The other big elections that have just taken place are those in Iran. The reformist candidate, Masoud Pezeshkian, won the presidential election run-off on Saturday against the hardliner Saeed Jalili.

Western media showed relief and heralded the election of a moderate president as a diplomatic game changer. Pezeshkian promised to revive the nuclear deal, engage with the west and to soften the country's hijab rulings.

But Iranian experts warn not to expect too much. Pezeshkian may talk reforms, but he is still a loyalist to Supreme Leader Ayatollah Ali Khamenei, who is the final arbiter in all state affairs. Pezeshkian also still has to govern with hardliners in his government.

Then there is the question of democratic legitimacy. Even if the officially recorded 50% participation rate was true, it would be a historic low for the regime. Turnout may even have been less than officially reported. Many polling stations throughout the country remained empty according to many social media postings, while there was some moderate traffic in dozens of polling stations in Teheran.

Pezeshkian, a former heart surgeon and lawmaker from the multi-ethnic region of western Iran, was the only reformist candidate allowed to run in the presidential elections. His victory came with a blessing from Khamenei. The foreign policy calculation in Iran is that it might soften the impact of the US elections. The regime dreads the return of Donald Trump. Last time around, Trump exited the nuclear power deal and introduced the maximum sanctions that weakened Iran. A reformist candidate may lull western electorates into believing that Iran has opted for a reformist government, while it continues to pursue hardline politics in more subtle ways. Still, Pezeshkian could demonstrate his skills in negotiating compromise with hardliners. 

The European Commission has pressed ahead with its tariffs on Chinese electric car manufacturers. After a 4 July deadline expired, it will implement a range of additional tariffs, differentiated by manufacturers, on top of the 10% already applied on auto imports. BYD, China’s largest carmaker, gets off comparatively lightly, with an additional 17.4%. Saic, the largest Chinese importer of electric cars into the EU, will face additional tariffs of 37.6%.

Now the question is what China decides to do. Possible consequences range from being bad news if you are a Beijing-based cognac fan to being bad news if you are a German carmaker. The German carmakers are afraid it will be the latter, with Volkswagen having been critical of the tariffs. Germany’s government is similarly unhappy with them.

But overturning the Commission’s decision would require a qualified majority of EU member states representing at least 65% of the union’s population. That is an extremely high hurdle to overcome. This looks so far like one the more protectionist EU countries will win.

We have seen various scare-stories from the Chinese media too about retaliation against large-engine car imports specifically. These would hit the German automakers where it hurts. It is difficult, however, to ascertain the extent to which they are serious, or negotiating tactics designed to frighten the Germans, and put pressure on the Commission.

From our perspective, we don’t see why China would need to take a particularly hard line. Geopolitically, it would not make so much sense. We are in the middle of China’s contest with the US. Coming down hard on the EU would risk pushing Europeans closer towards the US in the longer run, which we doubt it will want.

There’s also, from this longer-term perspective, not necessarily much need. Even with the tariffs, many Chinese automakers may still be competitive with their European counterparts. The Rhodium group estimated a 50% total tariff would be necessary to put the two on a par. None of these reaches that level, though the Saic ones come close.

The other tool China has at its disposal is near-shoring. BYD will open a site in Hungary, and is considering a second elsewhere in the EU. Chery, another Chinese electric car specialist, is opening a factory in Spain. Like BYD, it may opt for a second one. These companies can keep the supply chain for the most important value-added component, the batteries, under their control.

Already assured of victory at today's general election in the UK, Sir Keir Starmer has started to make manifesto pledges for beyond 2029. Yesterday he said that the UK would not rejoin the EU within his lifetime, nor would it try to become an associate member of the single market or the customs union. People at Sir Keir's age - he is 61 - should be careful about making pledges about their lifetime - but one can safely assume that the intended horizon extends to a second term and beyond.

We are not surprised, except that the issue came up so early. The reason to shut this down right now and as conclusively as he did is that keeping the door open for the future has policy consequences today.

To rejoin even in the medium-distant future would have required him to start closing the massive regulatory gap that has opened since Brexit almost immediately. Most of that gap was due to divergence by the EU itself. The UK did not mirror the 50 or so laws of the Green agenda. It adopted the data protection regulation - GDPR - in the last decade, and maintains its own version to this day. But the UK does not have the EU's digital markets act, or EU regulation on AI and cryptocurrencies. Nor does have regulation on what is euphemistically called corporate social responsibility - making companies liable for human rights violations in their supply chains. For the UK to rejoin the EU even during a second term would require such a high degree of regulatory convergence that it would dominate all other policy areas. Why impose such constraints on yourself when you got elected on a pledge that you focus public services? 

