Europe’s Chaotic Future

The decision by France’s poll-leading politician Marine Le Pen to contest the presidency has revived, once again, the prospect of a national-populist challenge to the dominant European orthodoxy of pro-EU centrism. This challenge has been regularly underestimated for about 20 years, with each populist setback looked to as evidence of a turning of the political tide back toward centrist normalcy. The defeat of the self-described “illiberal” Hungarian leader Viktor Orban in April was the most recent instance. SIG’s view is that European right-wing populism is as close to a durable trend as one can find in politics. Investors cannot afford to ignore it.

In the past decade and a half, Marine Le Pen has run for president three times. Her electoral performance has increased each time: 17.9% of the first-round results in 2012; 21.3% in 2017 (with 33.9% of the runoff vote in the second round); 23.2% in 2022 (and 41.5% in the runoff). With her declaration last Tuesday, Le Pen is on course for her fourth run and leads French polling for the next election, scheduled for April 2027.

Meanwhile Nigel Farage, leader of the Reform UK party, has called for a by-election in his constituency of Clacton. Farage was leader of the United Kingdom Independence Party (UKIP) from 2006 to 2016, with a short break in 2010 to run, unsuccessfully, for Parliament. UKIP agitated for Britain’s exit from the European Union, which occurred in June 2016 with the support of 52% of the British electorate. Farage co-founded the Brexit Party in 2018, and the next year it became the dominant party in the European Parliament. (The process of Britain exiting the EU lasted from the 2016 election will into 2020.) The Brexit Party was renamed Reform UK in 2021. Current polling shows Reform as the dominant British political party at 25%, trailed by Farage’s former political home, the Conservative Party (21%), and Labour (20%). Britain’s mainstream parties have so far refused to engage in the Clacton by-election, calling it a “circus” (Labour) and a “gimmick” (Conservatives). There was some hope that the UK’s chancellor, who must certify a by-election, would block Farage’s plans. That hope disappeared on Thursday, July 9. The by-election will probably take place in mid-August.

Germany’s far-right party Alternative für Deutschland leads the most recent polls at 27%, followed by the conservative CDU/CSU coalition at 22%. Italian Prime Minister Giorgia Meloni’s center-right party Brothers of Italy continues, at 27.8%, to dominate polls, but is facing a surge to its own right from the months-old Futuro Nazionale, which appears to be displacing the League (5.9% vs. 5.8%) as the far-right alternative. Spanish politics also seem to be moving rightward. In Austria the ruling far-right FPO party remains dominant at 37%, followed by the center-right OVP at 20%.

Centrist or center-right coalition governments trying to avoid being pulled further right have become a European norm. The countries in question are all democracies; the rightward trend is a result of voter preferences. When the center-left London Guardian framed Le Pen’s “resurrection” as “a wake-up call” it did raise the question how many wake-up calls there can be before some new descriptive term is required.

What does this mean for investors? The main question is productivity growth, or the lack of it. GDP per capita growth rates in Europe have been declining since the 1960s. Rates in the rest of the world surpassed Europe’s in the mid-1990s. European fertility has been declining over the same period, from a high of 6.8 million births in 1964 to 3.55 million in 2024. Population growth is persistently well below replacement level. This is important because weak domestic demand is one of the few explanations for low European productivity that economists agree on — and opposition to non-European immigration is the main point of agreement among Europe’s center-right and right-wing political forces. Strikingly, 24% of European births in 2024 were to foreign-born mothers, although “foreign-born” includes intra-Europe migrants as well as those from outside the EU.

Reconciling  declining population with economic growth and productivity growth is not easy. The European economy’s response has been to look for demand outside Europe while increasing openness to trade. Euro-area trade openness has doubled since 1999 while it has stayed stable in the rest of the world. Europe has had a trade surplus over the same period as producers find demand overseas — particularly in the US. The EU’s goods trade surplus with the US has doubled over the past decade. In short, more globalization has eased the problems posed by weak domestic demand and low productivity.

The proposed centrist solutions to productivity decline in Europe have been to deregulate labor protections, encourage intra-European population movements, improve technology, support European entrepreneurship, and consolidate markets across European national borders. Much of this comes under the slogan of “more Europe” and from many points of view is inarguable. However, these solutions can also be understood as more globalization within Europe itself —an internal liberalization.  In either case, such policies run against the national focus of most center-right and far-right political groupings.

If the growth of such groupings is stable, as it has appeared to be for some time, then Europe will be at war with its own economies. The most likely policy solutions are at odds with the most likely political configurations as validated by the preferences of European voters. Investors would prefer the centrist reforms associated with Mario Draghi and Enrico Letta, but the political trends point in the opposite direction, with enduring negative implications for European growth.

The Nine Lives of Economic Nationalism – Part Four of Four

Earlier posts in this series considered the multi-century trajectory of economic nationalism in reaction to empire, the resurgence of import substitution and major-power resource competitions, and the ways in which major-power economic nationalisms have made non-market-based economic development policies more popular than they have been in decades, almost regardless of levels of industrial development or economic size.

This final post considers some likely near futures of economic nationalism and economic sovereignty, with particular attention to AI.

First, the United States. The US was born in a determination to end external imperial dictation of economic policy and has, for the most part, guarded a relative autonomy from other economies ever since. The unification and then expansion of the 13 colonies across the continent integrated conquered territories into a “domestic” economy in a way that had few comparators elsewhere in the world. The resulting extent of US natural resources, from fresh water to arable land to natural gas, also proved to be unique. The US was peculiarly well suited to economic sovereignty, and with large-scale immigration it was able to grow on domestic demand better than anywhere else. Exports therefore accounted for a relatively smaller share of GDP than was the case in other industrial countries.

