There is a lot of excitement now about increased defence spending in Europe. But we will have to see how far this goes in countries that don’t have Germany’s fiscal space to borrow more. In France, Emmanuel Macron’s ambitions are already starting to face budgetary realities, hence the lukewarm response from a government he doesn’t really control. In the UK, increased defence spending is, too, coming only if the government can find something politically expedient to cut. It will probably run out of those options too.

Pedro Sánchez is telling a similar story in Spain. His recent pledge was to increase defence spending, but not at the expense of social spending. What he did say is that his government would commit to even the relatively modest target of increasing defence spending to 2% of Spanish GDP by 2029, though he didn’t say exactly when.

It’s also possible that some of this is basically just rejigging the definition of what constitutes military spending. El Pais reports that the Spanish government has recalculated how much it spends on defence. This apparently boosts the percentage of GDP Spain spends on defence from near-bottom levels in Nato to something more on par with Canada or Italy, but still below 2%.

Of course, what changing the definition of defence spending doesn’t do is give you actual new capabilities. Including retired military personnel’s pensions won’t get you new tanks or planes, let alone new satellites. This is basically Goodhart’s law in action, but with defence spending now. It is why we think we should move away from talking endlessly about defence spending as a percentage of GDP to actual capabilities. We should focus on what we want European militaries to be able to do, with how much we spend being a means to this end.

Sánchez’s reticence to touch other areas of spending is not unique to Spain either. In Italy, the government is similarly being cautious about a big defence push. Giancarlo Giorgetti’s own response to the EU’s defence loan proposals and stability pact rule changes was unenthusiastic. Italy’s latest defence spending projections are for it to reach 1.6% of GDP by 2027, well below 2%.

It's not hard to see why Spain and Italy might not be so willing to push the envelope on defence spending. Neither country is especially close to Russia, and they both have concerns to deal with domestically around economic performance and, especially for Italy, debt sustainability. Sánchez has said before too that Spain’s own defence and security priorities go beyond just Russia. That Mediterranean countries might see their security needs differently is something any EU-wide defence proposal will have to take into account to succeed.

In each case, coalition politics plays a role too. Lega is more reticent about defence spending, especially at the EU level. In Sánchez's case, he has left-wing allies who are more reluctant to spend more on defence to deal with too. These are the considerations you have to deal with if, or when, you cannot just borrow to paper over your problems. 

In the 1930 elections, the Nazis got 18% of the votes. In the November 1932 they had 33%, though at that point they were still excluded from the government. But it was the moment when they start to wreak havoc with parliamentary procedures.

We have to be careful with historical analogies. The AfD is not a Nazi party. But centrists in the newly constituted German Bundestag yesterday felt that they had a 1932 moment. The AfD, with its 152 MPs, appeared to be the overwhelming force in the new parliament, which has 630 seats. The geography of front row seats in the Bundestag reflects the number of votes. The CDU/CSU has five senior MPs in the front row, the AfD has four, and the SPD has only three. It is one thing to look at election results. It is quite another to see the people sitting in chairs. 

It is not a visible change, but also an audible one. AfD MPs are louder and angrier in any case, but 152 of them is a source of significant volume in the Bundestag. If you add the 64 members of the Left Party, this is now a much larger group of MPs that scream from outside the political firewall. The firewalls are maintained inside the Bundestag. For example, the AfD is not part of the consensual job allocation carousel for Bundestag vice president jobs, committee memberships, and even the appointment of judges. So they have nothing to lose by screaming.

And it’s working politically. Since the elections, when they got 20.8%, they have enjoyed a persistent rise in support as disgruntled CDU voters are starting to abandon their party, disappointed with the speed with which Friedrich Merz is giving up political promises. The AfD is now polling at around 23%, only narrowly behind the CDU/CSU. Our expectation is that they will draw level at some point during the four years, and they may even end up as the largest party.

Do we have to worry about Turkey? Just two weeks ago, Recep Tayip Erdogan was on the height of his power as his geopolitical influence grew with the new leader in Syria, and after the PKK’s leader Abdullah Öcalan called for the outlawed group to end its 40 year long insurrection against the Turkish state and dissolve itself. But then Erdogan went after his most formidable opponent, Istanbul’s Mayor Ekrem Imamoglu, and had him arrested.

The authorities threw everything at Imamoglu at once, they cancelled his university diploma, a requirement for presidential candidates, and came up with charges of corruption, terrorism, and treason. They arrested him in the end on corruption charges. Just the annulation of the university degree would already have disqualified him from running in the presidential elections. But Imamoglu also had to be turned into a villain, writes Selim Koru on his Kültürkampf blog.