We suspect that the emergence of right-wing governments in the EU and right-wing policy agendas are making the EU less attractive for the UK left. Political cycles between the UK and the EU have forever been asynchronous, but never more so than now. 

We see another reason in the EU's Luddite tendency, its attachment to 20th century technologies and corporatism. We always felt that the undoubtedly large economic gains from goods trade integration need to be set against the opportunity cost of the EU's failure to partake in the 21st century digital economy. The single market, as it is constituted today, is very much a product of 20th century product-focused regulatory thinking.

The option to rejoin would have been more realistic if the Labour Party had not swung behind the second referendum campaign, spearheaded by Sir Kier himself.  

It is also possible that Sir Keir's motives were much more party-political. He has more to fear from the Conservative regrouping around their old favourite theme of Brexit than from Liberals or Greens capturing pro-European metropolitan voters from Labour. We are also not sure whether the mostly pro-EU polling gives a sufficiently reliable indication of the public mood. Rejoining the EU in 2030 or 2035 would be a very different proposition from not leaving it in 2016. The young generation of the 2030s will have a different agenda than those of the last decade. They might come to regard the idea of rejoining the EU as a leap back towards the digital stone age.

What the EU and the US have in common that the centrist reliance on rule-of-law proceedings against their opponents is backfiring. They did not see this coming. The EU thought it could force recalcitrant governments into line through budgetary sanctions, without sparing a moment of thought that Viktor Orbán’s vote is needed for virtually all that is politically important right now, like sanctions on Russia, or Ukraine’s accession. The rule-of-law procedure started off with the intention to fight corruption and breaches of European law. But it ended up as a sanction mechanism against the far-right. It is not a legal procedure, but a political one. It is appointed politicians, in the Commission and the EU Council, who vote for it. When Poland changed government last year, the Commission revealed its hypocrisy when it dropped the procedure immediately. The very worst aspect of it is that together with political firewalls ended up having the opposite effect. It strengthened the opponents of liberal democracy.

The legal pursuit of Donald Trump falls into a similar category. The US was on the verge of graduating to the select group of countries that incarcerate the leader of the opposition. We can’t count the number of comments from partisan journalists, academics and other commentators who confidently declared that the multiple charges against Trump would kill his campaign. European newspapers in particular could not hide their glee about Trump finally meeting his deserved fate – leaving their readers in a dangerous delusion about US politics.

This week’s Supreme Court rulings have thrown the multiple legal campaigns against Trump into doubt. Worse, they backfired politically. Even before, they did not work politically. They gave Democrats a false sense of security. It lulled them into supporting Joe Biden for another term, when his mental deterioration has been obvious for some time. It is July now. How on earth can you organise an orderly primary for Democratic candidates? Jimmy Carter, Bill Clinton and Barrack Obama did not start out as front-runners. They needed the snake-pit politics of the primaries to get their agenda across. Chances are that if they manage to ditch Biden, they end with a controversial stich-up at the Democratic conference, or with Kamala Harris as the candidate. And then what? The Democrat establishment has been transiting from complacency to panic in a short period of time, with sparing a moment on the massive political misjudgements that caused this mess. There are some obvious parallels to French politics right now – where the political establishment, too, is obsessed with tactical games.

Back in 2020, when the EU passed its rule-of-law procedure, it already had bigger problems on its plate: faltering economic dynamism, falling behind the US and China in high technology; overreliance on the US for defence, on Russia for gas, and China for critical nodes in our supply chains. The economic dynamic has since become worse. As Mario Draghi said at a recent speech ahead of the publication of his report, the EU lacks the ability to mobilise capital. We are one or two French elections away from a sovereign debt crisis. Five years of unfocused hyper-activity, with the potential of another five years to come, are going to pose an existential threat when your enemy is more focused than you are. Should that not be what EU leaders should be discussing over dinner before they talk about jobs?

The last seven days have been a reminder of the power of intruding events. Emmanuel Macron’s gamble has not worked. Donald Trump has taken two big steps forward in his road back to the US presidency – the debate with Joe Biden and yesterday’s Supreme Court ruling on presidential immunity. There are no good options for the Democrats right now. Replacing him would be the riskier choice, not in theory but in practice. It is not as though the Democrats have agreed on who that person should be, and how that person, when selected, would run a successful campaign from start to finish in three months.