The constraining factor in the US case was not a lack of petroleum or fresh water or food but labor productivity. This was addressed through numerous means, from transport infrastructure to compulsory public education to industrialized agriculture. It helped that the US economy, unlike other industrialized economies, benefitted from both world wars. Productivity entered a crisis in the 1970s. It was eased, in a way, by the Internet and industrial globalization: your wage might be stagnant but it bought much more. But that improvement depended on production outside the US under working conditions that would be rejected in the US itself.

The extraordinary US investment in artificial intelligence comes from this.  AI holds out the promise of increasing productivity. But will it be global productivity or national productivity? Differently put, will the gains be captured by transnational capital and consumers or by tax-paying domestic markets and citizens? Will it be international or nationalist? Low unemployment, very slow job creation and high government and corporate debt all suggest that, absent an AI productivity miracle, the US will head into recession. That might well make the American people more nationalistic and insistent on economic sovereignty, but economic nationalism will not be able to solve their problems.

Chinese economic nationalism faces other constraints. A shrinking workforce and resistance to immigration mean productivity gains will have to come from labor-saving technology and investment in the non-Chinese global workforce. The first would be economically nationalistic. The second would be more like what US companies did in the 1980s and 1990s, and it could hollow out the Chinese jobs market as it once did the American. This would fuel the popular appeal of economic nationalism but, again, economic nationalism is not likely to be able to solve China’s labor productivity problems. An AI productivity miracle would help China as it would help the US. But it would be a miracle.

AI looks different outside the US and China. Those two countries thoroughly dominate the AI space. In AI terms, most other countries are takers, not makers. Africa’s population, a bit larger than China’s, captures 2.5% of the global AI market and is expected to attract 0.3% of global AI investment. The European Union attracts 7%. Britain, Canada, Israel and India also have significant investment, with Britain’s spend twice that of Canada’s. Nonetheless, the US and China attract 80%, with four fifths of it in the US. If an AI productivity miracle occurs in the existing economic-nationalist environment, it is difficult in political terms to imagine the benefits being rapidly diffused across the globe, since the goal of the investment is roughly the opposite.

AI aside, the resurgence of discredited 1960s-era development economics, from “national champions” and import substitution to infant-industry protection and tariffs, is becoming widespread. These policies were celebrated by the Left half a century ago as a way to withstand US corporate domination. Today their appeal is close to universal. They are even seen in the US as ways to ensure the US domination that they were once meant to block.

The essential point seems to be sovereignty. It is a phenomenon rich in paradox. The US-led Internet boom made possible a globalization that dramatically increased the wealth of once-poor countries, above all China but also India and others. These states could then afford to oppose what had just made them wealthy and to revive policies that had not helped them at all the first time around. China, India and other once-colonized nations wrap this in a rhetoric of anti-imperialism while hurrying to lock up poor-world resources before their once-imperial competitors do.

This is the central reason why China’s alternative global-governance schemes will go only so far: they are motivated by economic nationalism. Yet the same is true of US, Indian and European efforts, although European economic nationalism plays out on two levels at once, the national and the supranational. The major EU reform initiatives of 2024 were all premised on consolidating nation-based sectors into a super-nation capable of competing with the US and China.

For investors, at the national (or for the EU, supra-national) level, the play is in policy arbitrage, which is also political arbitrage. At the global level, as between major economic-nationalist actors like China, the US, India and the European Union, it makes sense to hedge with presences in at least two, navigating the relationship in each market among affirmative industrial and financial policy, protection, and market-based competitiveness. (A simpler way to do this, of course, is to invest in multinationals and funds with the proven capacity to do this kind of multi-market navigation themselves.) Beyond that, in countries like Nigeria and Ethiopia, which aim at economic sovereignty but lack much of what is necessary to achieve it, there are opportunities in the state-favored sectors themselves, the import and domestic sectors that provide the necessary inputs (such as electricity and raw materials), and the export sectors that ultimately make imports possible.

Little of this was featured in business school and Adam Smith would be appalled, but for the time being economic nationalism is the way of the world. 

The Defense Industry's New Math

Global military spending in 2024 hit a record that will be broken in 2025. Much of the growth comes from the US (which just announced a goal of a $1 trillion defense budget) and its adversaries, but an important part is from US allies that feel they can no longer rely on US security guarantees. For that reason, they seek to build their own defense industrial bases rather than simply buy more American military products. There are opportunities for investors in this global proliferation of military production financed by government budgets, although the peculiarities of military industries make it more important than usual to have the right expertise. Defense-sector exchange-traded funds (ETFs) have, not surprisingly, boomed: the VanEck Defense UCITS Took in $1 billion in March 2025 alone.

In 2024 global military spending hit $2,718 billion, a 9.4% increase over 2023 and the steepest year-on-year rise since the end of the Cold War. The main drivers were the conflicts in Ukraine and Gaza. Israel’s spending increased 65%, to $46.5 billion, which represented 8.78% of GDP, the second highest ratio after Ukraine — which spent nearly 35% of GDP on its military. Russia spent $149 billion, up 28% from 2023 and representing 7.1% of GDP and 19% of total government spending. German spending surged to $88.5 billion, the fourth largest total in the world after the US, China, and Russia, and just ahead of India at $86.1 billion.

All of these numbers are likely to grow in 2025 and into 2026, except perhaps in Ukraine, which might not be able to get above 35% of GDP. But the Ukraine example illustrates a different and more interesting dynamic. According to one report by a former Ukrainian official, Ukraine’s domestic defense sector has grown from $1 billion to $35 billion in just three years. It now produces about a third of Ukraine’s weapons and ammunition, and nearly all of its drones. That is not nearly enough to protect itself against the Russian army, but it is enough to ease some of the country’s dependence on the US

Similarly, Germany in particular, but also France and the European Union, have entered a new era in terms of domestic military production. Germany’s head of state, Friedrich Merz, won a parliamentary vote in March to not apply Germany’s “debt brake” policy to the defense sector. Merz also appealed to the EU to exempt defense production from its own spending rules. (EU member states have their own military budgets but the EU has rules on public debt.) Sixteen of the Union’s 27 members are seeking exemptions from the EU rules so they can increase their defense spending.