The reaction to the arrest was ferocious. Over the past five days, mass protests gathered in Istanbul every day, with some estimates saying they reached a million demonstrators. Since Sunday, riot police got increasingly aggressive, and over 1000 people were arrested. Social media has been restricted since the day he was arrested. Unlike some previous protests, like the 2013 ones over Gezi Park or the 2021 protests at Bogazici university, the cause is how Erdogan is treating the opposition, rather than some other grievance that has taken on a life of its own. 

The stock market plunged, and Turkish banks had to sell over $12bn to support the lira. Trading was repeatedly halted, and short selling was banned across the board and share buyback rules relaxed to help stem the losses.

But will it force Erdogan to retreat? There is no sign of that. Instead, Erdogan accuses protestors of aggression, and has insisted that the market volatility was artificial. Can he count on that the storm blows over? At this point there are more questions than answers under two scenarios:

• If Imamoglu gets out, would he be even more powerful to win against Erdogan in the next presidential elections, as Al-Monitor suggests? In this case would Imamoglu be back as mayor of Istanbul, a post that Erdogan always wanted back, or in some other function? Would the masses continue to mobilise for him to get his rights back to run in the presidential elections or become more radicalised for regime change?
• If authorities keep Imamoglu locked up, he may become the martyr hero behind bars. Will he still be able to mobilise a threat to Erdogan’s power? Unless there is a reaction from the security apparatus or his coalition partners, which seems unlikely at this point, protests could peter out as they did after the coup attempt in 2016. But what if it is different this time?

What is clear after these events is that Erdogan plans to run for a third, constitutionally prohibited presidential term. His decision to revive talks with the PKK’s chief Ocalan was to ensure that he gets the support of the Kurdish DEM party in parliament for a change in the constitution. But the arrest of Imamoglu puts the DEM party in a bind due to their electoral alliance with Imamoglu’s party, the CHP. They provide support for the CHP since the arrest, but critically they have not instructed their supporters to join the opposition and are unlikely to do so, according to one DEM lawmaker. It was also the DEM’s electoral alliance with Imamoglu that brought him the terror charges.

Erdogan has still three years until the next scheduled elections. In times when going after opponents is the latest authoritarian global trend in the US and Israel, Erdogan sees himself as part of a powerful geopolitical club. And Europeans are surrounded by increasingly authoritarian leaders that they need to learn how to deal with without losing their footing.

It all started so well when Donald Trump managed to get Benjamin Netanyahu to sign up a ceasefire agreement for Gaza ahead of his inauguration. But Trump now seems passive on the Middle East, leaving it to Netanyahu to define the next steps in this peace by force plan. This risks an escalation in the Middle East and further implicates the US in the war.

On this issue we agree with Jon Hoffman from the Cato Institute, who writes in The American Conservative that Trump is about to lose his authority in the Middle East and peace has become a more distant prospect. Netanyahu resumed the war after Hamas did not accept their change of plan from the original ceasefire deal. Haaretz writes it is a deja-vu from the Biden administration when the US, aided by the governments of Egypt and Qatar, tried to broker a ceasefire agreement, but couldn't overcome the fact that Netanyahu only agreed to a temporary pause in the fighting, while Hamas demanded a formula that would end the war. So nothing much has changed?

Steve Witkoff, in his interview with Tucker Carlson, made it clear that the US would not challenge Netanyahu even if they disagree with his strategy. After watching the video showing what happened on 7 October, Witkoff acknowledged that it is hard to be neutral after that. Witkoff, however, did talk about the two-state solution and the Arab initiative. He laid out a vision for Gaza to offer opportunities rather than a welfare state, evoking job opportunities by planting data centres, blockchain or robotics into the post-conflict rebuild for Gaza.

As long as Netanyahu has no interest in getting there, this lies in a distant future. Witkoff talked about a bridging deal that would introduce another temporary ceasefire, without getting a clear commitment from Netanyahu to end the war in return for the release of the hostages. This again sounds similar to the endless chain of peace deals that the Biden administration put forward.

We know from experience that Israel’s strategy of eliminating Hamas has not been working. And Hamas as a resistance force will continue to exist as long as Palestinians are not given their rights. As long as Israel feels it has US support for denying Palestinians the right to self-determination or sovereignty in any form, this current strategy of not ending the war will not even get to the reconstruction phase. And forced displacement is likely to increase violence, not from Gaza but in the neighbouring countries where they would be pushed to. Egypt is on high alert at the border crossings, as a new Israeli agency for voluntary displacement has been set up.  

Trump has many things on his plate right now at home and abroad. His relationship with Russia over the war in Ukraine seems to take precedence over what happens in Gaza. The risk is that by taking a backseat and by supporting Israel militarily, along with a maximum pressure strategy on Iran, Netanyahu will not have an incentive to change his own approach.

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.

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.

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.

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.

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. 

"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.