Last year, investors pulled out of solar and wind energy. The all else dwarfing exodus in the first quarter of 2025 has been from batteries. The retreat from sustainable investment is in full swing. Donald Trump is a factor, obviously, since the US is the largest economy in the world, and it is moving away from green energy. But in the US the trend already started in the last quarter of 2022, with a run of ten consecutive quarters of net fund outflows, according to data from Morningstar. The Europeans have now joined the exodus of sustainable investment. And so have the Asians.

The problem with sustainable investment is that it has become unsustainable as so many ideas from the latter part of the age of hyperglobalisation. We always thought the most useful shortcut way to think about this is through Dani Rodrik’s trilemma: You cannot have national sovereignty, democracy, and hyperglobalisation at the same time. You can think about the EU as an attempt to fight this trilemma – the current version of the EU with deeply integrated decision-making procedures and regulation, but where the ultimate power still resides with member states. This version of European integration is as unsustainable as a European battery factory.  

Sustainable investment is by definition long-term, and would have required a consensus that persists across the political spectrum, and across time. Instead of permanent consensus we had occasional majorities. The unsustainable either ends because it self-implodes, like a Ponzi game, or because nobody turns up anymore. This is the second variety.

The global retreat of sustainable investments also has implications for central banking. Green central banking was Christine Lagarde’s big idea. These were the heydays of QE, when central banks could choose which corporate assets to buy. Bank portfolios were scrutinised in respect of their carbon exposure, with the argument that that this constituted a financial risk that was not caught by standard risk metrics. What the private sector outflows are telling us is that financial institutions can also face the opposite risk through excessive exposure to dead-end green technologies.

This week, the UK will have local elections, the first major contest since last year’s general election and change of government. There will be contests in 1600 council seats, six mayoral races, and a by-election. On a case-by-case basis, regionally specific issues can intrude. But at an overall level, local elections are usually a popularity test for the government of the day.

What they might tell us is that Labour has lost a lot of its support, but the Conservatives aren’t really benefitting. Instead, the outlook ahead of the election has turned into a three-way race, between Labour, the Conservatives, and Nigel Farage’s Reform party. Reform could come out on top in the council elections, as well as Runcorn and Helsby in the by-election.

Labour has a large parliamentary majority, and we are still more than four years off of when a general election has to happen. But with three parties at similar levels of support, in a hypothetical general election the situation starts to get very unpredictable. The UK’s first-past-the-post system works as intended when you have two dominant parties, the situation for the vast majority of the UK’s history as a mass suffrage democracy. But with three, even small changes in support could produce significantly different results. Seat projections show a wide range of results, from a dead heat to Reform potentially coming close to a majority.

There will be a few things to watch out for after the local elections. If Reform does pick up several councils, it will test the party’s internal structure and decision-making apparatus. At the moment, it is very Farage-centred. The party is also very message-disciplined, and fond of talking about immigration in particular.

Governing locally could pose difficulties for both Farage’s centrality in Reform and this focus on immigration. Farage obviously wouldn’t be able to micromanage a clutch of local councils. Local governments also have virtually no control over immigration policy, and will not be popular if their only response to deteriorating local services is to blame Westminster.

Another would be how a Reform surge impacts Labour’s approach to governing. We can see it posing yet another obstacle to rapprochement with the EU. Even youth mobility, relatively low-hanging fruit, still draws a maybe-maybe-not response from Labour. Moving to an unequivocally pro-EU policy would also risk drawing Reform and the Conservatives closer together, removing one advantage Labour does have: a split on the right.

It’s also worth reflecting on how Farage is back in politics almost a decade on from the Brexit referendum. One reason why David Cameron called the 2016 vote in the first place was because UKIP, which Farage led at the time, was eating into the Conservatives’ vote share. It was also destabilising the party, because it led to disagreements over the direction it should take on the EU.

We had the vote, the Eurosceptics won, and now the UK is out of the EU. It was pretty much the hardest Brexit imaginable, short of leaving without any deal. But Farage is still around, and stronger than ever. Brexit might have happened, but whatever caused it is still with the UK to this day.