The legal pursuit of Trump was a slow-moving political train-wreck. So was the EU’s rule-of-law pursuit of Viktor Orbán. He is stronger than ever, and just started the six-month Hungarian presidency of the EU with the slogan to make Europe great again.

What we described above is not than just a string of recurring political misjudgements. It is a source of geopolitical risk in its own right: it is the tendencies of embattled governments to double down with political misjudgements. Liz Truss and Emmanuel Macron have little in common, except that they both took uncalculated risks. Probability theorists describes this phenomenon as gamblers’ ruin. In politics, in life, and in investing, you should take risks. But you should not play Russian roulette.

One of the reasons of our incapacity to spot such risks is the tendency, especially here in Europe, for everybody to huddle together in government – the pro-European coalitions in Brussels, grand coalitions in Berlin, or the centrist counter-revolution in Paris. Everybody is screaming at each other, but nobody is speaking truth to power. Just look at Macron’s uncritical centrist supporters who fell over themselves to laud the brilliance of his dissolution of the parliament. The French language has a great expression for this type of risk taking: Va Banque!, named after a 19th card game called Pharo, in which the gambler tries to match the house – the bank – with his bets.

Va Banque! is a bigger risk than impossible to predict events because it goes to the heart of where the real risk lies. Like Macron, who gambled all on an election, the west is taking similar uncalculated risks in its geopolitical decisions: the promise of open-ended support for Ukraine in pursuit of a nebulous war goals; the imposition of sanctions without an understanding of how they can be evaded; unconditional support of Israel; the implicit threat to go to war with China over Taiwan. And yet, our societies are not ready for any of this.

The day after Russia invaded Ukraine, the West imposed pre-agreed sanctions on Russia that had no material effects beyond pure-virtue signalling. It was the commercial interests that prevailed. The West's ambitious geostrategic goals stand in sharp contrast to our collective unwillingness to make offsetting sacrifices. We saw this in Brussels last week where a consensus emerged in the European Council in favour of debt-financed defence spending. Olaf Scholz vetoed it, but it is also the consensus of his own party. The SPD’s latest red line is that there can be no trade-offs between social transfers and defence spending. Our welfare systems are not only economically unsustainable, but also politically. That’s a geopolitical risk. Our societies are much more fragile than China’s or Russia’s. We read in the German media yesterday that the failure to inherit money from your parents has become a recognised trauma.

So herein also lies a source of geopolitical conflict – when you are trying to pick a fight without being politically in a position to do so. This is why we keep on remarking that the EU should focus on its core functions and make them work better: the single market, the banking union, the capital markets union.

The EU is clearly not following this advice. A sovereign debt crisis is a very plausible scenario in a low-growth environment with legally protected social rights. It is not the only risk, and possibly also not the worst risk. 

Last week we wrote about one avenue through which the EU could take damage as a direct result of the French elections: through the repatriation of policy areas and pressure to lower French contributions to the EU budget.

Christian Lindner just gave us another one. He is quoted as saying that the ECB may be prevented by the courts from buying French bonds during a sovereign debt crisis. The trigger of the ECB’s transmission protocol instrument to help prop up the French bond market would raise what he called economic and constitutional questions.

Our own reading is that the ECB is legally entitled to trigger TPI for as long as governments are formally inside an excessive deficit procedure and comply with the guidance they have been given by the EU. The only conceivable hypothetical situation where we would see this condition violated would be a victory of the far-left. The danger the far-right poses to French democracy is of a different nature. It is not primarily fiscal. 

The EU’s and the euro’s survival are strongly premised on certain accidents not happening. In several countries the far-right is either in the main government, or the main opposition party. In France, the RN will be the largest party represented in the parliament. Oppositions eventually win elections. The UK is about to remind us of this fact.

A conflating accident the EU must avoid is that a political crisis in one country is turning into a crisis of populism in another. Lindner is a bigger threat to French sovereign bonds than Le Pen. Debt crises fall into the category of things you can trigger by talking about them.

We too see a problem of fiscal sustainability in France, but this is not related to the far-right. Macron’s government has been the fiscally most profligate in decades. If your fiscal deficit is accompanied by strong GDP growth, as is the case in the US, it won’t lead to a crisis. But that did not happen in France.

