for us Europeans and how Vladimir Putin could react; we also have stories on the collapse of coalition talks in Austria and what comes next; on the French interior minister running for the Gaullist leadership just like Nicolas Sarkozy did before him; on the practical difficulties behind political decisions to build more nuclear reactors; on why the Spanish proposal of another recovery fund is a really bad idea; and, below, on what game Trump could be playing with us on tariffs.
Today's free story
Tariff Day
Donald Trump will today announce the reciprocal tariffs, according to his press spokeswoman. We are not sure whether his separate threat to impose tariffs on cars, semiconductors and pharmaceuticals fall under this, under a separate category, or both. The EU levies a 10% tariff on imported cars. A reciprocal rule would introduce a 10% tariff on EU imports, but Trump may seek bigger tariffs. In 2023, the EU exported cars worth €56bn to the US, and some €92bn in pharmaceuticals. Machines and chemicals are other sectors in which the EU runs large trade surpluses with the US.
The EU's entire trade surplus with the US is a little over €200bn. If Trump wanted to plug most of it, he would need to do more than reciprocal tariffs. From a European perspective, it would cancel the competitive advantages of a weak currency. We conclude that this is not going to do the heavy lifting.
A small reciprocal tariff may well be compensated for by an increase in the dollar-euro exchange rate, so that the impact of the tariffs is mostly neutralised. The question then becomes: what does Trump want from Europe?
We hear a number of progressively implausible suggestions from European policy makers, like Germany's finance minister, Jörg Kukies, who thinks that we can import US hydrogen. The newspapers report this without doing the maths. The entire US production of hydrogen is 10m tonnes. At a price of $5 per kilo, this translates into a total production value of some $50bn. Only a fraction of that will be available for export to Europe. There is no way the EU can credibly plug an export surplus of $200bn with gimmicks like these.
We don't think the Trump administration's goal is to take the EU's surplus down to zero, but we struggle to see how the EU's trade surplus can be plugged by purchases of gas and hydrogen. They will be part of a broader equation.
So would defence goods. In 2025, EU GDP is projected to be some $20tn. If 1% of GDP was spent on arms imports from the US, that alone would plug the entire EU trade surplus. But it would increase Europe's dependence on the US further.
We think the EU would be better off developing its own defence industry, and manage defence spending through a defence procurement union. And weaning itself off its export dependence as a source of economic growth. Given the constraints the EU has imposed on itself in fiscal and financial policies, it looks to us that this will end as another game, set, match contest for Trump.
12 February 2025
Could Trump be right on trade?
We have been writing about global imbalances for almost 20 years. China and Germany run economic models that systematically depress consumption, and in Germany’s case investment too, as a result of which the two ended up with large savings and current account surpluses. The US, and to a lesser extent the UK, were the big absorbers of other people’s savings surpluses.
There is no rule that says that the current account between countries need to be balanced at all times. But large and persistent trade imbalances are something different. China and Germany have been running a Mercantilist systems. Neither country has made any attempt to bring down their surpluses.
There are only two ways to address the issue of global imbalances. The surplus countries adjust voluntarily – or the deficit countries refuse to absorb the excess savings. The first never happened, and will never happen. The whole of Germany thinks that trade surpluses are a wonderful thing. It’s like winning the football game every time.
Trump is clearly not focused on global imbalances, but about bilateral balances. This is generally not a good idea, but it can succeed in this case because most of the US deficit is accounted for by only a few trading partners – of which the EU is one. What makes his trade agenda serious is his concomitant attempt to bear down on government spending, which addresses some of the deep causes behind the imports of other people’s savings.
We came across a very interesting blog post by Matthew Klein, who makes the point that the large current account surpluses of Edwardian Britain – like in China and Germany today - reflected deep economic problems. They point to an unhealthy distribution of income, and they also pose risks for the US, as it fosters de-industrialization and currency overvaluation.