Anyone who has ever heard of the Guardia di Finanza, Italy’s financial police, will know they are a force to be reckoned with. But they probably aren’t what most people had in mind when they thought about increasing Europe’s defence spending. Nevertheless, one of the ways the Italian government plans on boosting defence spending to the 2% Nato target is by including their outlay, as well as that of the Carabinieri and Coast Guard, in their calculations. Include these, plus some other accounting items, and, presto, you have met the target.

The government’s point is that these do fall within Nato’s accounting criteria for defence spending. Part of the reason why Italy has looked like poor performers relative to others is that those items have not been included in its own reckoning before. True as that may be, there are a couple of issues with this.

The first is that even if it is within the letter of the rules, it obviously misses the spirit of them. If there is a rationale for a defence spending push in Europe, then you need actual new capabilities. Hitting the target by including some things you were already spending money on is not adding anything you didn’t have the day, week, or year before. Collective defence is also not a football league season: you don’t get extra points for coming ahead of Canada or Luxembourg.

Or at least you shouldn’t. Part of the rationale is possibly to appease the US. But Nato’s upcoming summit in June could bring a new, higher, defence spending target of 3.5% of GDP. Alessandro Barbera, writing for La Stampa, recently pointed out that this would mean about €30bn more in defence spending compared to the current budget.

This is a lot of money for the Italian government. It is in the ballpark of a typical manovra, the annual discretionary budget increase in Italy. Boosting defence to this level could hypothetically mean foregoing tax cuts, a key pledge for Italy’s right-wing coalition, or slashing healthcare or other social spending.

It would, we think, not be something that would go down well with the Italian electorate. We are also sure that both Giorgia Meloni and Giancarlo Giorgetti realise this. Ultimately, this is a question of priorities. Some countries in Europe might be prepared to forego social spending, or accept higher taxes, for the sake of boosting their defence capabilities. Or take on more debt. For others, like Italy, it may not be worth the fiscal pain, or damage to credit ratings, which have begun to improve for Italy.  

This is the point, we believe. If there was a noticeable sense amongst the Italian public that they faced a threat worth making sacrifices for, there'd be no need to try and reach the 2% target by changing accounting definitions. Instead, it would come through extra spending on more personnel, or things the military needs and uses. The consensus on the threat facing Europe, then, might not be as strong as it superficially looks. 

In the old Habsburg days, they would describe Austria's strategy as follows: let others wage war, but you, happy Austria, marry. Today, Austria is equally caught in the crossfires of geopolitical wars over tariffs, and the marriage of its manufacturing sector to the German car industry no longer saves it from troubles. Quite the contrary.

Austria was the only industrialised country the IMF predicts a recession for in 2025. Austria’s economy is expected to shrink by 0.3% in GDP this year. Much has changed since last November, when the IMF still predicted a growth rate of 1.1%.

The 0.3% figure is also what the Wifo research institute predicts for this year. For Austria, 2025 would be the third year of recession after a negative GDP growth rate of 1% and 1.2% in 2023 and 2024.

The resilience of several industries will be severely tested this year, though Wifo expects a turnaround for the second half of the year. Construction and consumption are already trending upwards. The housing initiative adopted in 2024 will support demand in the second half of 2025 and shows its full effect in 2026.

Real investments are expected to continue declining amidst low-capacity utilisation and geopolitical uncertainty. There are structural reasons for low investment, as Austria’s manufacturing sector is closely linked to Germany’s, and the classic car industry is losing its role as a growth engine. The decline of the car industry in Germany hits Austria too. Another factor is the geopolitical uncertainty. How US tariffs and China’s exports affect the European market is also not yet clear, investments are thus put on hold or cancelled.

The IMF writes that interest rates are still too high and that the planned budget consolidation will also affect growth negatively. Austria has one of the largest budget deficits, at 4.7% of GDP. The more the economy starts growing again, the more this ratio will come down by itself.