What is driving all this spending is principally the desire to, as Merz puts it, “achieve independence from the USA,” which under President Trump he sees as “largely indifferent to the fate of Europe.” EU Commission President Ursula von der Leyen, herself a former German defense minister, declared, “We are in an era of rearmament,” one that requires Europeans to construct their own defense as part of what France’s President Macron refers to as “strategic autonomy” from the US. The EU hopes that new bloc-wide procurement policies will strengthen European defense production at the cost of American materiel.

There is irony in the fact that European NATO members in recent years have spent more, not less, on weaponry produced in the US: from 52% of spending in 2015-19 to 64% in 2020-24. But that very dependence is why traditional US allies are so focused on independence from the US now that the US has abandoned its traditional approach to alliances. It is not just Europe. South Korea has been trying to replace US purchases with its own production for several years, including so that it might export weapons. Japan also seeks to increase domestic military industries. Israel is striving for self-sufficiency in bomb production. Even Australia has been trying to be more militarily independent, although in practice Australian defense production, current and projected, is commonly done jointly with US defense primes.

The proliferation of defense production in a globalized world can lead to curiosities, such as the battle between a Chinese state-controlled defense company and an Australian to buy a troubled Brazilian manufacturer. That in turn points to both the internationalization of military production and the question of what gets done with the products. US military industries and the US military itself have always advanced together. Foreign military sales were integrated into a much larger public-private strategy that was rooted in political alliances. The point was not to sell to enemies. The proliferation of military-industrial production in the past three years suggests a future in which weapons will be available from many sellers, including NATO members, with little or no reference to US policy guidance.

In short, the desire for autonomy from the US is driving a global surge in weapons production that will in turn lead to weapons proliferation on an unprecedented scale. Unless there is a significant increase in war, there will be an increase in excess production. Excess production will need to be off-loaded somewhere. This is the peculiarity of defense production. If you are not simply stockpiling — which is a dead weight on the economy — then you are proliferating. Weaponry ETFs in this scenario would have to be a short-term play. The longer-term returns will be in companies that aim not just at domestic production but at export.

The European Union's Right-Wing Future

Elections for the European Union’s parliament more than confirmed predictions of a nationalist rise and of a decline in support for environmentalist parties. The initial reaction was nonetheless one of shock, a reaction compounded by French President Emmanuel Macron’s surprise decision to dissolve the National Assembly and force an election as a sort of referendum on French extremism. (“The rise of nationalists, of demagogues, is a danger for our nation but also for our Europe, for France’s place in Europe and in the world,” Macron declared.) News cycles being what they are, there then followed a calming line of argument that emphasized European Commission President Ursula von der Leyen’s insistence that “the center is holding.” Finally, the argument was made that the center might be holding for now but the mainstream political groupings that provide that center need to change course now, before the political support for European union really does decline.

SIG’s view is that the European parliamentary election results fundamentally reflect the victory of economic concerns over moral ones. The project of European unity has always had a moral proposition at its core: that nationalist competition within Europe leads to war, and therefore European unity is a project of peace. European unification since the 1940s has been animated by a sense that it was morally superior to all the political alternatives. For a number of reasons, that sense of moral direction is being lost.

One reason is the structural problem of democratic representation. The “democratic deficit” of the European Union and its predecessors has been a chronic complaint that has been ameliorated in various treaties but cannot be entirely resolved. National governments are more truly representative and therefore more legitimate than the delegations each member state sends to Brussels/Strasbourg.

The political response to this has been twofold. The first response is to reject the EU as unrepresentative and unaccountable and revive the nation-state as the best available alternative. Alice Weidel, of the German party Alternative für Deutschland (AfD), put it with characteristic bluntness: “We’ve done well because people have become more anti-European.” AfD recorded its best performance yet in European elections, moving into second place ahead of Germany’s current governing party.

The second response has been to increase the power of the European Commission and its president, that is, to increase the power of the European executive. On the face of it, this would seem to be the opposite of democratic: the empowerment of a very indirectly elected president and of commissioners approved by her after being proposed by national governments. But the rise of the Commission was in response to a strongly felt political need, during the 2007-08 financial crisis and the euro crisis that followed, for there to be greater power in Brussels. This was not a reward for Brussels’s political successes. Rather it was a response by the European political class to the inability of national governments to solve the financial crisis on an individual basis — and to the realization that if Brussels were not strengthened Germany, because of its economic dominance, would come uncomfortably close to being master of Europe. Then-Chancellor Angela Merkel shepherded a process by which German power was both acknowledged and contained within the reforms of the 2009 Treaty of Lisbon. Since 2019, President von der Leyen, who rose to prominence as a long-serving member of Merkel’s government, has enlarged the Commission’s effective power, pushing forward policies on the environment, defense, technology, competition policy, foreign policy, agriculture, the euro, and much else. Her presidency has made the EU more effective and thereby more worth voting about. The turnout last week was the highest in 30 years. In that quite real sense, the democratic deficit is shrinking.

However, if the European Union has become more responsive to voter needs since 2019 and a more plausibly effective companion to member states’ national governments, it has also become a prosecutor of war (in Ukraine), raised the barriers to immigration, and utilized regulatory, competition and other industrial policies as weapons against, principally, the US and China, though also Russia. In short, the EU is losing that sense of peace-loving, internationalist moral distinction that differentiated it from the patriotic model of nationalism it was invented to replace. The EU is becoming a center-right power tolerant of illiberal identitarian and economic policies and engaged in war.