So we should at least address the question whether Donald Trump has a point, rather than hyperventilating and trying to fight a trade war we are bound to lose. Reciprocal tariffs, which he now appears to be leaning towards, are not illegal under WTO rules. It is the EU, and the UK, that impose a protectionist 10% tariffs on cars, which together with regulation to comply with safety standards that were specifically tuned to cope with high speeds on German motorways. The UK missed a big trick with Brexit. They could have opened up their car market to cheap imports.
11 February 2025
Trump talking business
Donald Trump surprises us every week with new shocking moves at the domestic and international front. Observers psycho-analyse, they try to get into his head to understand why he did what he did and where he would be ready to take his battles. We are reminded of a similar episode shortly after Vladimir Putin invaded Ukraine. One of the main differences is that Putin created facts on the ground and started to take land by force, while Trump talks about buying the land to create a new seaside resort in Gaza and building nice houses for the Palestinians in neighbouring Arab countries.
Putin does war, Trump talks business. Both want to own the land, but while one causes physical destruction, the other just wants to build on what Israel left behind. In Putin’s war, people are dying, in Trump’s battle it is ideas and identities. Both men are testing the limits of the law. Which one is the more powerful, which one is the more ruthless? When it comes to ruthlessness everyone would point to Putin. But in terms of power, Trump could be winning this contest. Putin used his military while Trump uses his words as his weapon of choice.
Trump plays with the imagination of the people, who project their worst fears or best hopes on it. He still has not yet moved to action, thus he still has the whole potential of options from which to chose. He waits for others to react first.
Trump is selling his relocation plan of the Palestinians away from Gaza as a benevolent act and is confident that Egypt and Jordan, or Saudi Arabia, will agree eventually to a deal, if not voluntarily then by bullying them into accepting one. The King of Jordan is in Washington this week to plead with the US president not to proceed. Egypt also says no on many different channels. Trump already publicly reminds them that this would be the quid pro quo for the billions of aid to their country.
The US president also bragged that Saudi Arabia would accept normalisation with Israel without a Palestinian state, and that the bill for the clean-up for Gaza would be paid by the Gulf States. That irked the Saudis. Riyadh issued a statement shortly after insisting that Saudi Arabia would not accept normalisation without efforts towards a Palestinian state. On Sunday they warned that these statements should not divert attention away from the crimes Israel committed in Gaza. They said Israel does not understand the Palestinians' emotional, historical and legal connection to this land. Is this a break in relations?
Crown prince Mohammed bin Salman or MBS had build his path to power on good relations with the US and Israel, writes David Hearst, editor of the Middle East Eye. He kept his kingdom quiet throughout the 15 months of war in Gaza. But the words from Washington and Tel Aviv are now forcing Saudi Arabia’s foreign policy to revert back to Arab nationalism. From their view it is only a matter of time before Israeli expansionism destabilises the whole region with significant consequences also for Saudi Arabia.
The Abraham accords in Trump’s first term were negotiated as an anti-Iran pact. Now that Iran is weakened and Syria is no longer in its fold, Saudi Arabia does not have the same interest in such an accord. MBS has also established himself as a powerful and modernising leader in his kingdom. He may not personally care about the Palestinian issue, but 70% of his people do. So Arab nations may not so easily fold into this plan, as Trump and Benjamin Netanyahu make us believe. Peace by force is a no go for them.
Trump wants to end the war in Gaza, Netanyahu wants to prolong and extend it. The US administration eventually has to decide whether they want to be drawn into a religious conflict that it not theirs and support Israeli expansionism. It will be up to Trump and his administration to decide whether business means war just with other means and whether they are ready to pay the price for it. But even if this plan does not come to fruition, it will have affected the political dynamics in the Middle East. It will also be a measure of Trump’s threat potential and a test of his power beyond US borders.
10 February 2025
Who cares about TV debates?
We heard a claim yesterday from a seasoned BBC journalist that an interview helped end Margaret Thatcher’s career. Our own recollection of the period was rather different. Her end was triggered by a combination of the poll tax, deep divisions in her party in the run-up to the Maastricht Treaty, and a general sense that 11 years is more than enough.