Each political scenario in France would have different fiscal implications. What troubles us is that there is not one that is sustainable. This is what investors should worry about, not what the ECB can do in an emergency.

The European elections had huge impact on France with yet unforeseeable consequences for the country itself and its role inside the EU. Another country where EU election results had a direct national impact is Greece. The two main parties both suffered. New Democracy, the incumbents, saw their votes drained by three far-right parties. Syriza lost to its three split-away parties.

Kyriakos Mitsotakis’s New Democracy even responded with a mini-reshuffle after his party did not do as well as hoped for. Three of the four far-right parties got into the European parliament, representing 4 out of the total 21 seats allocated to Greece. That is quite a significant 19% of the total seats. The Greek Solution, Niki, and Voice of Reason are nationalist parties. They cover the full spectrum of far-right voters from ultra-conservative, religious, populists, radicals. The parties did well also because a fourth, the Spartans, were banned by the courts from running in the elections.

Does this mean more trouble ahead in national elections too? The question is whether this is a protest vote against the incumbent government or reflects a deeper sense of what is going on in Greek society. There are those arguing that the far-right is a protest vote against Mitsotakis's more liberal policies, in particular pushing through same-sex marriage. For the more orthodox voters, this is a bridge too far to the centre. Then there are those who argue that it reflects the voters' desire for more security amidst growing uncertainty. The question is whether Mitsotakis will move to the right to compensate, or if this will weaken New Democracy structurally in the political landscape. Both would be common phenomena observed in other EU countries too.

Israel could extend its war to Lebanon any time now. Yoav Gallant, Israel’s defence minister, went to the US to secure their backing in case Israel decides to go in. Everyone prefers a diplomatic solution, but the threat of an all-out war is clearly there. Iran-backed Hezbollah and Israel have been engaged in daily cross-border fire since the war in Gaza started. These were mostly tit-for-tat hits, but in recent weeks those strikes intensified and hit deeper into each others territory. Rhetoric also intensified on both sides, Israel has warned that it could wage an all-out war to eliminate Hezbollah while Hassan Nasrallah, the leader of Hezbollah, promised that there will be no place in Israel that will be safe in an event of war. Several countries started warning their citizens not to travel or to leave Lebanon, Al-Monitor reports. Canada is reportedly preparing evacuation plans for its 45,000 citizens there.

If they were to opt for a war, it could affect the Middle East and Europe. Syria and Iraq are likely to be drawn in next via their Iran-backed militias. Others could follow due to politics and proximity. Israel’s all-out war would trigger a large wave of migrants towards Europe just when far-right parties are winning elections in several EU member states with promises to stop immigration. As well as Lebanon's own population of about 5.3m, the country hosts 1.5m Syrian refugees. The EU’s new migration pact could be seriously tested.  Preventing such an escalation is thus a vital interest for the EU itself and for the stability of its neighbourhood. It will be another priority for Katja Kallas once she takes over from Josep Borrell as High Representative for Foreign and Security Policy.

Hezbollah says it will fight Israel as long as the war in Gaza continues. But even if the war in Gaza were to stop tomorrow, Hezbollah and Israel won’t stop as long as the matters between them are unresolved. The current border tension is a continuation of a conflict that goes back since Israel invaded Lebanon in 1982. Diplomatic solutions to end the fighting at the borders have been on the table with the UN resolution 1701 and various proposals from the US and France have been discussed in recent months, but crucial differences remain. Implementing 1701 would require to settle once and for all the borders for Lebanon and to disarm Hezbollah. As long as the territorial integrity of Lebanon is not resolved, Hezbollah can claim to be a resistance force for Lebanon to justify its armed existence. And Israel can continue to argue that it has an enemy at its northern borders, to which it has to respond to. It is a vicious circle. The war in Gaza and the increased attacks from Hezbollah also forced Israel to evacuate an estimated 120,000 civilians from its Galilee region. This is not a sustainable solution. A war with Lebanon also has not made Israel feel more secure in the past.

For the EU, the main interest is to support stability in its neighbourhood, and to prevent an influx of war refugees from Lebanon. The two are interlinked. If the war were to kick off, Cyprus would be the first port of call, some 180km away from the Lebanese coastline. It is also the cheapest route that smugglers offer. Migrant numbers already picked up since the war in Gaza. From January until April this year Cyrus recorded more than 2000 migrants, mostly Syrians, who had arrived in rubber boats on their shores, nearly 60 times more than the previous year. Their administration was overwhelmed and they asked the EU for help. The EU’s response was quick. Another migrant deal was drawn up by early May, and Ursula von der Leyen put the money on the table with basically no conditions attached other than to prevent the migrants from coming to Europe.