The consensus opinion has been that the European parliamentary elections were a struggle between a morally legitimate, internationalist center and a demagogic, nationalist right surging upward from the murk of history. What seems more likely is that the EU is becoming a political manager for a European nationalism that can be relatively at ease with the sub-European nationalisms currently thriving in Germany, the Netherlands, Austria, Italy, Belgium and France. Austria aside (and adding Luxembourg), that has been the core group of European unification since 1951. It may prove to be the core of a right-leaning Continent.

Paying the China Price

In his recent meetings with France’s President Emmanuel Macron and EU Council President Ursula von der Leyen, Xi Jinping mocked the concept of “dual-use” equipment such as semi-conductors, saying that by European definitions rice would be dual-use because soldiers have been known to eat it before battle. (Dual-use is commonly applied to products or technologies that have military as well as non-military uses. The proximate cause for the discussion was Chinese exports to Russia, which help Russia sustain its war in Ukraine in the face of Western sanctions.) Xi also rejected the concept of Chinese industrial “over-capacity” in reaction to charges, emphasized in the meeting by von der Leyen, that state subsidies have enabled Chinese steel and car manufacturers to dominate European markets with underpriced goods.

Of particular concern to von der Leyen’s home state of Germany is China’s dominance of electric-vehicle production. Macron urged Germany’s Chancellor Olaf Scholz to attend the talks with Xi, but Macron is less keen than Scholz on protecting Europe’s EV manufacturers from Chinese competition. This difference was a principal reason why Europe’s largest economy was absent from talks that pivoted on Europe-China economic relations. From an investor perspective, Europe’s current geo-economics offer little more than chronic unpredictability. Xi Jinping’s strategy is to divide the European powers from each other and from the US, a strategy that should be harder to do than it is.

The disturbing reality is that Xi is not wrong. The concept of dual-use is infinitely expandable. If its deployment were simply an artifact of political opportunism — for example, a means to foster non-Chinese semiconductor production — the problem presented would not be so difficult. But most advanced technologies, and the innovation systems that underlie them, really are dual-use, and in the end so is rice.

What Xi is really pointing to is the impossibility of neutrality. It was impolite of him to do so and probably bad politics, which could explain why the CCP’s Internet-scrubbing mechanisms were tasked with removing references to dual-use at the time of the Paris meetings. But for Xi it must be hard to resist pointing out to Europeans how dependent they are on Chinese tech inputs, not just for their own industries but for there to be much chance for European companies to compete with American ones. European states cannot be neutral profiteers trading with both sides in the US-China conflict. At the same time, Biden’s industrial policies (particularly for electric-vehicle production), US dominance of the West’s Ukraine policy, and the prospect of a second Trump administration all combine to gravely weaken trans-Atlantic solidarity when it is most needed. This is a key CCP strategic goal.

“Over-production” is also incoherent. The European argument is that Chinese production is state-subsidized and in excess of domestic Chinese demand for electric vehicles. The second charge is the weakest. Like Germany, China produces cars in excess of domestic demand because it wants to sell EVs on the world market. That’s what exporting is. It makes no sense to insist that Germany be able to continue manufacturing Mercedes or Volkswagens in excess of German consumer demand but China should not be able to do the same.

The state-subsidy charge is stronger but still not massively convincing. German subsidies to German consumers (4500 euros, sometimes more, per purchase) incentivized the buying of 2.1 million EVs in Germany from 2016 to the end of last year. Part of the goal of this policy was, through subsidized pricing, to artificially boost German consumer demand for electric vehicles and thereby subsidize German car manufacturers’ transition to EV production. When the German government rather abruptly cancelled its EV subsidy to address a budget shortfall, German manufacturers like Mercedes and Volkswagen undertook to pay it themselves for existing orders.

That policy is not intended to last, however. At some near date, Germany and other European states with auto industries will have to choose between protecting their own car industries until they are able to compete with Chinese competitors (a very distant prospect), leaving their markets open to Chinese EV imports (already accounting for 37% of European EV imports in 2023), or somehow managing the China trade at the EU supra-national level. The last option is the one the EU is aiming at, but it will meet strong resistance from individual European states who do not want to lose their auto industries to European competitors (mainly Germany) and from European consumers, who will be stuck with higher prices. Those high prices will in turn delay Europe’s transition to greener transport. This is the fate that US protection of EV manufacturing (and much else) is intended to avoid for Americans — but at the cost of hobbling European EV exports into the US market, further impairing the geo-economics of trans-Atlantic solidarity.

Efforts to reorient manufacturing to address climate change keep running into the wall of geopolitical competition. Meanwhile, the Chinese government has economic and environmental challenges of its own and will continue to try to punch its way out of them by subsidizing domestic production and controlling domestic consumption to favor Chinese goods.  Each side in this drama will correctly accuse the others of “over-capacity” and unfair state subsidization.

China has the advantage of an unblushing commitment to state capitalism and an immense captive domestic market. It also has an ideological advantage of sorts in that it frames its own economic growth in a long narrative — “changes not seen in a century”, in Xi’s phrase — of anti-imperialism. Ultimately, the Chinese contention is that Western-led modernization was itself “unfair trade” on a very grand scale, achieved at gunpoint and cementing first-mover advantages that Chinese state policy is dedicated to undoing. Of course, Chinese growth is fueled much more by a Chinese nationalist will to power than by any notional anti-colonialism. It is a Sinicized version of the German imperial push for a “place in the sun” alongside the other imperial economies of the 1890s, including Japan. The increasing brutality of the CCP regime both domestically and in its foreign policy is an index of where its commitments lie. It came to praise globalization but in all likelihood will end by burying it.