The media have a tendency to overplay their role, and that is even more the case today, where their influence is seriously diminished. As we saw in the US election campaign, and in Germany yesterday, TV debates are irrelevant to the dynamics of an election campaign. In the US, they have no impact on the result any longer. By the consensus of media commentators, Donald Trump lost the two debates against Hillary Clinton, and the one against Kamala Harris, and went on winning the elections.
A little over a week ago in Germany, the media had been running a relentless campaign against Friedrich Merz over his decision to introduce legislation on migration with the backing of the AfD. Normally a campaign of such magnitude would have ended the candidate's political career, but the polls did not move one small bit.
The legacy media still have one important lingering role. They remain an important echo chamber for political insiders. A TV debate did end the political career of Joe Biden, because his own people lost confidence in him. We recall the role the media played in the downfall of Boris Johnson. Their relentless campaign against him had little effect on public opinion, but it goaded Tory MPs into replacing him – an act of political backstabbing from which they never recovered. Modern political campaigns are won and lost on social media, on YouTube, on podcasts, on Substack, and the other post-legacy-media formats that roam our debating space today.
7 February 2025
Plugging in
Efforts to water down the EU’s 2035 internal combustion engine ban are already underway, and gaining some traction. According to reporting from Der Spiegel, a possible compromise has been found. Plug-in hybrid cars and electric cars with combustion-powered range extenders could still be sold beyond 2035. The key intermediary between the EU institutions and the car industry has apparently been Eckart von Klaeden, a former minister in one of Angela Merkel’s governments. In classic revolving-door fashion, he now works for Mercedes-Benz.
We think it is at least plausible that this could come off. According to Der Spiegel’s reporting, progress on this within the EU institutions is already quite advanced. Links between Mercedes-Benz and the wider car industry are solid: Ola Källenius, Mercedes-Benz’s CEO, is also president of Acea, the European automakers’ association.
It would also, at least on the surface, make sense as a compromise. Both plug-in hybrids and range-extended electric cars can run without the use of petrol for most trips they take. But they also incorporate combustion engines for longer trips, the bread and butter of Europe’s big automakers. Plug-in hybrids use their petrol engines to power the car directly, whilst range-extenders use it to recharge the car’s batteries.
The logic there makes some sense. Both are an intermediate step to electric cars, and can alleviate some of the consumer concerns about range. The big Chinese automakers also trade in them. China’s definition of so-called new energy vehicles, and their statistics on their adoption, include plug-in hybrids. BYD, the largest of the bunch, sold 2.49m plug-in hybrids last year, compared to 1.76m battery electric cars.
We are not sure, however, that this will solve the European car industry’s woes. In the long term, we cannot see the much more mechanically complicated plug-in hybrids winning out over simpler electric cars as battery technology improves and manufacturing processes scale. The value-added is also still in the software, an area where European carmakers continue to lag behind. The Chinese firms can produce plug-in hybrids more cheaply too, further eroding our advantages.
What this does do, however, is potentially create more uncertainty in the industry. The point of having the target in the first place has been to create some long-term certainty about demand prospects for these new technologies. Messing with the targets undermines this objective. We are no fans of the EU’s various regulatory overreaches. But we also think that the 2035 ban is far from the most egregious one.
6 February 2025
AfT - Alternative for Tesla
E-car sales in Germany rose in January by over 50%, compared to January 2024, and yet Tesla’s sales declined by 60% in the same period. Its market share declined from 14% to 4%. This is as dramatic as the decline of German cars in China. Compared to four years ago, Tesla sales in Germany are down 59%, and there are similar declines recorded in France, though sales in the UK are holding up.
One factor is surely that the company is about to launch an update of its best-selling model, while competitors have just introduced their own updates.
But as Handelsblatt reports, the Tesla brand is starting to have a reputational problem as it is becoming increasingly associated with the AfD in Germany. Company directors, who in Germany seem to care greatly in what type of car they are seen when they drive into the executive parking areas, do not want to be caught dead in a Tesla. A dealer estimates that three out of ten second-hand car sales of Teslas are motivated by political reasons. Another interesting snippet of information is that Tesla’s reputation has increased with AfD voters. The trouble is that the AfD voters are not your classical electro-mobility type.