If Israel were to invade Lebanon, the government won’t be in the position to hold all those migrants back. Not only will Syrians flee, but Lebanese too as well as those in the region worried about the prospect of a regional war. Lebanon already has the highest refugee per capita ratio in the world, and has not emerged yet from one of the worst financial and economic crises any modern country has ever faced. What will the EU do then? This is not solved by pushing back rubber boats to prevent them from reaching the shores in Cyprus. This could easily end up in a humanitarian catastrophe. The EU has every interest to prevent such a scenario. More diplomatic efforts are required to support Israel and Lebanon finding a solution for their border conflict.

People made a lot of the AfD’s fall in the opinion polls before the European elections, but we think that the overall trend in German politics remains highly favourable to this party. The AfD has also started to bounce back in the latest polls since the European elections.

We saw some interesting research about how the party is starting to take roots in rural parts of western Germany. The party is stronger in the east than in the west, but it is growing faster in the west. This is not a disgruntled farmers' phenomenon at its heart. An analysis of the European election, as relayed by Handelsblatt, shows that the AfD does very well in wealthy rural areas, especially in the lowlands of the north-west of Germany. What the analysis shows is that the distinguishing characteristic is between rural and very rural. The former are regions with a large market town, whereas the latter are more dispersed.

The data don’t tell us why people voted, but the researchers quoted in the article said that they believe that the decisive factor is loss of status in society. After a long period of a high-level stasis, there has been a lot of change going on in Germany in the last few years. Rural Germany has been a largely functional place. Germany has a three-tier school system, where the lower tier would still lead to good jobs, something that is not true in the large cities any more. Lots of small and medium-sized companies are located in rural areas. In Germany, it was industry that kept on giving to all parts of the country. As those industries decline, people in those rural communities are starting to worry about their status.

Perhaps the most shocking scene coming out of Germany recently was that of a group of wealthy young people in designer clothes chanting a Nazi song on the grounds of an exclusive resort in Sylt. What we noted is that despite their outward appearances of wealth, they were not part of the successful professional classes. A young woman in the group got immediately fired from her job – as an assistant to a Youtube influencer. They have wealthy parents – otherwise, they could not afford this expensive resort. But other than that, it is not a group that has much going for them. It’s the German version of a landed gentry which is about to experience a hard landing.

We reported a few weeks ago that Giorgia Meloni and Marine Le Pen were open to a merger of their respective groups in the European Parliament, but right now the opposite is happening. Rather than merging into one big group, Europe's far-right is splitting off into three groups.

After Le Pen’s Identity and Democracy groups expelled the German AfD, one of the largest national groups of right-wing parties in the parliament, we are now on the verge of such a third group being created, as Der Spiegel reports.

Yesterday, the AfD’s executive has decided unanimously, for the party to leave Identity and Democracy European Party formally – after having been expelled from ID’s parliamentary group. The expulsion was triggered by comments from the AfD’s former European leader, Maximilian Krah, who tried to exonerate members of the SS. Right after the European elections, the AfD group expelled Krah, hoping that this would be enough for ID to readmit the AfD. But the negotiations failed.

The AfD had only joined ID a year ago. Since then, there has been a great deal of resentment within the party that it has allowed itself to be talked into positions it did not support. So they are now going it alone.

Under the rules of the EP, the formal status of a group requires at least 23 members, and parties from at least a quarter of the EU’s 27 members - seven countries. The AfD alone has 14 MEPs, or 15 including Krah. The main obstacle is the number of countries.

The AfD’s potential new partners include parties on the extreme right: The Party is Over party from Spain; SOS Romania; the Republican Movement of Slovakia; NIKH from Greece; Our Homeland from Hungary; and Konfederacja from Poland. If all joined, such a group would fulfil the minimum requirements of seven countries being represented.

They are mostly signatories of Sofia Declaration, calling for an end of support for Ukraine. The AfD is formally in favour of a German withdrawal from the EU. This is where this group differs from both the ECR and ID. They want out.

We can still imagine Le Pen and Meloni’s group to merge. They are in favour of the EU itself, but want to recoup some rights, for example on immigration and in the case of the RN, on energy policy.