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Europe’s House Divided

The recent focus in Europe has understandably been on security. The European Union committed to massive support ($54 billion) for Ukraine, Donald Trump again put America’s commitment to European security in question with his remarks on NATO, and Alexei Navalny died at 47 in a Siberian penal colony. These were the leading topics at last weekend’s Munich Security Conference. But poor economic performance is the deeper problem in Europe and will remain so after memories of the conference fade. There are solutions available. Whether Europeans will choose to pursue them is the question.

The single market has been the great success of European integration. However, the EU’s 27 member states retain considerable authority over defense, telecommunications, finance, and energy. The economic integration of the continent seems to be reaching its limit under the current governance structure. This harms competitiveness, because national entrepreneurial energies are directed to national companies that serve national markets, some of which are very small. While the overall EU market is enormous (448 million people), the great majority of European companies, especially small and medium enterprises (SMEs), develop and market their products for national markets.

One clear solution would be to reduce the inherent barriers that keep European competitiveness trapped in 27 individual boxes. This is likely to be the main focus of two reports for the European Commission, one on the internal market and another on EU competitiveness. The first will probably arrive in April and the second in July.

But will dramatic steps toward greater integration be taken? The chances don’t seem good. The EU’s recent embrace of industrial policy has hugely privileged the largest economies, Germany in particular. Faced with Covid and then the Russian invasion of Ukraine — followed by an American turn to industrial policy under Joe Biden, notably for green industries and products — the EU, under Commission President Ursula von der Leyen, turned on the aid spigots. The funding went to deal with Covid, reboot European weapons production, stimulate the greening of the European economy, and triangulate economic aid in relation to US priorities as revealed in the Inflation Reduction Act, among other goals. The biggest beneficiaries of this sudden largesse were the economies with the greatest capacity to answer policy needs. Not surprisingly, these were also the largest economies. About half the aid between March 2022 and August 2023 went to Germany — half, that is, of €733 billion.

In such a situation, the willingness of smaller European countries to give up what control they retain over defense, telecommunications, finance, and energy is going to be limited. The brain drain from smaller to larger economies has further fueled resentment of the major European powers and left large parts of the region populated mainly by the elderly or by younger people who are either determined to stay in place or feel that they have little choice. Given these dynamics, the growth of nationalism in smaller or medium-sized electorates, and in the less developed parts of larger ones, seems inevitable. It would directly militate against the political viability of further economic integration. So would the ongoing flow of European capital to the US in that it acts to reduce investment in Europe.

Still, the European model of governance innovation has always been a kind of crisis response and Europe is now rich in crises. Russia’s actions in Ukraine inspired a surge in European defense spending, reviving a sector that had been in decline. The first Trump administration delivered a severe shock to Europe; a second would do the same. Some European reformers joke that a Trump presidency might be just what it takes to reinvigorate the European project. Kamala Harris, at the Munich Security Conference, carried a message of reassurance about American commitments to Europe, but she might not be in any position to fulfill that promise.

Investing in Europe necessitates close attention to these dynamics. Large-scale EU industrial policy is likely to continue for some time. The EU is participating in an “onshoring” cycle that is just as vigorous in China, the US, and India. Each of these reacts to the others, deepening the replication of production in the world’s largest economies. Selling further integration to European electorates will probably require more emphasis on industrial policy rather than less, along with a serious commitment to making Europe more competitive and less dependent upon the US and China. This seems certain to create new trans-Atlantic tensions as the US reacts to European “protectionism.” In many ways, an integrated trans-Atlantic market seems to be the only long-term solution for a Europe in demographic decline, but the chances of it are getting lower.

The Ukraine War and EU “Strategic Autonomy”

The Ukraine War and EU “Strategic Autonomy”

The European Union has not yet been a significant actor in the Ukraine crisis. The EU’s hard-power defense capacity is exceedingly weak and focused mainly on defense-industrial policy. To the degree that “European defense” has a strong operational meaning, it is due to NATO, which is dominated by a non-European power (the US) and has several militarily significant non-EU members (the US again, Canada, and Turkey). Understandably, the consensus view has been that the EU is close to being a non-actor in the defense of Europe. However, various developments — the waning of American support for Ukraine, the chaos of British foreign policy, the political desperation of Emmanuel Macron, the sacrifice of Nagorno-Karabakh’s Armenians — may contribute, however unwittingly, to a strengthening of the EU’s security purpose, if only because they render the status quo less and less tenable.

Not long ago, the key question for the EU was whether it was evolving into a “two-speed” configuration, with “core Europe” leading or ignoring its periphery as it saw fit. The core-Europe idea, not surprisingly, had been associated principally with Germany — as Kernereuropa — since the end of the Cold War. Kernereuropa was a concept for fiscal rectitude, rather than centralized defense, and was revived in response to the eurozone crisis of 2009 and 2010. But the Brexit referendum of 2016, which removed Europe’s first- or second-ranked military from the EU table — a quick comparison of the British and French militaries is here — notably weakened Europe’s defenses in the absence of NATO. This brought further rounds of EU defense-policy rethinking amid an increase in German interest stimulated by the Russian annexation of Crimea in 2014. German interest inevitably brings French interest. French interest inevitably brings a conceptual framework of resistance to American power — at least, it has since De Gaulle, if not Clemenceau. After Emmanuel Macron was elected in 2017 and faced the neo-isolationism and unreliability of Donald Trump, he began to speak of European “strategic autonomy.” This meant autonomy from the US, which also meant autonomy from NATO. By 2019, Macron was speaking of “the brain-death of NATO.” Given Trump’s open questioning of the alliance, this was understandable. However, Germany and others still preferred to wait on events, even if Angela Merkel once spoke of Europe taking its fate “into our own hands.”