Some European media speculate whether the recent decline may have something to do with the boss taking his eyes of the ball and leaving the operational management of his companies to his underlings, while he is running the new government efficiency department.
We wondered a few years ago whether Musk did himself a favour by locating his main European Tesla plant in eastern Germany, not exactly a hotspot of car engineers and high productivity. With sales volumes and profit margins falling, the question may arise whether Tesla would be better off importing the cars into the EU.
An alternative strategy would be to build on Musk’s association with the AfD. As cars are turning into political fashion accessories, Tesla might double down on its image of an AfD car. If the AfD gets 22% of the votes, that’s a big market share going forward. Tesla has an image problem mostly with corporate buyers, not so much with private buyers, who care mostly about price and functionality.
5 February 2025
Black swans and Trump
In her oped for Les Echos, former French ambassador Sylvie Bermann sees the transactional nature of Donald Trump’s foreign policy as the result of a series of extremely unlikely events. Those extremely unlikely events are called black swans in statistics. And these black swans are beginning to outnumber the white swans, the likely events. Given this mismatch it is no longer possible to predict what the future might bring.
Ever since Brexit in 2016, unpredicted crises have been piling up. First there was the pandemic that brought the world to a quasi-standstill, then Russia’s invasion of Ukraine, an energy crisis, Hamas's 7 October attack and Israel’s war in Gaza.
The Europeans still think that they are the norm and provide the model for engagement in this world. But those black swan events and transactional politics will upend this model.
Unpredictability becomes a pond to fish in for unpredictable leaders like Trump. Take Trump’s idea to take over Gaza. How will Europeans respond to this? Statements that this is illegal have lost their power in a world where international law becomes dispensable so easily. Piece by piece, the multilateral order that we grew so accustomed to is hollowed out, while the most powerful in this world set the tone for our future.
The idea of taking over Gaza comes after Trump expressed his desire to buy Greenland. Security reasons are cited. He also threatened to take back the Panama canal, allegedly because its port is run by China. And he threatened to annex Canada as the 51st state to the US.
His threats may never come true but they fundamentally change the nature of foreign policy. By exaggerating the threat, Trump forces his opponent to come to the negotiation table with a better deal for the US.
The Danes were quick to show their willingness to negotiate with Trump over Greenland. NATO did the same to appease the bellicose inclinations of Donald Trump. Panama has already announced that it will end its Silk Road agreement with China early. Canada and Mexico have agreed to strengthen border controls in exchange for a pause for his tariffs. Ukraine may offer its rare earths to ensure foreign aid continues to flow. This list will go on.
Trump does not care whether he targets an ally or not, thus breaking with diplomatic codes. Annexing territories over security reasons also puts force over rule of law. It gives the impression of exonerating Putin in Ukraine and Israel in Gaza. It is the return to the Monroe doctrine, according to Bermann, with its sphere of influence. The US loses its appeal as a leading democracy in this world. This will be also fuelling populist movements in Europe. On this path of power, will Europe finally know how to get its act together? What do they have to offer other than their disunity?
4 February 2025
Who is Bart De Wever
Two hours after being sworn in as prime minister, Bart de Wever already plunged into the deep pool of EU politics. At the informal summit meeting in Brussels entirely dedicated to European defence, de Wever knew hardly anybody. Several of his counterparts asked him bluntly: who are you?
The N-VA, de Wever’s party in Flanders is part of the ECR group in the European parliament. But they are not the classic Eurosceptics. At one point, they even considered joining the liberal Renew group. De Wever had to explain to the press that they are not anti-EU, but want the EU to focus more on central tasks and on competitiveness.
The N-VA does not sit well on the hard-right spectrum, where the international media sometimes put them. It is a nationalist party, yes, but its tone has nothing in common with the polarising discourse of other nationalist parties in Europe. The party refers to it as inclusive nationalism. The N-VA also embraces conservative values, like many parties of the right. They define a cultural identity in Flanders and have toughened their migration policies over the years. Their main theme is reforming national institutions and granting more autonomy to the regions of Wallonia and Flanders.