The poor economic performance does not help the new coalition government. The latest Insa poll suggests that the FPÖ gained over 5pp in the polls, now leading with 34% ahead of the SPÖ with 23% and ÖVP with 20%. The hard-right party thus regained in opposition what popularity they lost when coalition negotiations with the ÖVP collapsed. By contrast, the ÖVP, in coalition with the SPÖ and Neos, lost more than 6 percentage points.

It has been almost 70 years since Giuseppe Tommasi di Lampedusa’s book, The Leopard, was published. In the novel, about a Sicilian noble family struggling with Italy’s changing social and political climate, the young reformist Tancredi has the book’s most famous line: that everything must change if everything is to stay the same. There is still a lot of truth in the truism. Like the conservative family patriarch that Tancredi says this too, we in Europe will end up re-learning this lesson, the hard way.

The latest example of this is a major problem for the European car industry. Electric cars are now advancing to the point where they can remove some of the last barriers to entry for consumers, and fully replace petrol-driven ones. But this isn’t happening here. Instead, it is happening in China.

CATL, a Chinese firm that is the world’s largest electric car battery-maker, has said that has developed a battery with 520km of range that can charge in five minutes. It is in a competition with BYD, the Chinese electric carmaker that’s also the second-largest battery-maker. Its most recent announcement was for a 400km-range battery that could charge in the same time. If CATL can deliver on it, this round goes to them.

Another breakthrough that CATL announced is perhaps as, or more, significant. It is a new brand of sodium-ion batteries. Sodium has similar chemical properties to lithium, being another member of the same family of elements. It is, however, much more abundant than lithium. Sodium-ion batteries would also help solve another barrier to entry: fire safety.

The issue has been getting them to a similar level of performance. But according to CATL, these batteries can perform almost on a par for energy-density with its current LFP lithium-ion batteries. Incidentally, CATL developed LFP battery technology to obviate the need for other metals, such as cobalt, in the battery manufacturing process. That was another barrier to entry, gone.

China’s electric car and battery industry is continuing to make cheaper, and better-performing, products. If you add in advances in automation, you can see a major problem coming for existing car companies that rely on internal combustion engines, like most of those in Europe. CATL and BYD are both very young companies. CATL was formed in 2011 as a spin-off from another battery-maker, Amperex, which was founded in 1999. BYD dates from 1995. This compares to the often century-old auto makers we have in Europe.

There are a lot of different ingredients to the Chinese electric car industry’s rise. These include financial repression elsewhere in the economy, and active industrial policy. But we think another factor that’s easy to overlook is how agnostic China seems to be to who exactly ends up making the next technology, as long as it is a Chinese firm.

Is EU independence a dream or a new goal for EU member states? We live in a time when the US closes in on itself, China expands, and Russia stiffens. This raises strategic questions for the EU about its response and geopolitical positioning.

The EU has been operating in crisis management mode since the financial crisis in 2007. There was one crisis after the other: first the euro crisis, then Brexit, then the pandemic, Russia’s war in Ukraine, and now Donald Trump’s tariff war. At the same time our economies struggle and our political systems fragment. A Venn diagram that is circulating in social media shows that compared with the US and China, the EU is frontrunner in none of the new driving technologies but it is in regulation.

Emmanuel Macron has ambitions for Europe to go beyond its own limitations, to become an independent Europe and a geopolitical player in its own right. A dream, yes. An agenda? Not really.

But if we were to take this ambition more seriously, how could European independence be defined? It is certainly not a reflexive rise in tariffs in response to Trump’s tariffs. Nor can it be solely defined over the support for Ukraine. This is not independence.

Would the EU be ready to give up unity to allow an alliance of the willing to move ahead on defence, or further economic integration? What trading partners will the EU seek out to be aligned with? In the Cold War there were three zones, those aligned with the US, those around the Soviet Union, and a group of non-aligned states, with Egypt and India as its main members. Now we could see a similar tri-partition of the world emerging over tariffs, with the US and China as two poles and a non-aligned group of nations in the middle. Which camp does the EU want to be in? 