The accession to power of Joe Biden made the questioning of NATO less urgent for a French president. Biden promised a policy of friendliness toward allies, and toward democracies in particular. Strategic autonomy begin to lead a quieter life, with the focus shifting somewhat to cyber autonomy. In this comparatively mild environment, Macron was even able, after Russia invaded Ukraine at the end of February 2022, to attempt the role of mediator, insisting that Russia had its own perspective and Putin might be reasoned with. The US, Germany, and Britain ignored him.

By December 2022, Macron was shifting to the opposite view. By May 2023, he had fully transitioned, signing off on weapons transfers to Ukraine. Faced with a European policy on Ukraine that was being dominated by the US, Germany, and Britain, France presumably wanted a place among the actual decision-makers. Under Russian pressure, NATO itself was undergoing a strategic revival less than three years after being declared brain-dead. By the autumn, the French military and intelligence services were being humiliated by revolts in the Sahel and by the French, and European, inability to oppose the Azerbaijani offensive against the Armenians in Nagorno-Karabakh.

The cliché has been that Europe requires crises to move forward. Another way to put it is that the EU only learns from failures. As it is certainly experiencing an abundance of failures now, will they herald a period of learning and change? The growing American reluctance to spend on Ukrainian defense might well help force some strategic unity on aKernereuropathat has long resisted it. In a peculiarly European dynamic, the need for greater unity is being expressed, in part, by moves toward EU enlargement, which Germany’s defense minister has called “a necessary geopolitical consequence of Russia’s war.” Macron has also switched from opposing enlargement to backing it. When the Nobel Peace Prize committee gave the 2012 prize to the EU, it emphasized the union’s enlargement policy as a strategy for peace. It appears now to be part of a strategy for fighting a war, and a conflict on the periphery might give core Europe a security purpose it has always lacked.

Turkey’s Autocrat Shifts the Balance (I&W)

Turkey’s Autocrat Shifts the Balance

During the NATO summit in July 2023, a sudden change in policy was announced: Turkey would not veto the application by Sweden for admission. In apparent exchange, Turkey would receive F-16s from the United States along with access to advanced upgrades for its existing F-16s. As part of a “general normalization and improvement” of relations with the EU as well as with the United States, Sweden would work closely with Turkey on “counter-terrorism.” Turkish accession talks with the EU would resume, along with discussions about the Turkish role in the European Customs Union and the possibility of visa-free travel for Turks to the 27 countries of the Schengen Area.

The news was generally received in the Western press with a mixture of delight, incredulity, and suspicion, especially as Erdoğan had repeatedly denounced the behavior of the West during his campaign to win the presidential election of May 2023. How could a country, or at least a president, alter his course so suddenly and so dramatically?  

One point to bear in mind is that capriciousness is part of Erdoğan’s autocratic style.  The persona that he affects as a political leader is often volatile and irascible. He frequently berates Turkey’s citizens, shouting at them as a disappointed and exasperated father while he castigates other nations and their leaders for their failure to treat Turkey, Turks, or Muslims in general with the respect he believes they deserve.

As second point is that autocratic caprice has been part of modern Turkish political tradition.  Since the founding of the republic in 1923, Turkish politicians have rarely hesitated to embark on ambitious programs of social engineering. The first president, Kemal Atatürk, transformed the subjects of the sultan into citizens of a new secular society, changing their clothing, their names, their alphabet, and their language. Erdoğan was intent on promoting a revolution in attitudes toward the history of the Turkish nation and especially the Ottoman Empire, the last and greatest of the Muslim empires, which collapsed in the aftermath of the First World War. He was determined that it would no longer be seen as an embarrassment.

This affected foreign policy. Under Erdoğan, Turkish strategists became increasingly interested in extending their reach into lands that the Ottomans had lost, or into regions they had not controlled but were nonetheless seen as part of the wider Turkic world of Central Asia. Since the 19th century, of course, Central Asia had been under the control of the Russian Empire and then the Soviet Union. Indeed, Russia still assumes that the Central Asian republics remain within its sphere of influence. But, many Uzbeks, Kazakhs, and other inhabitants of the region are increasingly inclined to disagree, seeing Russia as an imperial power to be resisted.

As Russia weakens, strategists in Ankara have become aware that the opportunity to realize the Pan-Turkic dream of the late 19th and early 20th century is growing, especially if it is understood in terms of the “soft power” implied by closer cultural and economic ties. Even when relations with Russia seem relatively cordial, therefore, it is not seen in Turkey as an ally. Although it is not really an enemy, at least at the moment, it will definitely be seen as a rival and an obstacle.

It should be emphasized that a pan-Turkic Central Asia is not just a romantic fantasy. A region in which Chinese, Iranian, and Russian areas of influence meet is undoubtedly of strategic interest for the United States. America’s rivals possess far more extensive ties than its bureaucrats or corporate executives could hope to acquire by themselves; Turks, therefore, are ideally positioned to support American aspirations if they so choose. Turkish religious, linguistic, and cultural affinities have existed for many centuries and Turkey is not only an American ally but also a member of NATO. This gives it a status to exploit in the former Ottoman lands.

Erdoğan is sometimes misunderstood as merely an Islamist politician. It is more accurate to say he recalls the fusion of Islam and Turkish nationalism that was encouraged by Kenan Evren and the generals who led the coup in 1980 against the ineffective coalition of Süleyman Demirel. This is one of the reasons why his alliance with the MHP on the far right of the political spectrum has not diminished the support that he receives from more conservative or traditional Muslims. He offers something that very different sections of Turkish society can admire, or at least support in elections.