The N-VA has been in government in Flanders many times, and now de Wever is prime minister of the federal government. De Wever managed to win the national elections in Flanders despite the polls favouring the far-right populist party Vlaams Belang. He now will have to prove that his inclusive nationalism can produce real change and that his method works better than any radical recipe far-right parties may have.
3 February 2025
Teflon Meloni
Many of us would like to think politics and popularity follow a pretty linear relationship. You promise things, people like them, you get them done, and people like you more. You fail to do this, and you don’t. In practice, of course, it is more complicated than that. For some people, just as success can look like failure, so too can failure look like success.
We can see one example of this in Italy. For the third time since October, an Italian court has ordered a group of migrants transferred for processing to Albania under an agreement between the two governments to be sent to Italy instead. The group which the court just ordered returned was the first to be sent there since November, from when the facility has been empty. As has previously been the case, the justices bumped things up to the ECJ for confirmation of the legality of Italy’s returns plans for rejected asylum-seekers.
These outcomes are still pending. The ECJ should deliver a ruling on 25 February. But, for the time being, the Italian government has paid for a very expensive empty series of blockhouses next to the Adriatic. This bears comparison with another famous empty European-funded holiday camp further south, in Rwanda.
But while the UK’s Rwanda scheme was a subject of ridicule, and a severe political issue for the last Conservative government, Meloni is weathering these issues much better. Fratelli d’Italia, her party, is still in a commanding position according to Politico’s poll of polls, at 30%. Her personal approval ratings have slipped a bit since taking office, but are still holding up reasonably well.
One possibility is that Meloni is still doing alright because despite the policy’s overall failure so far, Mediterranean crossings are down by a lot. But it was also true that Rishi Sunak’s government presided over a material drop in small boat crossings to the UK. That was thanks to some less well-heralded policy successes with Albania, funnily enough.
Instead, a more likely explanation is that Meloni runs a tight ship. She is clearly in control of her party, and that party is clearly in control of the government. This was not the case for Sunak, who was his own party’s third choice at best for the job. Maybe there is a lesson in there that being seen as in charge counts for a lot, even if in the short to medium-term.
31 January 2025
Who is copying now?
When OpenAI accused DeepSeek of using its propriety output to train their own open-source model, people had a field day on social media. Whoever sits in a glass house should better not throw stones they say. But behind the noise, there are some fundamental questions about intellectual property. What is original and what is not in the AI world?
Tech policy distinguishes two categories of litigation on copy rights related to AI: on copyright violation caused by generative AI, and on granting of copyright to a AI-generated work. There are many lawsuits against OpenAI from media organisations and artists over the use of their original work in ChatGPT output. The case of copyright on AI-produced work is rare by comparison. And this accusation against DeepSeek would be a defining landmark if it ever were to be fought out in the courts.
How can an AI that scraps texts from all over the internet, claim originality for its output? It is fed by the originality of many sources to create content. What does AI add? Where does its copyright start and where does it end? Does the fact that OpenAI has a propriety model mean they have a copyright over its output? Or is it limited to the service they offer? Where are all those artists and media companies in this chain of intellectual property rights? Does this mean that OpenAI owns copyrights on their output if it is transformed through AI? What if it misrepresents the original text and could lead to a bad reputation for its creator?
OpenAI often defends itself in those lawsuits by saying that the sources are public and therefore they can use them and that they do respect content behind paywalls. So DeepSeek output could also be used for their training purposes.
The other question is for the user of ChatGPT. If you use ChatGPT to write emails or programme your business model, then, theoretically, this would belong to ChatGPT if we were to follow their line of logic. Or could the users and companies then argue that ChatGPT is only an input, whereas their final tweaking is what makes it a distinguished copyright output in its own right?
This sounds like arguing in circles, where those who copy are faster to improve than those who insist on originality throughout the creation process. The OpenAI versus DeepSeek case is essentially a question of how to make money with a learning model that relies on other people’s work.