There are many aspirations. Writing in l’Opinion, Macron evokes the philosophers of the Enlightenment with their call for the audacity to know in a time when Europe was ravaged by wars and epidemics, and subject to religious and autocratic yokes. Daring to know is his new mantra, and a way to shake off dependencies. These are lofty words.

But Macron has one concrete audience, that of those researchers, who are limited either by cuts to funds or stifling freedom of speech. Macron tells them: choose France, choose Europe!

Last week France announced a new platform called Chose France for Science, which will enable universities, schools and research organisations to apply for co-funding from the government to host researchers. The initiative will be launched on 5 May by the French National Research Agency. The ANR writes that France is committed to standing up against attacks on academic freedom across the globe, and it prepares for a wave of mobile researchers whose funds have been cut. It invites universities to present projects in particular in areas such as health research, climate and biodiversity, artificial intelligence, space studies, agriculture, low-carbon energy and digital systems.

Aix Marseille University has seen a flood of applicants since it announced a programme in March to host researchers from the US threatened by cuts to funding. Their president is also advocating for the creation of a new status of refugee scientist.

But even if we had all those cutting edge researchers in the world, more  needs to happen to turn this into concrete advantages for Europe. Past experiences with Erasmus and joint research programmes have been disappointing in this respect. More needs to be done to harvest what research comes up with and translate it into tangible outcomes for the European economies and societies. This is where the US and China continue to dominate with their competitive advantage. So for Europe, the challenge will be to move beyond the dare to think and deliver on the dare to act.

Gridlock is what happens in systems of proportional representation when the political system fragments. But political gridlock is also a cultural phenomenon. In Germany, Tagesschau had an article discussing Friedrich Merz’s suitability for the job of chancellor on a singular dimension: ability to compromise. It is an example of the centrist coalition mindset. The compromise is always more important than the thing that gets compromised. There can be no economic reform until that mindset changes.

The political device that keeps the centre locked in perma-coalitions in Germany is the political firewall against the far-right that precludes any form of co-operation. Jens Spahn, the former health minister, and potentially one of the next generation CDU leaders, advocated treating the AfD as a normal opposition party. This would involve co-operating with them in situations where their support is needed. One such example is a constitutional change. At the last election, the political centre lost the two-thirds majority. This a threshold required for much of parliamentary business, not only to change the constitution but also to appoint senior judges. Together with the Left Party, the AfD has a blocking minority in those areas.

Spahn got an immediate pushback against the idea from the SPD and the still-strong Merkel wing of his own party. His critics see it as step 1 in a long process to break down the firewall.

As so often, you just need to look at neighbouring countries to see what is going to happen in Berlin too. Coalitions with far-right parties have become normal in Northern Europe and in the Netherlands. A stint in government has more often than not taken the shine of these parties' appeal as they have to lead difficult ministries. Why not put in them in charge of housing and transportation, departments with a strong record of ending the political careers of incompetent ministers? One of the reasons why the AfD is so popular, and also so extreme, is the certainty for now that they do not have to implement their policies. We think Spahn has a point.

In the outgoing Scholz government, the ministry for economics was the power centre of the coalition. Robert Habeck was not only vice-chancellor but in charge of a ministry that co-ordinated all the important stuff, from the classic job of business regulation to energy and climate change polies, and digitalisation. In the new coalition under Friedrich Merz, it is the ministry that nobody wants to run. The person widely considered to be the next economics minister, Carsten Linnemann, said no yesterday. He wanted to remain in his current job as CDU general secretary, which is effectively the number two job in the party. Linnemann is a former leader of the CDU’s Mittelstand wing, which represents the interest of that sector of the economy, the mostly privately-owned medium-sized company sector.

FAZ cites two reasons. One is that the coalition agreement gives the new minister little chance to shine, since it prescribes a continuation of the status quo. The ministry will also lose responsibility for energy, climate and digitalisation. And, as the commentator pointed out, trade is done in Brussels.