Turkish neo-Ottoman nationalism is enough to get Erdoğan his electoral majorities, however slim (just 4% in 2023). His reversal of position on Sweden and NATO in July was a sign of how much Erdoğan values Turkey’s membership in the alliance, not because of any shared values but because it could serve, in the moment, his strategic goal of neo-Ottoman revival. Erdoğan has long since proved he can provoke the West; that was always just one stage in a broader agenda.

NATO Finds Its War (I&W)

NATO FINDS ITS WAR

Did NATO miss an opportunity at its recent summit in Vilnius? Some critics have said as much, pointing to divisions within the alliance about the measures that it should adopt in offering assistance to Ukraine. But NATO is aiming at something much larger: the transformation of an old Cold War alliance into an institution fit for the new Cold War. It may in fact have achieved it at Vilnius.

Ukraine is the key that opened the door. Until Russia invaded Crimea in 2014, NATO had been organizing itself around the two challenges of terrorism and cybersecurity, finally adopting a Comprehensive Cyber Defense Policy in 2021. Since then, and at a quickening pace after the Biden administration found its feet and Russia invaded non-Crimean Ukraine on 24 February 2022, NATO has been focusing on democratic principles and the rule of law in order to shape a strategic approach. The emphasis on these values at Vilnius underscores their role in guiding NATO’s strategic evolution within the paradigm of the New Cold War.

What is often missed is that an emphasis on values – just the sort of approach that is often dismissed as mere piety – marks the transformation of NATO from a defensive alliance into an ideological alliance. Although attempts by the Biden administration to promote ideological initiatives such as the Summits for Democracy have gained little traction, NATO is different. It has been steadily expanding a conventional concept of security to encompass the global commons, including oceans, space, technology, and cyberspace. Departing from a conventional summit declaration, the Vilnius outcome document suggests a strategic roadmap, delineating NATO’s envisioned trajectory in a global order now characterized by constant transformation.

It makes no obvious sense that the North Atlantic Treaty Organization should have any responsibility for the global commons. However, the reality is that conflict between the United States on one side and Russia and China on the other leaves the global commons up for grabs. Due to technological shifts and innovations, the means for conflict and the platforms for conflict are in effect global, specifically the Internet, cyberspace, and space itself, where military command and control by major powers is dependent not only on satellites in fixed positions above national territory but also on a system of satellites in constant orbit around the planet. The global commons has become a zone of conflict because certain aspects of conflict have become globalized. An organization that includes the specifically geographical definition “North Atlantic” in its name and its mission is now embracing a more global role.

While post-summit commentary centered on NATO’s relationship with Ukraine, perhaps the most crucial immediate outcome lies in the adoption of new Regional Defense Plans. Devised for the protection of NATO’s northern, central, and southern flanks, they signify a new chapter in its strategy. Prepared by SACEUR General Cavoli and his team, and totaling over four thousand pages, the regional plans offer intricate and precise delineations of the alliance's intended actions in the event of an assault on any of its member states. This marks the first time since the Cold War that NATO has formulated such comprehensive and detailed plans, rendering the deterrence and defense capabilities of the alliance more credible than ever before. The impetus behind the completion of these regional defense plans has been the Russian aggression against Ukraine.

Looking to the next summit, which will be held at Washington in 2024, we anticipate the full emergence of Global NATO on the 75th anniversary of founding of the alliance. The North Atlantic Council has been assigned the task of producing a comprehensive threat assessment. The results will accelerate deliberations about the future of Ukraine, provide clarity on NATO’s relationship with China, and demonstrate the ways in which the alliance is preparing to confront the globalization of major-power national security. The Washington summit may well grapple with the same unresolved questions that linger after the Vilnius Summit: Does the Alliance’s door remain open? When will Ukraine find a place among its members? On the largest and most important questions, however, NATO will already have found its answers.

Saudi-Iranian Rapprochement (I&W)

Saudi-Iranian Rapprochement

The rapprochement between Saudi Arabia and Iran, engineered by China in March, received a mostly favorable reception, with analysts suggesting that the process of normalization could alleviate regional tensions and pave the way for a tangible reduction of hostilities between Riyadh and Teheran. Some possibilities that have been aired include a cessation of Iran's interventions in Bahrain, Saudi capital infusions into Iran, and the promotion of nuclear non-proliferation.

But Saudi-Iranian relations are governed solely by self-interest and driven by the intricacies of geopolitics in the region and the emergence of a multipolar global paradigm. Both Saudi Arabia and Iran still aspire to be regional powerhouses and principal actors in this evolving multipolar order. China’s role in bringing them together is itself principally geopolitical. It is intended to improve China’s position in its long struggle with the United States. Whatever peace effects it might have are all to the good, but they were not the point. Neither Iran nor Saudi is especially weary of conflict. The rapprochement is part of a complex power struggle, not an embrace of peace.

It is up to Saudi and Iran to demonstrate that there is any substance to the agreement.  A crucial aspect that has yet to be adequately addressed is the establishment of some foundation of trust between the two nations. Considering their enduring rivalry and a historical backdrop riddled with mutual mistrust, Saudi Arabia and Iran both need to demonstrate some dedication to resolving their differences and participating in productive discourse together. Such efforts have not yet materialized, and until they do, the prevailing geopolitical landscape in the Middle East will persist unchanged, despite the purported reconciliation.

While there may be a convergence of interests in defying the United States, Saudi Arabia and Iran have very different objectives in the region. Crown Prince Mohammed bin Salman (MBS) harbors a grand vision of reshaping not only the face of Saudi Arabia within the Middle East but also its standing on the global stage. MBS's decrees are  unquestionable in the kingdom;  Saudi foreign policy is inextricable from his ambitions. MBS has shown no intention of relinquishing power or engaging in conflict de-escalation. Foremost on his agenda is elevating Saudi Arabia to the status of a preeminent power in the Middle East, employing any means necessary to achieve this objective.

The pursuit of hosting the World Cup in 2030 stands as a prominent testament to Saudi Arabia's endeavor to foster international engagement. This initiative, alongside notable undertakings such as the Neom project and the establishment of a desert-based ski resort, exemplifies Saudi Arabia's transformative policy trajectory. But the global battles over Saudi Arabia’s alternative golf league show that much of the world is unwilling to do much more than humor Saudi episodes of over-spending.

Iran’s attachment to the deal is costless. Its gradual movement toward Russia and China is propelled by many factors but peace is not one of them. Iran has chosen this paper peace as a way to position itself better in its struggle with its enemies.

‘’The new era’’ hailed by diplomats of both states is as thin as a straw, for it is sustained by temporary interests and untested alliances in a changing geopolitical landscape that cannot be predicted by anyone, and certainly cannot be controlled by two relatively minor players.

Elections and Earthquakes (I&W)

Elections and Earthquakes

The first round of the Turkish presidential election on 14 May was a disappointment for almost everyone. There was no winner. The opposition was convinced that years of economic mismanagement, along with a devastating earthquake exacerbated by the notorious corruption of the Turkish construction industry, would drive Recep Tayyip Erdoğan from office. His supporters believed that the great man would crush his enemies once again. But as neither side secured more than 50% of the vote, a second ballot needed to be held. When it was, Erdoğan was clearly the winner.

In North America and most of Europe, the result has generally been described as unwelcome and perhaps even disastrous. But is it?

There is little doubt that Erdoğan’s success was due to policies that became ruthless and vindictive following protests against his plans to build a mosque at Istanbul’s Gezi Park in 2013 and a coup attempt against him in 2016. The only two politicians who might have led a credible challenge to his authority both faced criminal prosecution and imprisonment. The press and television stations had been placed in the hands of AKP and its supporters by an obliging judiciary and voices opposed to Erdoğan were rarely heard during the campaign. The result was an election that has been seen as “free but not fair”, although it was not really either. While some degree of irregularity appears undeniable – Turkish nationalist candidates received an astonishing number of votes in Kurdish areas of the country, for example – no one seems to doubt that Erdoğan really won the election. He is therefore in a stronger position than he was before. His reign and his policies will endure for another five years, at least if his health remains robust. 

His undoubted appeal lies in an ability to display a patriarchal authority as well as an unwavering devotion to traditional values that half the country finds inspiring and reassuring. The other half, of course, disagrees. Nevertheless, after more than two decades of AKP government, Erdoğan continues to represent hope for the new middle classes in Turkey that a more affluent way of life will continue even though levels of personal debt have become almost insupportable. Whatever the risks, millions of Turks thought them less alarming than those posed by a rival candidate who had never held a position of greater responsibility than leader of the opposition and who never appeared to be tough enough for the job.

This may be worth remembering, especially in Europe. In the hope of winning the second ballot if he could attract support from the far right, Kemal Kılıçdaroğlu promised to expel “more than 10 million” refugees from Turkish territory. Would he have made a serious attempt to do it? Who really knows, but the consequences would have been appalling. Even the risk that he might try would have been profoundly alarming in most of Europe, especially given a war in Ukraine and rising tension in the Balkans. European politicians have years of experience in negotiating with Erdoğan when refugees are used as political weapons, and a known quantity is undoubtedly preferable at a time of rising uncertainty.

Erdoğan also wants something. His position requires the appearance of power as well as the reality of it. Sophisticated American weaponry is fundamental to both, especially as Russian equipment has been seen to be no more effective in Ukraine than Russian tactics. Erdoğan has been allowed by Washington to purchase much of what he wants from the United States, but not yet everything that he wants, including the most advanced versions of the F16. At the same time, he has the ability to grant favors that are of great importance to American strategists, including an agreement that Sweden will have the unanimous support it needs to enter NATO just as Finland has done. There is clearly an opportunity for both sides in the conversation.

Erdoğan’s attitude to NATO is undoubtedly ambivalent. Although a man of considerable intelligence and a politician of extraordinary ability, he has little formal education and no real knowledge of English or other foreign languages. He is therefore suspicious of a world that he sees as alien, even if his attitude tends to be pragmatic and transactional. His ambitions also extend beyond Europe and into Africa and Asia.

While Turkey was certainly involved in the rivalries of the Cold War, it played little more than a supporting role. The alternative at the time, the Non-Aligned Movement or NAM, was in large part a reaction to the bellicosity of the Great Powers, but a new unwillingness to choose sides, often known as NAM 2.0, reflects growing unease or alarm at the implications of a globalized economy dominated by the United States and its rivalry with China and Russia. In countries such as India and Turkey, it is not surprising that a vision of a new international order has also been accompanied by enthusiastic or aggressive forms of ethnic and religious nationalism.

So what will Erdoğan choose? He would naturally prefer Turkish prominence within the enduring structures of earlier decades as well as a leading role in a new NAM 2.0. Can he have both? His country has extended its reach throughout the world by relying on the soft power of its media as well as the harder forms of power displayed in its successful aerial drones. Turkish military technology is highly attractive to foreign investors as well as foreign customers, and it is only one in a series of lucrative possibilities that include property development in Istanbul or along the Mediterranean coast and the growing markets offered by Turkish consumers. For the rest of the world, therefore, Turkey remains tantalizing. In that sense, Erdoğan’s victory has changed little. The claims that it represents a defeat for either American or European interests and that Kılıçdaroğlu would have been a more effective or at least a more amenable president seem excitable as well as condescending.