Indeed it is. What surprises us is the idea that this ministry does not have much to do, considering what has been happening in the last few days. Germany will have to reorganise its external commercial relations. The country may be forced to decide whether it wants to be commercially part of the China zone, or the US, because the US will not allow Germany to be part of both as it used to be. For a creative minister with new ideas, this would have been an ideal job – the reinvention of an economic model. The fact that nobody wants that job tells us a lot about the state of the debate.

The concept of safe third countries for migrants has been one that haunts the EU since it concluded its first pact with Turkey to keep migrants away from European shores. It is a foreign policy position based on fear and a strong desire to curb migration into Europe. It has completely shifted the debate away from migration as a counter-point of shrinking and ageing population. Any failure will be seized by far-right parties as yet another reason why to vote for them.

The safe-third-country concept allows asylum-seekers to be sent to a country where they can find protection, instead of staying in the country they applied to. But what exactly is a safe third country? There are also questions about what such a country would get in return, what are the safeguards to make sure the agreements are honoured and whether such a provision can it stand up in the courts. The UK had a terrible experience with its attempt to send migrants to Rwanda. Italy had also not been successful with its plans to send migrants to Albania.

In its latest move the European Commission is proposing seven countries to be considered as safe third countries. According to Euractiv these are Bangladesh, Colombia, Egypt, India, Kosovo, Morocco, and Tunisia. These are countries that all have their own economic difficulties or massive climate change challenges. These countries could then expect to get money in return for hosting migrants on the behalf of EU countries. How we can expect them to look after our migrants when their own population is suffering is a mystery to us. 

It seems EU countries are determined to use this avenue under the migrant pact as a principle and deterrence of further migrant flows. The Commission's move will be followed by a fast-tracked review of the safe third country concept under EU law. The EU countries are also debating the latest rules for migrant returns the Commission proposed in March. If this all goes through, the final list of safe countries, expected to be published before June, would be added as an amendment to the EU’s asylum procedure regulation as part of the migration pact.

Maybe Donald Trump really will get the Ukraine peace deal he wants. Just not in the way he necessarily planned to. The cliché is that trade wars have no winners. But they do have different degrees of losers, and one of the biggest so far from this war is Russia. A significant drop in oil prices has left the country vulnerable economically, both in fiscal and inflationary terms. It may end up being this, rather than international sanctions, that complicates its war effort, at least enough to seek a deal in good faith.

Although oil prices have pared back their losses a bit since Donald Trump’s announcement on Wednesday that he would pause most tariffs, they continue to remain relatively low. The Brent crude benchmark, for instance, is trading at below $64 a barrel. This is better than the sub-$60 it hit earlier this week. But it’s still far from close to $75 a barrel levels on 2 April.

Typically, there is a discount between Russian crude oil and global benchmark prices, though this varies. When global oil prices hit their lowest points earlier this week, Russian oil tanked even more. The Urals crude grade that Russia sells at the port of Primorsk was fetching less than $53 a barrel. Through most of 2024, it was somewhere in the range of $60-70.

These drops have a couple of different implications. One is budgetary, something Elvira Nabiullina, the Russian central bank governor, warned about earlier this week. As of last year, around 30% of Russia’s budget revenue comes from energy products, and 85% of that is from the sale of crude oil or refined products. Russia’s defence spending, on the other hand, has continued growing, providing a significant budgetary need. It went up by more than 40% from 2023-24. Defence spending in the country is now 6.7% of GDP.

Then there is inflation. A drop in Russian oil revenue would also contribute to a weakening of Russia’s current account balance and position. This is not what the country needs when the central bank is also trying to fight off high inflation, with interest rates at 21% currently. This makes it more expensive for the Kremlin to borrow. But it also creates difficulties for businesses and other borrowers.

If Putin does agree to a peace deal, the oil drop probably wouldn’t be the only thing that would influence this decision. But in the short term, it makes the war even more difficult to prosecute for the Kremlin, and compounds the damage a war economy will do if it’s sustained. It will make its fiscal choices to sustain military spending even more acute, and contribute to politically unpopular inflation, plus restrictive monetary policy, too.